Reclassification of Investments and Impairments

On page 111 of FSA, it says "IFRS generally prohibits the reclassifcatino of securities into or out of the designated at fair value category, and reclassification out of the held for trading ategory is severely restricted.

I can memorize this, but I wonder if anone can shed some light on why it is so. Thanks.

Same for Impairmens (page 113 paragraph 2): Impairment losses on available-for-sale equity securities cannot be reversed. However, impairment losses on available-for-sale debt securities can be reversed if a subsequent increase in fair value can be objectively related to an event occurring after the impariment loss was recognized in profit and loss.

Meh. No reasoning behind these rules besides the fact that IFRS is principles-based. Their argument would be, we gave you enough flexibility to report and represent these securities (with respect to how you categorize them) to start off with. We’re not going to stretch end users’ imagination by allowing you to move in and out of categories at will.

Technically, you’ll have an incentive to recategorize something from trading as HTM, for example, if you’re making a loss on a security. Since an HTM security bypasses the I/S, your books will look better. In almost all cases, debt will be categorized as HTM and reported at amortized cost - writing down debt is more deterministic since your future cash flows may be in jeopardy. Equity, by its very nature, is speculative compared to debt (for e.g., there are no laws on paying out quarterly dividends) - writing down equity is not so deterministic.

However, I’d argue that you see this (writing down equity) in practice a lot… in the form of writing down goodwill. Latest example being HPQ taking a $9B charge on its Autonomy acquisition.