Bought and classified an asset in 2010 as AFS for $ 200
MKT value in 2011 : $ 210
Mkt value in 2012: $220
Just assume there is no interest or coupon., company decides to reclassify asset in 2012 as HFT
What will be the increase in net income before tax aka gain : 20 or 10 ?
Also does anyone have an explanation of why equity method income on the IS despite being a non cash inflow AND a balance sheet asset doesn’t impact the cash flow statement?
The increase in net income will be $20.
All of the unrealized gains when it was AFS would have gone to OCI, whereas all of the gains for HFT securities would go through the income statement. Thus, you have to reverse everything out of OCI, so the full gain, from $200 to $220, will show up on the income statement.
Note, too, that there is no tax effect (i.e., the increase in net income before and after taxes is the same $20): tax authorities tax you only on realized gains, not on unrealized gains.