doubts on available for sale debt investments

CFA Level II FRA
#1

I have some doubts regarding the reporting of available for sale investments.

Suppose there is an investment with par value 275000, issue price=300000, coupon rate =6 and market interest rate at issue =4.5

now if we consider it to be a held to maturity security, we get the following amortization table at the end of the first 2 years

year interest payment interest income amortization carrying value

1 16500 13500 3000 297000

2 16500 13365 3135 293865

let the fair values at the end of the 2 years be 330000 and 300000

Now if the investment is classified as an available for sale security, I suppose the balance sheet value at the end of first year will be 330000 with (330000 - 297000) viz 33000 as unrealized gain classified in the equity statement.

Now here comes my doubt… If we consider the end of 2nd year, then value for the AFS will be 300000, but what would be the value of unrealized gain in the equity statement?

will it be 300000 - 293865=6135

In other words do we have to calculate the difference between the amortized cost of the security considering the original rates viz is 293865 and the market value viz 300000 to find the total unrealized gain/loss at the end of any year ??

and similarly what would be the interst income to be recorded for the available for sale security? will it be 13500 and 13365 just the same as that for HTM security?

#2

Kapish,

the amount of interest income recognised in respect of an AFS debt investment is exactly the same as under the HTM classification, so in your example, it’s 13,500 in Y1 and 13,365 in Y2.

Under the AFS classification, the amount of fair value gain which gets recorded within euqity via OCI in Y1 is 33,000. In Y2, you would have a 26,865 fair value loss (also recognised in equity via OCI). So, the overall effect would be, an unrealized gain within equity of 6,135 (+33,000 - 26,865) or, as you calculated it (300,000 - 293,865).

all the best

#3

thanks !

#4

Interest+ dividend income on avaliable to sale- Income statement

Unreliased gains/losses- OCI

Realised gain/losses- Income statement

#5

I am afraid I can;t agree with the result of Year 2 if classified as AFS: the interest income is the coupon, which is 16,500, and unrealized gain/loss recorded within equity via OCI should be the change in Fair value, which is 300,000 - 330,000 = -30,000. Otherwise, there will exist unbalance between B/S and I/S.