Under US GAAP;
i can reclass from Trading to Available for sale (AFS) = difference in fair value goes in income statement
where as: Held-to maturity to AFS = difference in FV goes to OCI
what’s the logic behind the first ? aren’t both going into OCI?
I know trading any changes in FC flow to the IS.
Here’s my guess:
If you weren’t required to report any gain or loss on an HFT security on the income statement when you reclass it to AFS you could manipulate net income simply by reclassifying the security.
When you reclass HTM to AFS, any gain or loss as of the reclass date wouldn’t have been reportable on the I/S so there’s no potential manipulation of NI. Changes in prices of HTM securities are not reflected on the I/S or B/S.
Thanks Lammy!
I agree!
I was curious as to why you would hit I/S if reclassing trading to AFS?
Did I answer your question? Or are you still wondering why you have to hit I/S?
All unrealized gains/losses in HFT are reflected on I/S.
All unrealized gains/losses in AFS are reflected in OCI.
Securities are marked up or down to market value so that the values reported on the B/S reflect better reflect economic reality.
Suppose that you have an HFT security with a CV of $100 as of 12/31/14. Now suppose that 1 year later you decide that it should really be classified as AFS rather than HFT. Let’s say the security increased in value to $500. You have an unrealized gain of $400. If you continued to hold the security as HFT you’d have to pick up the $400 of unrealized gain on your I/S when you mark up the security. You have to hit I/S when you reclass it to AFS because if you didn’t you could understate your NI simply by choosing to reclass it.
I found this article helpful in understanding OCI and its purpose.
http://www.investopedia.com/articles/fundamental-analysis/12/other-comprehensive-income.asp
You might also ask why you don’t have to mark HTM to market. My guess is because HTM consists only of bonds with market values that will converge to par the closer they are to maturity so any difference between market value and carrying value will go away.
Anyway, this is my made up rationale that helps me remember the rules.
Helps alot!
Thank you!