Can someone explain this in simple terms?

[jimrod1000]

 

[bklynboy]

Not sure why a fictional account was used but moving to AFS means MV movements go through OCI instead of P&L for Trading. Where was this written? My only guess is its an internal method of getting their system to tag these assets differently from what they were.

 

[jimrod1000]

This is not my field, I'm an EFL teacher and one of my students wanted to know why this method was used.

 

[jimrod1000]

If anyone can throw another angle on this, it would be much appreciated.

 

[bklynboy]

Holding investments as trading requires that the change in market value be recorded through earnings. This can be very volatile as market returns can go up or down and create noise on the reported earnings. Its usually only a good idea to do this when the assets are backing liabilities that also go through the P&L so that the noise is cancelled out. Opting to classify as AFS means that although they are still at MV the change goes through equity and not the P&L. This way when people look at earnings the noise is not there and doesn't take away from understanding what you earned for a period. This is what most companies do BTW so not really unusual.

Regarding the fictional account - I am not certain but very likely this is an internal trade (where they did not sell anything but to get the category right in their system they made a fictional sell of all the Trading securities and a buy of the same securities as AFS). If this is not your expertise why is the student asking you for the answer?

Does this make it clearer?

 

[jimrod1000]

These are foreign students, looking for simplified language. In most cases this can be done, but the complexity of statement made it challenging when trying to simplify its meaning.

Your response has help me, and ultimately the student, have a greater understanding of the statement.

Many thanks.