Why is B wrong? - Financial Reporting and Analysis

Analysts should be wary of which of the following equity transactions a company may use to manipulate its reported earnings to reflect a higher net income? A company can move shares that have appreciated in value from: A) available-for-sale to the trading portfolio. B) held-to-maturity to the trading portfolio. C) trading to the available-for-sale portfolio. Your answer: B was incorrect. The correct answer was A) available-for-sale to the trading portfolio. I understand why A is correct, and I was wondering about A or B, but went with B. Isn’t that pretty much the same reason. The held to maturity would also increase in value and could be moved to trading portfolio to recognize the gains. Why is this wrong??? Anybody??

You’re technically not allowed to move something from Held To Maturity to Trading, unless something REALLY legit comes up. If accounting govern bodies see your Corp doing this they will never allow you to classify anything for Held-to-Maturity again, and you will be the laughing stock of the neighborhood.

Not to mention, the word “shares” indicates its an equity investment and equity investments can’t be classified as HTM.

@ Reggie Isn’t that only under IFRS? Under US GAAP you can move the securities in and out of held for trading.

Yeah in and out of held for trading but I don’t think held to maturity. I think once it is classified as held to maturity I think it is both IFRS/GAAP (but no 100% positive) that they will both restrict you from ever classifying HTM again if you move it without meeting strict and specific criteria. B/C it is looked at as just a way for managers to manipulate earnings and income. But yeah once again not 100% if GAAP does that too, I would say so on the test just to be safe.

Makes sense. Thanks!