reclassifying investments from htm to afs acceptance

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Reclassifying investments from htm to afs acceptance tenhands investment firms

Reclassifying investments from htm to afs acceptance

How is that done? Now you want to move that bond to HTM. This is amortizting original price to FMV time of transfer using effective interest rate method. Held-to-Maturity Securities DR I am sorry for confusing. Here is what is stated in IFRS 9 about this issue, "Where the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss ".

I have no idea what is Yankee approach, but obviously is different from European. How much is done each year? Maybe I am looking beyond the scope of the curriculum. Bond with value adjusted for each OCI offset entry. Thus a security book value had been adjusted already for any gain or loss in OCI.

It is only a few sentences. I would paste if I could, but for some reason cannot. If market rates go down, your bond will appreciate and you will show a positive unrealized gain in the OCI statement. Then you re-classify your bond into an HTM one. How do you think, is that fair? Will IRS accuse me of hiding part of the interest income from taxation due to such re-classification? The unrealized gain in OCI will amortize into interest income and perfectly in theory offset the amortization of your premium.

In other words you will have two offsetting amortizations. Both amortize into Interest Income, and offfset. Low credit ratings or concerns regarding creditworthiness existing at acquisition would generally lead to a conclusion that a subsequent not insignificant sale from the HTM category taints the rest of the HTM portfolio. A downgrading by a rating agency may provide objective evidence of a significant credit deterioration. An expectation of deterioration should be supported by objective evidence.

Some of the financial measures that may provide objective evidence are:. In many situations, an effective measure of a significant deterioration is a significant increase in the yield on the debt of an entity when compared to the change in the yield of a risk-free security of a similar maturity. Information affecting the issuer e. For example, widespread difficulties experienced by others in the industry e.

In contrast, the development of severe competition, adverse tax or regulatory developments, or declining markets may have a direct bearing on the creditworthiness of specific issuers. However, the deterioration in creditworthiness must be significant judged by reference to the credit rating at initial recognition.

A credit downgrade of a notch within a class or from a rating class to the immediately lower rating class could often be regarded as reasonably anticipated. If the rating downgrade in combination with other information provides evidence of impairment, the deterioration in creditworthiness often would be regarded as significant.

A permitted i. If an entity does not sell a debt instrument immediately in response to a significant credit deterioration, but continues to classify the instrument in the HTM portfolio, a sale of that instrument at a future date would not satisfy the conditions for permitted sales.

Because an entity is required to make an ongoing assessment of its ability and intent to hold an instrument to its maturity, by not reclassifying the instrument out of HTM when the credit deterioration occurred, the entity effectively reconfirmed its intent to hold the instrument to its maturity.

An exchange of debt securities classified as HTM pursuant to a bankruptcy generally qualifies as a permitted sale out of HTM because bankruptcy is the ultimate form of credit deterioration. HTM: sale due to cash need resulting in tainting — example. Entity P, an insurance entity, sells financial assets that have been classified as HTM due to cash needs arising from the failure of one of its principal reinsurers.

A sale from the HTM portfolio for this reason would be inconsistent with the positive intent and ability to hold the security to maturity. HTM: reclassification as a result of counterparty restructuring — example. Entity N, a life insurance entity, purchased a debt security in a private placement offering. The issuer, a private entity, is currently in bankruptcy proceedings and is restructuring its debt. The issuer is contemplating swapping its debt security to Entity N for new debt and shares.

In some circumstances, it may not be possible to hold a security to its original stated maturity, such as when the security is called by the issuer prior to maturity. Under these circumstances, the maturity date is accelerated to the date of early redemption or when the debt security is exchanged.

Entity N should determine whether an impairment loss has arisen and, if so, recognise that impairment loss see section 5 of chapter C6. Sales out of HTM in anticipation of future tax law changes that have not become law will taint the HTM portfolio if sales are significant in comparison to the HTM portfolio. To reduce the risk of tainting, the tax change must already have become law prior to the disposal of the assets.

HTM: reclassification as a result of a change in a tax treaty — example. Entity X, an entity operating in Canada, has a portfolio of financial assets classified as HTM, which contains a Malaysian bond issue. At the date that Entity X purchased the security, a tax treaty existed between the Canadian tax jurisdiction and Malaysia which Entity X anticipated would continue for the foreseeable future and at least for as long as the bonds were outstanding.

This treaty allowed the use of Canadian foreign tax credits to reduce the onerous tax consequences that would otherwise result from inclusion of interest on the Malaysian security in taxable income in both tax jurisdictions assuming Entity X is also taxed on the income in Malaysia. If the treaty does expire, however, reclassification may be permitted which will not taint any remaining HTM securities.

A disposal out of HTM is permitted if it is consequential to a major business combination or disposal of a business and affects existing interest rate risk or credit risk positions which must be maintained in accordance with risk management policies. Therefore, an entity may reassess the classification of HTM securities concurrently with or shortly after a major business combination and not necessarily call into question its intent to hold other securities to maturity in the future.

As time passes, it becomes increasingly difficult to demonstrate that the business combination, and not other events or circumstances, necessitated the transfer or sale of HTM securities. Sales in anticipation of a business combination e.

Sales out of the HTM category as a result of a change in senior management in connection with a restructuring of the entity will result in tainting. A change in management is not identified as an instance of sales or transfers from HTM that does not compromise the classification as HTM because a change in management or a restructuring cannot be argued to be an isolated, non-recurring event that could not have been reasonably anticipated. In some countries, regulators of banks or other industries may set capital requirements on an entity-specific basis based on an assessment of the risk in that particular entity.

Note that an entity cannot apply the conditions separately to HTM financial assets held by different entities in a consolidated group, even if those group entities are in different countries with different legal or economic environments.

