RE IAS 39...
what does the standard say with regards to an HTM (Held to maturity investment) sold prematurely... does one have to reclassify the whole class of investment to Available for sale or Held for Trading ?
Ofcourse in either case the Profit/loss will have to be charged to the profit and loss (HFT, AFS if so opted).
Any comments ?
"Allah does not change the state of people unless they change what is within themselves" Quran 1311
hi
I think "reclassification is not required" if you reclassify it will not be in line with the thrust of IAS. selling prematurely- you are correct the residue would pass through p&l, makes no difference if you reclassify, infact you wont reclassify.
but as a matter of int. why did the entity sell HTM prematurely. I mean HTMs are pretty much inelastic and often carry penalities for premature exit.
The HTMS the unit holds has lower interest rates (as the case for instruments floated in the last couple of years)compared to better deals that the unit thinks it can now dabble into.
hmm.. so there are no penalties to that effect... tx.
"Allah does not change the state of people unless they change what is within themselves" Quran 1311
Salam!
IAS 39 requires that a held to maturity investment must be reclassified (to either available for sales or trading) and re measured at fair value (from amortised cost) if there is a change of intent or ability to hold such investments till maturity. this also applies to transfers of such investments. The term "Transfer" comprise any re classification out of held to maturity category including pre mature sales. Thus, the transfer of more that an insignificant portion of held to maturity investments into the available for sale or trading category would not be consistent with an intent to hold other hald to maturity investments to maturity.
The reclassification is recorded in the reporting period in which the sales or transfers occurred and is accounted for as a change in classification. IAS 39 makes it clear that at least two full financial years must pass b4 an enterprise can again classify financial assets as HTM. <font face='Georgia'></font id='Georgia'><font size=5></font id=size5><font color=navy></font id=navy>
Idrees
W Salam (idrees)
i think the change in intent applies, if the org. have loads of HTM and part of them are sold prematurely, then the directors have to consider if the catagory needs changing for all of them.
However, if the only batch being held is sold prematurely, change of intent applies but makes no difference to reclassify and then pass the gain/loss through p&L.
Please correct me if my understanding is incorrect and btw what did you do pracs.
Yes, I agree Good man.....partly though..
Batches/Loads of HTMS
If more than an insignificant portion of held to maturity investments are sold, then the company MUST RECLASSIFY.
Single Batch of HTM
The company is prohibited then from classifying any of its investments as held to maturity for next two consecutive years.(in both the cases)<font face='Book Antiqua'></font id='Book Antiqua'><font size=5></font id=size5><font color=teal></font id=teal><font color=navy></font id=navy>
Idrees
Salam
Well i agree with the IAS wording that if the enterprise attempts to premature encashment, then there are two implications, one those investments shall no longer be considered as htmi and shall be classified as either availabale for sale or trading investments, secondly for the next two consecutive years none of the htm investments shall be classified as "htmi". no more implications as such.......
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Be careful! Words speak....
Consider the case of a Polish company which produces engines and spare parts for ships.The reporting currency of the entity is polish zloty but lots of contracts between two polish or polish and other European companies are denominated in US dollars. The problem is whether the embedded financial instrument (under IAS 39) should be recognized in this case or not. Can we treat US dollar as "a (follow IAS 39) currency in which the price of the related good or service that is acquired or delivered is routinely denominated in international commerce (for example, the U.S. dollar for crude oil transactions)"? If we could, there would be no embedded derivative but if we couldn't, the derivative would have to be recognized.
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Idrees
Still no reply.....<font face="Times New Roman"></font id="Times New Roman"><font size="5"></font id="size5"><font color="blue"></font id="blue">
Dear,
Can you identify and explain the embedded financial instrument and derivative in the above situation narrated by you?
If contracts are denominated in US Dollars, then whether US Dollars are used just as a measure of the transaction by setlling down in local currency determined through applicable exchange rates or even the transaction is settled by actual delivery of US dollars instead of local currency?
Does such company book a forward rate contract for the underlying transactions (if actual delivery of US dollars is made) or just incorporate the transactions on spot rate and any resulting coversion exchange gain or loss on actual settlement date is carried to profit or loss account?
Regards,
Kamran.