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Disclosures – Summary

  • 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 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 available-for-sale category to 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 in respect of 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 other comprehensive income 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 standard. 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 other comprehensive income and as such forms part of the temporary differences as defined in the accounting standard. The deferred tax effect of those changes should also be presented in 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 should 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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