Im reading the topic on Incorporate Investment and it says that equity securities can be classified as either held for trading or available for sale.
Can anyone give an example of an equity security that is classified as available for sale?? Is that normal in real business?
Thank you.
Yes it is normal and quite common.
When you classify an equity security as ‘available for sale’ you are simply saying that you do not intend to hold it for trading purposes (short-term, with view to profit from price fluctuations).
Imagine a company invests in 5% of the ordinary share capital of another business. It is probably not enough to give it significant influence (associate), or control (subsidiary), and hence the investment would fall under standard financial instruments accounting. If the investor plans to hold the shares for the medium or long term, or simply for an undefined time period, then the natural classification would be ‘available-for-sale’.
Then, if treated as available for sale if u are checkin for impairment and the fair value is lower than its carrying value u report a loss than as i have read it goes directly to the I/S. (I assume then that is a realized loss).
However if the fair value is higher than itrs carrying value it goes to equity. (I assume then that is an un realized gain).
So, as a I see it there wouldnt be any unrealized losses, since they have to go directly to the I/S?
Thank you.
Not really. Both gains and losses, so ups and downs in fair value, initially go to OCI (equity) instead of the I/S. It is only when you determine that impairment has occured that you take the loss to the I/S (and out of OCI).
Not every drop in fair value constitutes impairment. In the case of equity instruments, impairment is associated with a significant or prolonged drop in value below the cost at which the instrument was purchased.
So, if you buy a share for $10 and it subsequently drops to $9 for a couple of weeks but subsequently picks up to above $10, the drop does not constitute impairment and is not taken to income.
regards
Wow!! I completely got everything!!
Many Thanks Wojtek!!!
Ok, you are welcome!