Forex gains/losses on AFS Debt security

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sooraj

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Hi Friends, I was going through the cfai material and didnt understand the below two sentences in the book. “Under IFRS for the purpose of recognizing forex gains/losses, a debt security s treated as if it were carried at amortized cost in the foreign currency. Exchange rate differences arising from changes in amortized cost are recognized in profit or loss, other changes in the carrying amount are recognized in the OCI”. What do they mean by amortized cost in the foreign currency? What do they mean by other changes in carrying amount? What other changes are possible? Could you please let me know your thoughts, friends? thanks, Gopal.
 
Hi,
what they mean is:
a) FX is calculated as an amortised cost in original currency at reporting date times difference between current and original FX rate (at date of inception),
b) total change in the carrying value of the security is current market value times current FX rate minus current amortised cost times FX rate as at inception date,
c) the difference between (b) and (a) is the part that goes to OCI under IFRS,
d) in other words you say that only FX gain/ loss is coming and related to amortised cost and the rest of the change in FV is related to market changes.
Hope it is clear but let me know if you need an example.
 
In simple words
If we hold Available for Sale Security
US GAAP
1) Any changes (Unrealised gain/loss) in the value of Available for Sale Security is part of OCI or Other Comprehensive Income. Since we show the Investment at Current Market Value.
2) Any realised (gain/loss) by way of Income Dividend/Interest is recognised in Income Statement.
3) When we sell the security, first we reverse the OCI and then recognise the realised gain/loss in Income Statement (simpler way imo)
IFRS
1) For Equity Security any changes (Unrealised gain/loss) in the value of Available for Sale Security is part of OCI or Other Comprehensive Income. Since we show the Investment at Current Market Value.
2) For Debt Security we divide the Unrealised gain/loss into a) change in the value of security which is part of OCI b) increase/decrease in the value of Security because of Foreign Exchange Rate weaking and Strengthening. This is then charged off to Income Statement.
3) When we sell the security, first we reverse the OCI and then recognise the realised gain/loss in Income Statement (simpler way imo)
So in IFRS for Debt Security you recognise gain/loss due to Forex Trnslation changes in Income statement and rest in OCI. Thats the only differance between US GAAP and IFRS wrt AFS Secs.
 
So in IFRS for Debt Security you recognise gain/loss due to Forex Trnslation changes in Income statement and rest in OCI. Thats the only differance between US GAAP and IFRS wrt AFS Secs.
Initially you recognise Investment at amortised Cost and then subsequently change it to Fair Value. e.g. If a 1 year Debt Sec. has Par value of $1000 and Coupon rate of 9% and was issued for $991/- with a yield(YTM) of 10%. so in Balancesheet under IFRS you would show it at Rs.991/- at the purchase date, when we receive Coupon of $90 we would receive an Income of $99 in Income Statement, add $9 to Investment to make it $1000. and add $90 to Bank(the amt. we received)
Thus we recored at Amortised cost and not PAR Value initially and hence referred as changes in “Amortised Cost”
 
Is this a dual-currency bond???
vgmalu wrote:So in IFRS for Debt Security you recognise gain/loss due to Forex Trnslation changes in Income statement and rest in OCI. Thats the only differance between US GAAP and IFRS wrt AFS Secs.
Initially you recognise Investment at amortised Cost and then subsequently change it to Fair Value. e.g. If a 1 year Debt Sec. has Par value of $1000 and Coupon rate of 9% and was issued for $991/- with a yield(YTM) of 10%. so in Balancesheet under IFRS you would show it at Rs.991/- at the purchase date, when we receive Coupon of $90 we would receive an Income of $99 in Income Statement, add $9 to Investment to make it $1000. and add $90 to Bank(the amt. we received)
Thus we recored at Amortised cost and not PAR Value initially and hence referred as changes in “Amortised Cost”
 
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