CFA Practice Question

CFA Practice Question

When a marketable security's classification is changed, which of the following apply?

I. The transfer is accounted for at the amortized historical cost of the security.
II. The change in the fair value of the security is reported as part of the income statement.
III. The switch in classification is at management's discretion.
A. III only
B. I, II & III
C. I & II
Explanation: When the classification of a marketable security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement (in the case of trading and held-to-maturity securities) or as a separate component of shareholder equity (in the case of available-for-sale securities). The classification and reclassification of securities is largely based on management intent. This allows the firm to manipulate current income by timing the reclassifications. Consequently, any financial statement analysis must take into account the effects of such artificial effects on income.

User Contributed Comments 9

User Comment
sireklove The answer indicates that II and III should be correct, not III only. Am I reading this incorrectly?
synner II is not correct because for available for sale securities, gain or loss is reported in a separate component of shareholder equity.
Will1868 I also agree that this question implies that two and three are both correct. The income statement would show a gain(loss) or writedown on a security or other investment right??
johny As indicated by synner, II is not correct for available-for-sale securities.
danlan Why is I wrong?
eddeb Because should be transferred at fair market value
thekapila 11 is incorrect because it should be presented seperately on income statment and not as a part of income statement.
iambroke 1 and 2 is wrong simply because they are not saying how it should be reclassified....and the answer could vary on the classification
manju79 Available for Sale=Marketable!
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