Hi, Could you help me explain the difference between Designated Fair Value through Profit & Loss and Held for Trading, why would a firm prefer one over the other? Thanks
Good question…looked it up and still not sure. CFAI says the classification is allowed under GAAP and IFRS where the firm would otherwise use AFS and HTM classification. Initially recognize at FV with changes in FV (as well as divs in interest) recorded on IS. Seems identical to trading. Under IFRS Designated Fair Value through Profit & Loss INCLUDE trading securities. thats all I got…
Fair Enough. I think the difference would be in the subtilties beyond CFA. On the other hand I was confused about couple of other details: 1) Is transaction cost only included for Held to Maturity instruments 2) Page 15 of CFAI textbooks explains on paragraph 1 that for any security in held for trading being reclassified to Available for Sale is adjusted for the difference between carrying cost and fair value. I thought that everything in Held for trading was held at Fair Value. Any insights?
- Transaction costs are included for INITIAL Recording of HTM and AFS investments and NOT for Trading Securities. 2. Trading Securities are ALWAYS reported at Fair Value. What is meant in that Statement is, when you convert a Trading Security to an AFS security, you need to adjust its Carrying Cost (which is its Previous Fair Value at Previous Reporting Date), to its CURRENT Fair Value. 3. Also, regarding the difference between ‘Designated for Fair Value’ and ‘Trading Securities’: The only difference I came across is when you want to re-classify them out of their current classification. Under IFRS, re-classification out of ‘Designated for Fair value’ is GENERALLY prohibited, where as any re-classification out of ‘Trading Securities’ is SEVERELY prohibited. If that was much of a difference
> 1. Transaction costs are included for INITIAL > Recording of HTM and AFS investments and NOT for > Trading Securities. > Under IFRS, transaction costs are not included in instruments using fair value, thus transactions cost are included in HTM initial cost, but not to be included in AFS instruments’ fair value, and of course, NOT for Trading securities. The transaction costs are then either expensed in PL immediately or over time. There are specific rules how to expense them depending on category, but it is way beyond the scope of CFAI reading here. > 2. Trading Securities are ALWAYS reported at Fair > Value. What is meant in that Statement is, when > you convert a Trading Security to an AFS security, > you need to adjust its Carrying Cost (which is its > Previous Fair Value at Previous Reporting Date), > to its CURRENT Fair Value. > Agree > 3. Also, regarding the difference between > ‘Designated for Fair Value’ and ‘Trading > Securities’: The only difference I came across is > when you want to re-classify them out of their > current classification. Under IFRS, > re-classification out of ‘Designated for Fair > value’ is GENERALLY prohibited, where as any > re-classification out of ‘Trading Securities’ is > SEVERELY prohibited. If that was much of a > difference Fair Value through Profit & Loss (FVTPL) is used when the (investing) company chooses to use the ’Fair Value option’ to recognize instruments that should NOT be classified as ’Held for Trading (HFT)’ (e.g., as AFS or HTM), but the company wants to recognize it similarly to ’Held for Trading (HFT)’ anyway (accounting wise). When the company chooses this option, the instrument is categorized under FVTPL (not HFT) and prohibited to be reclassified to another group, say AFS or HTM. Similarly, once you choose NOT to use the ‘Fair value option’ initially, you are not allowed to used it later on, i.e., reclassifying AFS or HTM to FVTPL is not allowed. Accounting wise, FVTPL and HFT are treated identically, as mentioned earlier. In summary, you classify instruments as HFT if you intend to trade short term, FVTPL if you don’t plan to trade short term, but choose the Fair Value option to recognize. Hope it helps.
Thank you elcfa. It makes much better sense now regarding usage of FVTPL classification. But, regarding this: > Under IFRS, transaction costs are not included in > instruments using fair value, thus transactions > cost are included in HTM initial cost, but not to > be included in AFS instruments’ fair value, > and of course, NOT for Trading securities. The > transaction costs are then either expensed in PL > immediately or over time. There are specific rules > how to expense them depending on category, but it > is way beyond the scope of CFAI reading here. > What you say makes perfect logical accounting sense, and if it is that way it will be one less exception to memorize. But, unfortunately CFAI text (Page 12 Para2 Line2) says AFS Fair Value includes transaction costs for both IFRS and US GAAP for initial recording. I have not checked errata though.
rus1bus You are right. It seems that I make a mistake in my notes. Under more careful review, I agree. IAS says Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for assets and liabilities not measured at fair value through profit or loss). [IAS 39.43] so AFS, since it is not FVTPL (which includes HFT), should have transaction cost included in the initial value.
Just to to be 100% clear about the definition to avoid further confusion: Financial assets at fair value through profit or loss (FVTPL) is a category that includes. 1. Held for trading (HFT) 2. Electively designated into the category. The last subcategory is either called ‘Designated’ as in the CFAI book or just conveniently in practice called ‘FVTPL’ (through not 100% correct terminology) to differentiate it with the HFT subcategory. It is the last convention that I used above to explain the subcategory. So, for example, when I wrote “the instrument is categorized under FVTPL (not HFT) and prohibited to be reclassified to another group, say AFS or HTM.” I mean "the instrument must be clearly labeled/grouped separately in the subcategory “Electively designated into the category” under the "Financial assets at fair value through profit or loss " and cannot be grouped with other ‘true’ HFT instruments under the “Financial assets at fair value through profit or loss” category. Hope it is clearer now.
Perfect, thanks people.