04 - Transfer of Categories

Objective Questions

1. When securities are transferred from trading securities to available-for-sale, then
a. Gain/loss recognized as unrealized should be reversed.
b. Gain/loss recognized as unrealized should not be reversed.
c. Gain/loss recognized as unrealized will be adjusted with OCI.
d. None of the above.

2. When securities are transferred from available-for-sale to trading, then
a. Unrealized gain/loss will be transferred from OCI and treated as income.
b. Unrealized gain/loss should not be reversed.
c. No changes are required at all.
d. None of the above.

3. Impairment other than temporary with respect tof equity securities should be
a. Written down to fair value.
b. Treated alike as temporary impairment.
c. Considered a loss to be treated as temporary.
d. None of the above.

4. Stock dividend declared should be treated as
a. Income.
b. Increase in the value of original shares held.
c. Increase to the quantity (position) of shares held.
d. All of the above.

5. For securities classified as available-for-sale, which of the following items will be reported in the income statement of the current period?
a. Both realized and unrealized gains.
b. Realized gain alone.
c. Unrealized gain alone.
d. None of the above.

6. For income tax purposes, unrealized gain/loss will be recognized for reporting
a. Automatically at the end of the financial year.
b. Only if the securities are liquidated and realized.
c. As and when, depending upon the corporate action.
d. None of the above.

7. Unrealized gain/loss included in the income/OCI represents
a. Temporary difference recognized as deferred tax benefits.
b. Permanent difference recognized as deferred tax benefits.
c. No effect.
d. None of the above.

8. For available-for-sale securities, the deferred tax effect should be presented in
a. The income statement itself.
b. Other comprehensive income itself.
c. No need for accounting.
d. None of the above.

9. For trading securities, the deferred tax effect should be presented in
a. The income statement itself.
b. Other comprehensive income itself.
c. No need for accounting.
d. None of the above.

10. As per U.S. GAAP, changes in fair value for available-for-sale securities are reported in
a. The income statement.
b. Other Comprehensive Income.
c. No need to report.
d. None of the above.

11. When the equity securities are transferred from AFS to trading securities,
a. The unrealized gain/loss is recognized on T + 2.
b. The unrealized gain/loss is not recognized at all.
c. The realized gain/loss is recognized immediately.
d. The unrealized gain/loss is recognized immediately.
e. Realized gain/loss of trading securities is treated in the same way as in AFS.

12. Shares received as stock dividend should be added to the original shares, and when the mark-to-market process is performed, the impact of the stock dividend
a. Should be treated as unrealized gains and reported as income for the period.
b. Should be treated as dividend income.
c. Should be treated as dividend income but should be shown as a current asset on the asset side of the balance sheet.
d. Should be treated as realized gain/income for the period.
e. Items b and c.

13. According to the definition in FAS 109, the tax effects of all temporary differences arising from unrealized gain/loss are to be recognized in the financial statements as
a. Nontrading income.
b. Items exempted from taxes.
c. Deferred tax benefits or deferred tax liabilities.
d. They are not recognized for the current period, but are carried forward to the next accounting period.
e. Income or expense for the current period.

14. According to FAS 115, under U.S. GAAP, for securities classified as available-for-sale, all reporting enterprises shall disclose
a. Aggregate fair value.
b. Gross unrealized holding gains.
c. Gross unrealized holding losses.
d. None of the above.
e. All the above.

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Theory Questions

1. Can the securities that are classified once be transferred to other category? If so, what precautions should be taken to adjust the unrealized gains or losses?

2. How is the impairment of securities presented in the balance sheet?

3. What is the proper treatment of stock dividends? Can you report this as income?

4. How are the tax effects on unrealized gains/losses treated in the books of accounts in the securities classified as trading and as available-for-sale?

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• If the equity securities classified as available-for-sale are sold, then the realized gain/loss on such sale is transferred from the other comprehensive income (OCI) to the income statement and an entry is recorded to that effect.
• When the equity securities are transferred from trading securities to the available-for-sale category, then the gain/loss recognized as unrealized should not be reversed and no adjustment should be made to the OCI.
• When the equity securities are transferred from the available-for-sale category to the trading category, then the unrealized gain/loss on such securities based on the fair value of the securities should be transferred from OCI and thus recognized as income immediately on such transfer.
• Temporary impairment with respect to the equity securities that are held for trading is automatically tracked by valuing the securities at mark-to-market on every reporting day. Such temporary impairment is not to be recognized and acted upon for available-for-sale securities.
• However, if the impairment is anything other than temporary, then such impaired security must be written down to fair value. The realized loss on such impairment must be reported in the income statement. Once the impairment is recorded as loss, then even if the security recovers from such impairment, it would not be recognized in the earnings unless it is liquidated through the sale of the security.
• Unrealized gain/loss is not recognized for income tax purposes until the same is realized through liquidation. Hence the unrealized gain/loss included in the income or OCI, as the case may, be represents temporary differences as defined by FAS 109. The tax effects of all temporary differences are to be recognized in the financial statements as deferred tax benefits or deferred tax liabilities.
• For securities classified as trading, the unrealized gain/loss is included in the income and as such represents the temporary differences as defined in the accounting standards. The deferred tax effect of those changes should also be presented in the income statement itself.
• For securities classified as available-for-sale, the unrealized gain/loss is included in the OCI and as such forms part of the temporary differences as defined in the accounting standards. The deferred tax effect of those changes should also be presented n the other comprehensive income itself.
• As per FAS 115, under U.S. GAAP, for securities classified as available-for-sale, all reporting enterprises shall disclose
• Aggregate fair value.
• Gross unrealized holding gains.
• Gross unrealized holding losses.
• These should be grouped by major security type as of each date for which a statement of financial position is presented.
• IFRS 7 comes into effect for annual periods beginning on or after January 1, 2007. This standard requires that preparers provide quantitative and qualitative disclosures that would enhance a user’s understanding of the entity’s exposures to financial risks and how the entity manages those risks.

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