Reclassification of Financial Assets - Reading 19

S

Snah

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Hi,

I do not understand why the unrealized gain or loss is reclassified through OCI when is comming from avaliable for sale to Held for trading (or fair value through profit and loss).

“we should put the unrealised G&L following the rules of where is going to” in the above example, should be in P&L; as it is in all the other reclassifications (Held to maturity to Held for trading -P&L, Held to maturity to avaliable for sale - OCI, ect).

I do not understand why that exception exist.

Thanks

S
 
you want to avoid that companies can book a profit by going for HFT when the market is up…. btw it seems to me that IFRS was pretty strict on transfers to and from HFT was it not ?
 
Yes, IFRS is much stricter, where reclassification of investments into/out of the designated at fair value category are “typically not allowed,” and reclassification of invetments out of HFT is “severely restricted.”
For GAAP, when going from AFS to HFT (FV through P/L), you move the unrealized G/L from OCI to the income statement to make its treatment consistent with other HFT securities, which have their unrealized G/L recognized in the income statement.
I’m not sure I understand the exception you are referring to…
 
Well, changing classifications is frowned upon in US GAAP, as well. You can do it, but you should have a pretty good reason and be ready to explain and defend it to your auditors and potentially your regulators (if any).
Like MagicHat, I am not sure I see the exception that the original poster notes. I don’t know all the arguments for/against moving the OCI to the P&L when reclassifying from AFS to HFT, but it doesn’t seem to violate any general principles. Granted, if the OCI was kept there until disposal of the asset, that would also make conceptual sense. Not sure why the promulgators landed where they did on this.
 
Thank you all for the anwsers.
The confusion was comming from a misundertanding of the schwerser notes which says in the reclassification, the Gain or loss is “Transfer out of other comprehensive income”
 
Yeah, when they say “transfer” they just mean an accounting entry to zero out the Unrealized Gain/Loss in OCI and move the balance(s) to the Income Statement.
 
From PWC clipping of new adopting IFRS 9:
” Financial assets within FVOCI category are initaly recognized and subsequently measured at fair value. Movements in the carrying amount should be recorded through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognized in profit and loss. Where the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss. “
http://www.pwc.com/us/en/cfodirect/assets/pdf/in-depth/us2014-05-ifrs-9-...
Hope, it helps…and Schweser is not always good in explanation, especially if studying mattery is not your strict sector.
 
I’m pretty sure cumulative gains or losses for equity instruments previously recognized in OCI based on new IFRS 9 standards are reclassified straight from AOCI to retained earnings (not profit or loss) bypassing earnings
 
finmonkey wrote:
I’m pretty sure cumulative gains or losses for equity instruments previously recognized in OCI based on new IFRS 9 standards are reclassified straight from AOCI to retained earnings (not profit or loss) bypassing earnings
Click to expand...
If so, then firm has deferred tax position as well. Do you have any link about this constatation?
 
Edit: This is in reference to the disposal of an instrument, not reclassification to FVTPL.
https://inform.pwc.com/inform2/show?action=informContent&id=143205160815...
” … management has the ability to make an irrevocable election on initial recognition, on an instrument-by-instrument basis, to present changes in fair value in OCI rather than profit or loss. If this election is made, all fair value changes, excluding dividends that are a return on investment, will be included in OCI. There is no recycling of amounts from OCI to profit and loss (for example, on sale of an equity investment), nor are there any impairment requirements. However, the entity might transfer the cumulative gain or loss within equity.”
For reclassification from FVOCI to FVTPL, you are correct in that “Fair value at reclassification date becomes carrying amount. cumulative gain or loss on OCI is reclassified to profit or loss at reclassification date.”
https://inform.pwc.com/inform2/show?action=informContent&id=143205160815...
 
Then, for revaluation through OCI and later transfer profit/loss direct to equity from revaluation reserve (in IFRS this is capital surplus account), firm has deferred tax position which is realized as a current in the moment of disposal.
 
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