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Note that a disaster scenario that is only remotely possible e. They cannot be considered to be non-recurring or isolated and would not meet the exception under IAS Low credit ratings or concerns regarding creditworthiness existing at acquisition would generally lead to a conclusion that a subsequent not insignificant sale from the HTM category taints the rest of the HTM portfolio.

A downgrading by a rating agency may provide objective evidence of a significant credit deterioration. An expectation of deterioration should be supported by objective evidence. Some of the financial measures that may provide objective evidence are:. In many situations, an effective measure of a significant deterioration is a significant increase in the yield on the debt of an entity when compared to the change in the yield of a risk-free security of a similar maturity.

Information affecting the issuer e. For example, widespread difficulties experienced by others in the industry e. In contrast, the development of severe competition, adverse tax or regulatory developments, or declining markets may have a direct bearing on the creditworthiness of specific issuers. However, the deterioration in creditworthiness must be significant judged by reference to the credit rating at initial recognition.

A credit downgrade of a notch within a class or from a rating class to the immediately lower rating class could often be regarded as reasonably anticipated. If the rating downgrade in combination with other information provides evidence of impairment, the deterioration in creditworthiness often would be regarded as significant. A permitted i. If an entity does not sell a debt instrument immediately in response to a significant credit deterioration, but continues to classify the instrument in the HTM portfolio, a sale of that instrument at a future date would not satisfy the conditions for permitted sales.

Because an entity is required to make an ongoing assessment of its ability and intent to hold an instrument to its maturity, by not reclassifying the instrument out of HTM when the credit deterioration occurred, the entity effectively reconfirmed its intent to hold the instrument to its maturity. An exchange of debt securities classified as HTM pursuant to a bankruptcy generally qualifies as a permitted sale out of HTM because bankruptcy is the ultimate form of credit deterioration.

HTM: sale due to cash need resulting in tainting — example. Entity P, an insurance entity, sells financial assets that have been classified as HTM due to cash needs arising from the failure of one of its principal reinsurers. A sale from the HTM portfolio for this reason would be inconsistent with the positive intent and ability to hold the security to maturity.

HTM: reclassification as a result of counterparty restructuring — example. Entity N, a life insurance entity, purchased a debt security in a private placement offering. The issuer, a private entity, is currently in bankruptcy proceedings and is restructuring its debt. The issuer is contemplating swapping its debt security to Entity N for new debt and shares. In some circumstances, it may not be possible to hold a security to its original stated maturity, such as when the security is called by the issuer prior to maturity.

Under these circumstances, the maturity date is accelerated to the date of early redemption or when the debt security is exchanged. Entity N should determine whether an impairment loss has arisen and, if so, recognise that impairment loss see section 5 of chapter C6. Sales out of HTM in anticipation of future tax law changes that have not become law will taint the HTM portfolio if sales are significant in comparison to the HTM portfolio.

To reduce the risk of tainting, the tax change must already have become law prior to the disposal of the assets. HTM: reclassification as a result of a change in a tax treaty — example. Entity X, an entity operating in Canada, has a portfolio of financial assets classified as HTM, which contains a Malaysian bond issue. At the date that Entity X purchased the security, a tax treaty existed between the Canadian tax jurisdiction and Malaysia which Entity X anticipated would continue for the foreseeable future and at least for as long as the bonds were outstanding.

This treaty allowed the use of Canadian foreign tax credits to reduce the onerous tax consequences that would otherwise result from inclusion of interest on the Malaysian security in taxable income in both tax jurisdictions assuming Entity X is also taxed on the income in Malaysia.

If the treaty does expire, however, reclassification may be permitted which will not taint any remaining HTM securities. A disposal out of HTM is permitted if it is consequential to a major business combination or disposal of a business and affects existing interest rate risk or credit risk positions which must be maintained in accordance with risk management policies.

Therefore, an entity may reassess the classification of HTM securities concurrently with or shortly after a major business combination and not necessarily call into question its intent to hold other securities to maturity in the future. As time passes, it becomes increasingly difficult to demonstrate that the business combination, and not other events or circumstances, necessitated the transfer or sale of HTM securities.

Sales in anticipation of a business combination e. Sales out of the HTM category as a result of a change in senior management in connection with a restructuring of the entity will result in tainting. A change in management is not identified as an instance of sales or transfers from HTM that does not compromise the classification as HTM because a change in management or a restructuring cannot be argued to be an isolated, non-recurring event that could not have been reasonably anticipated.

For some of these banks, there were significant amounts not recognized on income statements due to reclassification, when compared to overall net income or loss. Examples, based on a percentage of reported net income or loss, include:. There also were puzzling reclassification issues related to some of the banks, as highlighted below:. The reclassification was presumably justified because management intended to hold and collect the contractual cash flows from these securities.

The related disclosures do not adequately shed light on the factors influencing the changes in management intention across different reporting periods, as evidenced by the reclassification choices for government securities in and Again, this situation raises the question regarding the durability of management intention as a basis of accounting.

The observed impact of reclassification under IAS 39 epitomizes the analytical challenge that investors face under a reporting framework with multiple exceptions. Making meaningful comparisons is challenging when management intention can result in different accounting for similar instruments — especially when management intention varies from period to period and across banks with the same business model.

Investors should be on alert to significant adjustments to reported numbers due to reclassification choices that distort performance reporting, and to situations where these reported numbers are not comparable across different reporting companies. If you liked this post, consider subscribing to Market Integrity Insights.

He is responsible for representing the interests of CFA Institute on financial reporting and on wider corporate reporting developments to major accounting standard setting bodies, enhanced reporting initiatives, and key stakeholders.

Prior to joining CFA Institute, he served in investment analysis, management consulting, and auditing roles. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Notify me of follow-up comments by email.

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