Reclassify as held to maturity

[abashtavy]

Sure, it goes like this:
“If it ain’t ‘bout cash I don’t really care
I’m straight ‘bout cash, I’m a hood billionaire”.
The only question is whether Rick Ross treats HFT securities as cash.

 

[str8up81]

S2000magician wrote:

str8up81 wrote:

40yoCFAcandidate wrote: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.

Most tax authorities don’t recognize unrealized gains/losses, so that likely wouldn’t be an issue.

Thanks for your reply. Just to be clear, I thought that if there was a loss for an HFT security then it is recognized in net income, whereas for an HTM security it would not be recognized in net income. If so, then net income would be higher under HTM, which would lead to higher taxes and thus less cash.
I am thoroughly confused now.

 

[Cynical Man]

Quote:Thanks for your reply. Just to be clear, I thought that if there was a loss for an HFT security then it is recognized in net income, whereas for an HTM security it would not be recognized in net income. If so, then net income would be higher under HTM, which would lead to higher taxes and thus less cash.
I am thoroughly confused now.

I think you are right about that, under the HFT the cash ratio would be HIGHER than under HTM.

 

[Rising Alpha]

If the bond isn’t HTM and the bond is down you should have an impact on your Equity (you’ll reduce your equity basis / OCI) and thus the ratios with an equity based denominator will increase, unless your assets exceeded all of possible denominators (<1).

 

[S2000magician]

str8up81 wrote:

S2000magician wrote:

str8up81 wrote:

40yoCFAcandidate wrote: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.

Most tax authorities don’t recognize unrealized gains/losses, so that likely wouldn’t be an issue.

Thanks for your reply. Just to be clear, I thought that if there was a loss for an HFT security then it is recognized in net income, whereas for an HTM security it would not be recognized in net income. If so, then net income would be higher under HTM, which would lead to higher taxes and thus less cash.
I am thoroughly confused now.

It’s not a question of whether it appears on the income statement or not. It’s a question of whether it’s taxable or not.
Interest income on municipal bonds, for example, appears on the income statement, but is not taxable. The more such interest you earn, the greater your net income, but your taxes are no higher.
Most tax authorities (with the notable exception of Croatia, apparently) don’t recognize unrealized gains or losses; gains and losses are recognized only when the security is sold. It doesn’t matter how you treat those securities for accounting purposes – held for trading, available for sale, held to maturity – the gains and losses will have an effect on your taxes only when the securities are sold and those gains or losses are realized.

 

[str8up81]

Thanks, S2000. I apparently overlooked that concept in my studies.

 

[maxhiggins]

So if you had bonds and were going to reclassify them as HTM they would no longer be a cash equivalent and cash ratio would be lower?

 

[40yoCFAcandidate]

Quoting US GAAP on Trading Securities “…..A security may be calssified as trading if the intent is to hold the security for a longer period. Classification of a security as trading should not be precluded simply becuse the entity does not intend to sell it in the near term. The trading classification should be documented at acquisition.”
This is consistent with my own experience. It creates ambiguity on whether Trading Securities should be including in short-term liquidity ratios. I thknk that the CFA answer is probably Yes. An argument for including them would be that they can be fairly easily converted to cash, even if there is no intent to sell them. But this is equally, or often equally, true for AFS securities. And even HTM securities, though there is accounting red tape to deal with if you sell HTM securities.
Perhaps this is a nice lesson that FRA includes lots of judgment calls, and those judgments come from all angles.