Intercorporate Investmentss

Fiduciary Investors held two portfolios of marketable securities:

  • $50 million in Portfolio A was accounted for as Fair value through profit or loss.
  • $50 million in Portfolio B was accounted for as amortized cost securities.
    Assume that Fiduciary reclassified securities ($10 million carrying value, $8 million market value) from Portfolio B into Portfolio A. If no previous write downs were made, Fiduciary must:
    A) do nothing to its income statement or equity section of its balance sheet.
    B) charge $2 million to its income statement.
    C) charge $2 million to the equity section of its balance sheet.
    Correct Answer B with explanation Reclassification of debt securities into FVPL is allowed if the business model has changed. Unrealized gain or loss on reclassification is recognized in the income statement.
    On January 9, 20X6, Company X, reporting under IFRS, purchased $1,000,000 of government bonds at par and 100,000 shares of stock in Company S for $2,000,000. The stock investment was held at fair value through OCI while the bonds were held at amortized cost. As of December 31, the bonds were valued at $900,000, and the stocks were valued at $2,200,000. The bonds paid $50,000 of interest and the stocks paid $20,000 of dividends. In 2006, Company S had earnings per share of $0.90. In late 20X6, Company X decided to reclassify the investments in stock. What classification can the company classify the investment in stocks to?
    A) Fair value through profit or loss or amortized cost.
    B) Reclassification would not be allowed.
    C) Fair value through profit or loss only.
    Correct answer B with explanation The initial choice of classification into fair value through OCI is irrevocable and reclassification is not allowed for equity securities.

My doubt - I attended the second question after first. The initial answer come to my head was option B, not be allowed. Then they said the initial classification is irrevocable. If so, why Q1 say otherwise. May be because the first one is bonds and second one is stocks? Thanks in advance.