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.
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.
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.
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…