Hi all. There is a illustration in Schewer on Intercorporate Invt on treatment for AFS, HFT and HMT for a particular bond. I am comfortable with treatment for HTM, but for AFS and HFT is it correct to include amortised discount to Income Statement. I thought only coupon would form a part of income stat in case of AFS and coupon plus unrealised gains/loss in case of HFT. Infact if you look at last years FRA book the treatment is what I have described above. Did Scheweser was goffing it up all this while or are there any changes in US GAAP which i am missing! plz help…
AFS: Only thing in IS is interest/dividends. It’s carried at FMV unrealized gains/losses comprehensive income. HFT: everything goes through IS so the illustration seems right.
yeah, but the interest to be recognised on IS should be realised interest and not the one relating to amortisation of security (disvount/premium). Bcoz AFS securities are carried at FV on balance sheet and not at amortised cost…what say…
Also, for AFS, if you are reporting under IFRS, you also include unrealized FX gains/losses (like if you are an American company that owns a French bond, you would report your gain/loss attributale to currency exchange rates on the IS). This is not done under GAAP. As for the amortized discount, I don’t think you would do anything with it for either of AFS or HFT securities. In terms of gains/losses, you’re more concerned about what their market prices are, particularly for HFT since changes in the market price of an HFT security go straight to the IS. As you know, an AFS security’s divergence from the purchase price is stored cumulatively in OCI until it becomes realized, which will make the Shareholders Equity bounce around in total value a lot, depending on how volatile the AFS security’s market price is. Conversely, the HFT security’s market price changes will have a more volatile effect on IS for reasons you can understand fairly easily if you think about it. long story short, for AFS and HFT securities, don’t worry about the amortization of discounts/premiums; just worry about the market value and what you’ll do to the IS for HFT or to OCI for AFS. As torontoanalyst mentioned, for both, do put the interest/dividends on your IS.
this is what my understanding is “magicskyfairy”. So does this mean the ilustration on scheweser 2011 book is incorrect?
i dunno; i don’t use schweser : /
The reporting for debt securities can be tricky, and is not as straight forward as that for equities. Remember, the debt securities are valued using “Effective Method” which simply means the effective market interest rate at the time it was issued. The interest income on the I/S is NOT the coupon*face value but the market rate (yield)*purchase price. The difference between the two is used to calculate the amortized discount or premium, which gets reported in OCI, alongwith the increase/decrease in the market value. The Schweser example is perfectly correct. If you refer to Example 1, page 127-129 on the CFAI text, it’ll make things much clearer. When in doubt, refer to CFAI! I’m not touching Schweser for FRA, at all.
yeah, totally agree that’s how you would calculate the interst you recognize for the period, but you still need to put it on your IS : /
Guys is there any disconnect here? Iginla2010 is saying amortised premium/discount should go to OCI for AFS securities. where as Schweser has reported it on IS. Also magicskyfairy thinks it should be reported on IS.
it does not go to OCI. It goes to the IS. OCI - only the Unrealized gains/losses go to OCI for AFS securities.
Actually, I think you would not do anything with amortized premium/discount for AFS; you would ignore it completely and report based on market relative to purchase price (the difference getting put cumulatively in OCI). only Interest income and dividends goes to IS for AFS. Amortized premium/discount only comes into play for H2M, and it goes to IS. Can we all agree on that?
^ Define interest income for intercorporate investments in financial assets. OK, I’ll say this last time: the difference between the purchase price and the market value at the balance sheet date gets adjusted for the premium/discount to calculate unrealized gain/loss for OCI for AFS. Interest income is market rate (yield) * purchase price. The difference between coupon * face value and interest income is added/subtracted to the difference between carrying value and market value to calculate unrealized G/L in OCI. I never said interest income goes to OCI. Read my post again. HFT is on I/S, AFS on OCI. Have fun!
"The difference between coupon * face value and interest income is added/subtracted to the difference between carrying value and market value to calculate unrealized G/L in OCI. " I’m not sure about this part; as I mentioned before, I think this is only done for H2M, and I think this difference would actually go to the IS, not OCI : / will need to review tonight.
and actually, I’ve thought it over, and I think income from an AFS security is straight up the interest you are paid by it, or the dividend you get from it; no need to worry about amortization. I’ll have to look it up to feel 100% on that, right now, I’m only feeling about 70% on this.
HTM - BS - Amort Cost. IS Int Income and realized gains/losses AFS - BS FV, unrealized g/l to OCI. IS Div, int, income, and realized g/l HFT - BS FV, Mark to market. IS Div, int, income, realized and unrealized g/l 100% positive here.
Qbank had 1 question about coupon receipt for HTM. Answer stated that coupon receipt will be on IS. my question is: coupon receipt = interest payment?
passme Wrote: ------------------------------------------------------- > Qbank had 1 question about coupon receipt for HTM. > > Answer stated that coupon receipt will be on IS. > my question is: coupon receipt = interest payment? yes
Coupon receipt = interest payment BUT NOT interest income. There is a difference.
I ll check the book later
passme Wrote: ------------------------------------------------------- > Qbank had 1 question about coupon receipt for HTM. > > Answer stated that coupon receipt will be on IS. > my question is: coupon receipt = interest payment? Agree with Iginla; definitely the coupon payment is the interest payment, but I think this would only be true for interest income too if the security was purchased at par; otherwise a premium or discount amortization would also come into play