Held for Trading vs. Available for Sale - why is my answer wrong?

CFA Level I FRA
#1

Held for Trading Securities: original cost $120 (end of last year), fair value $125 (end of current year)

Available for Sale Securities: original cost $170 (end of last year), fair value $160 (end of current year)

Net Income in Current Year under IFRS

A) 5 lower

B) 5 higher

C) same

I put 5 higher, but it’s telling me that is the wrong answer and I don’t udnerstand why if changes in Held for Trading Securities are reported on income statement and changes in Available for Sale are reported directly in comprehensive income

Am I missing something?

#2

IFRS vis-a- vis US GAAP net income would be same. No differentiation in treatment of HFT and HFS.

#3

I think the unrealized gain should be reported in the other comprehensive income. The -10 for available for sale is realized loss. -10+5 = -5.

#4

What is the difference between unrealized and realized gains?

#5

Realized gain means, you have reasonable and sound basis to include it in income statement. For Ex. Intt received/receivable on securities, Dividends Received/declared or gains when the assets are sold. These afftect the income statement.

Unrealized gains are generally the onces that increase the Balance sheet assets/liab. Ex. HFS can be reported at FV. If FV>Historical cost, then the differential amt is the unrealized gain (i.e your asset and OCI has increased) as you have not sold the asset. Had you sold the asset at higher than CV you would have realized gain.

Some Unrealized gains may pass through Income statement and then onto B/S whereas others are generally reported as OCI.

Hope this helps

#6
#7

I was working on the pm June 2015 mock exam and please look at solution to number 56. Similar question to your’s. Answer is “This treatment is the same for both IFRS and U.S. GAAP”. Answer should be no change.

#8

I think the -10 loss for AFS is only the change in market value and the securities are not sold, so this is unrealized loss and is recognized in other comprehensive income

The 5 gain for trading is the unrealized gain and is recognized in the income statement.

#9

I reread the section and think you are correct. Both are unrealized. One is in the other comprehensive income. Another is in the income statement.