Hi, When we reclassify an investment from Available for sale to Trading, what are the effects on Debt to Equity? Debt stays the same, and Equity decreases because unrealized gains from Equity is transferred to Income statement? Thanks.
…i think there shudnt be any effect on the equity if you do not take into account the tax impact…if u realize gain in NI …that NI is added to equity…so the difference would only lie on the NI side… however if you take taxes into accout…gain(1-t)would be transferred to equity…hmmm…so yeah equtiy would decrease… but wat if the trading security is debt…AFS is only for equities…rite?
I think it stays the same. In the balance sheet, for both methods, debt or equity is recorded at market value (or cost + unlrealized g/l). Even for Trading, if in income statement there’s unrealized GL–> it would flow to equity under the net income or retained earning.
Wait a minute…when mention about tax here, the question is whether this unrealized GL on HFTrading securities be recognized before or after the net income under the line of ’ Other Income from Investment". Hm…tax is always the complicated part…
its AFS to trading…so UR G/L flow to IS where u take in account the effect of taxes…which make the UR G/L small than before…so net effect would be a lower equity… rite?
Right! 
I’ve just confirmed after googl’ing it out.
Thanks. Stalla says Equity stays the same. Diediemustpass: what did u google out? pls share =)
so it does not? i was goiung with stalla that says it stays the same. whats the official answer on this?
SFAS 115, para.15: Transfers between Categories of Investments The transfer of a security between categories of investments shall be accounted for at fair value. At the date of the transfer, the security’s unrealized holding gain or loss shall be accounted for as follows: a) From HFT to HTM/AFS, unrealized g/l at date of transfer will have already been recognize in earnings and shall not be reversed. b) To HFT: the portion of unrealized g/l at the date of transfer that has not been previously recognized in earnings shall be recognized in earnings immediately. c) For a debt security to AFS from HTM: the unrealized g/l shall be reported in OCI. d) For a debt security to HTM from AFS: unrealized g/l at the date of transfer shall continue to be reported in OCI, but shall be amortized over the remaining life of the security. The amortization of unrealized g/l will mitigate the effect on interest income of the amortization of the premium or discount for that HTM security.