CFAI Book Page 13 “Both IFRS and U.S. GAAP allow entities to initially designate investments at fair value that might otherwise be classified as available-for-sale or held-to-maturity” - what does this mean? I understand that for securities classified as AFS and HTM can be initially recognized at fair value, but what does “otherwise be classified as AFS and HTM” mean?..is it because of the different treatment after subsequent reporting date? Thanks in advance!
HTM should be reported year-end at amortized cost. Available for sale should be reported at fair value so I dont get this statement.
The standards allow you to classify your investments at AFS or HTM – 1 choice. Another irrevocable choice companies can make is to always report the security at Fair market value. If they choose to do it this way - they cannot go back to reclassifying as AFS or HTM. In this case it will always be at FMV.
For better transparency, it is best to report fair values in the FS. however, the downside is more volatile earnings because of the nature of the disclosure.
chelseace Wrote: ------------------------------------------------------- > For better transparency, it is best to report fair > values in the FS. however, the downside is more > volatile earnings because of the nature of the > disclosure. Earnings are unaffected by changes in FV if the investments are classified as available for sale. The changes in fair value are accounted for as other comprehensive income. That is, unless the changes are realized, in which case it would be included on the income statement.
jensen - once you designate as FV option - you no longer have the ability to go back to reporting as AFS.
You’re right.
How have you been CP? Start studying again already or are you answering these questions from memory?
cpk123 Wrote: ------------------------------------------------------- > jensen - once you designate as FV option - you no > longer have the ability to go back to reporting as > AFS. is this true? doesnt it have more to do with what management’s intentions are to hold the security.
thanks everyone. so…am i correct to think that for securities that are “designated at fair value”, when the fair value is remeasured, the change of the fair value will not be reflected on the financial (hence more volatile numbers) ? on the other hand, for Held-for-Trading and Available-for-Sale securities, their change of fair value (unrealized gains and losses) are reported in either “profit or loss” or “other comprehensive income”. is this the difference?
Skies Wrote: ------------------------------------------------------- > thanks everyone. > > so…am i correct to think that for securities > that are “designated at fair value”, when the fair > value is remeasured, the change of the fair value > will not be reflected on the financial (hence more > volatile numbers) ? the change will be reflected in the P&L > > on the other hand, for Held-for-Trading and > Available-for-Sale securities, their change of > fair value (unrealized gains and losses) are > reported in either “profit or loss” or “other > comprehensive income”. > > is this the difference? only AFS securities go direct to equity if there are unrealized losses.
Thanks. Got it. I just couldn’t figure out the motivation to designate at fair value. Are there any downsides or advantages of doing this compared to HTM HFT and AFS?? I_Passed_Level_1 Wrote: ------------------------------------------------------- > Skies Wrote: > -------------------------------------------------- > ----- > > thanks everyone. > > > > so…am i correct to think that for securities > > that are “designated at fair value”, when the > fair > > value is remeasured, the change of the fair > value > > will not be reflected on the financial (hence > more > > volatile numbers) ? > > > > the change will be reflected in the P&L > > > > on the other hand, for Held-for-Trading and > > Available-for-Sale securities, their change of > > fair value (unrealized gains and losses) are > > reported in either “profit or loss” or “other > > comprehensive income”. > > > > is this the difference? > > > only AFS securities go direct to equity if there > are unrealized losses.
jensen - answer to this one was from memory. work is pretty hectic nowadays and not getting too much time to go over stuff right now. also areas of the curriculum - econ, alt inv. where I did really badly - want to finish those first and having a hard time with them as usual…
cpk123 Wrote: ------------------------------------------------------- > jensen - answer to this one was from memory. > > work is pretty hectic nowadays and not getting too > much time to go over stuff right now. > > also areas of the curriculum - econ, alt inv. > where I did really badly - want to finish those > first > > and having a hard time with them as usual… you are a god amongst men CPK
what’s the motivation to designate at fair value? are there any downsides or advantages of doing this compared to HTM HFT and AFS? thanks…
this is primarily used for hedging - so gains and losses go to the Income statement directly.
Good man CP. I suppose I’ll register again this weekend and probably start again early November. I don’t know why but Alternative Investments always gives me problems too.
register and take advantage of the 50$ they throw back at us… otherwise the rate goes higher
Good call. I’ll go ahead and do it. Thanks.
Fair Value allows you to mark up or down the position and to take the delta to PnL. Held for Sale, you can mark up and down, but the delta only goes to OCI (Equity) and doesnt touch PnL until you dispose of the position. Held to Maturity, you cant mark up or down, you can only amortise. Hope that helps.