So, nowhere in the text of the CFA material does it say what happens when you go from held for trading to held to maturity in regards as to whether or not the items are moved out of cash and equivalents or working capital.
It’s permitted under US GAAP only.
I don’t see how cash or working capital would be affected. I say no impact at all unless there were tax implications.
I believe there would be tax implications if there was a gain/loss since HTM wouldn’t recognize it, but HFT does.
I think marketable securities play a role here. Working capital includes marketable securities, which are lower under HTM than HFT.
Yeah, you may be right. This is where actually working with this stuff can put you at a disadvantage sometimes in an exam like this. At my employer, we reclassfied a large Bond Portfolio from Trading to AFS a couple years ago. All classifctions of Bonds are in the same section on our Balance Sheet (Investments). Nothing at all changed with respect to the firm’s actual liquidity. The bonds themsleves remained identical both before and after the accounting entry and could be sold just as easily if we called them HTM/AFS/Trading or whatever. The buyer wouldn’t care what we call them.
But in a texbook world with classified Balance Sheets and where Trading means you really do intend to sell pretty quickly then I see the point. In a purely hypothetical situations where this is a test question, I’d say not a great one. It could give the impression that how a company clssifies its investments matters more than it actually does.
I hear ya. This is what I consider to be a “trap”. No, there’s no hidden trick, but - without getting into question specifics - any problem that, as the original poster notes, wasn’t explicitly taught in the materials renders it a trap in my book. I’m not complaining, just explaining why I’ve said this exam has traps.
What about the equity? Retained earnings (equity) will be lower if the security’s market price is falling. So if a security is marked to market, as in the case of HFT, its value will be lower than that of a security classified as HTM, b/c it is carried at cost +/- amortization of a discount/premium.
I think this is good analysis, but you’re imposing an assumption of a security’s market prices falling, much like I initially responded in this thread while imposing an assumption of there being a gain/loss. I think the marketable securities explanation doesn’t impose any assumptions. Feel free to correct me if I’m wrong. I don’t want to get into question specifics, which makes this tough to fully explain.
It is a little bit of a clever scenario as I think of it some more. That the combo includes HTM does make some difference. Oh well.
Subsequent to the switch, yes. On the day of the switch, i don’t think equity will be affected. The cost basis of the new htm securities would be their fv/old trading value on the day of the transfer. Then any diff between that value and par would get amortized.
If i understood correctly what question the initial commenter was reffering to, price depreciation was a part of the scenario.
Most tax authorities don’t recognize _ unrealized _ gains/losses, so that likely wouldn’t be an issue.
After purchasing the bond, it is traded at a premium, so the purchaser gains from it. When reclassify the bond from HFT to HTM, does it impact ROE?
If HFT, the gains will go to Income statement and increase the NI, and increase the equity?
If reclassify as HTM, the gains DO not go ro income statement, the NI and equity decrease as a result?
If we have a HTM security and it is losing value (let’s assume it was purchased at par for simplicity, so no depreciation):
- NI is not impacted by the depreciation as well as equity - ROE stays the same.
If we have a HFT security and it is falling in value:
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NI is falling - b/c we are having realized losses
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Equity is falling, b/c we are marking to market.
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Within a one year timeframe, NI and Equity should decrease by the same amount I believe (due to the drop in value, dividends (coupons) received).
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Because numerator (NI) is usually lower than denominator (equity), the ratio (ROE) will fall.
That’s my thinking.
Cash Ratio = (Cash + Short Term Marketable Securities) / Current Liabilties
And those are not equities or longer term fixed income included to HFT. Only short term the most liquid fixed income securities (M1).
My tax authority does not recognize unrealized losses in FVPL (HFT) as tax deductable but recognize unrealized gains as taxable. What a consistency in taxation…
Purchaser gains from discount, premium amortization deduct yield.
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