[martimann]

Hello guys I have a firm understanding of where unrealized gains or losses from fair value changes in securities go. But I find contractory info on becker. Based on the book, the unrealized gain or loss that arises on the day of reclassification should follow the rules of its new classification.

Ex: if reclassified to trading it will hit earnings on the income statement
Ex: if reclassified to Available. For sale it will hit other comprehensive income

But in one of the questions they have securities that were reclassified from trading to avaliable for sale with an unrealized loss of $45,000 that arose on the day of reclassification and they threw the loss into the income statement rather than other comprehensive income.

Shouldnt these unrealized gains and losses follow it’s new reclassification?
Does anyone have any feedback of how to approach this rule? I’m good pretty much on all other securities rules except for this glitch.

[Anonymous]

I'm pretty sure there is an exception if its already in trading. Because its already in income, you cant go fetch it.

If that wasn't the case, management would be incentivized to manage earnings by doing exactly this..Ohh we don't want that loss, let's go reclassify it to AFS.

trading gains and losses, unrealized or not, stay there. There are exceptions for the others to maintain relatively stable income and reduce volatility. I'll look in my Becker book in a bit to verify.

From 2016 Becker book, pg F3-5: Transfers between categories should only occur when justified.

From trading category The unrealized holding gain or loss at the date of transfer is already recognized in earnings and shall not be reversed.

Cheers

[martimann]

@cessnapilot30
Here's how I viewed the reclassification rule based on the book:

On the day of reclassication you revaluate at fair value and whatever unrealized gain or loss arises it will follow it's new classification.

In the question the securities original cost, per say, was 530 And they were at 500 at end of year 1 so that 30 unrealized loss obviously hit the income statement.
But from Jan of Yr 2 to the day of reclassification they went from 500 to 455.

And So I thought that the 45k unrealized loss that arose on the day of reclassification would be thrown to OCI in order to follow it's new classification.

But in their explanation they throw that unrealized loss to the income statement, which I don't understand why since it does not follow the rules they present on the book.

Maybe I'm interpreting the rule incorrectly??? And the exception for Trading securities is that on day of classification they are revalued and the unrealized gain or loss Hits the income statement???? But not for any other reclassification? I wish they explained more.

[Anonymous]

I think you are overthinking it a little bit.

If it was for any other classification, that would be the case. But trading securities is essentially what the company does as its primary business..think a brokerage firm.. So if you created an income statement immediately before the transfer, the gain/loss would go to the I/S.
Then think of it, that the transfer occurs right after. That is one way to think of it.

Or that an I/S is created at every “instant” of time.Sort of like a meter. Hopefully one of those explanations made a little bit of sense.

I agree though, that there are alot of subtle points most review courses do not cover..So I go to a textbook to get the fundamental theory.

[martimann]

@cessnapilot30
Thanks and Yeap, I guess that's how it works then.
And Yeap, I got a few books here I luckily kept they've come handy once in a while.

[Author]

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