disposal cost of 'available for sale' investments

[Paki]

Asalam o alaikum
Under IAS 39, Availalble for sale investments should be carried at their fair value at subsequent dates aswell. This gain maybe taken to to Income statement or directly to equity (either of the one).
Upon disposal of such (or part) of investments, we take the relative portion of 'gain previously charged to equity' back to the Income statement.
My question is, if we are disposing off a part of this investment portfolio (that was acquired at different times and at different costs), then how are we going to determine the cost of the disposal?
Is it going to be an 'average cost' or 'fifo basis' or like previously 'lifo basis', or the actual cost??
I'm asking because I think the IAS 39 is silent on this issue.
Thanks

Further, are we going to assign any cost to shares acquired as a result of bonus dividend (i.e. their ex-dividend market price) and charge the amount to Income statement as 'dividend income' or are we going to use it to absorb the cost of previously held shares, and the result going to equity as the difference of that 'absorbed cost' and fair value???




Me rulz

[Pervez]

Hi Friend!
I think the answer to ur question is implied in IAS39. This standard is not different from U.S. GAAP. These things r better explained through examples
Assumed we acquired a financial asset in year 01 and classified it as available for sale. Initial recording will be on cost plus transaction expenses i.e basic cost of 100 and transactions cost of 2.
In year 02 we record it at FMV which has gone up to 112, this will give us two choices i.e.
1. Either report 10 as current year's unrealized gain in income statement or show dollars 10 as part of equity. In either case we are carrying the asset at 112 and not at 102 its original cost.
Assuming we sell 50% of financial asset in year 03 at 56, then we have to take 50% of 112 as costs of assets disposed i.e. 56 and recognize no gain loss on that portion, becuase sale price is equal cost. The other half is treated same as previous year and should be mark to market. Besides we have to bring half of cummulative gains from equity into income statement that were related to disposed portion. The question of LIFO or FIFO does not arise here? It is carrying cost at last Balane Sheet date which is relevant.
Now to second part of ur question. Dividends received in the investee corporation's stocks are not included in income of the recepient. Since each shareholder retains the same proportionate interest in the firm, but owns a larger number of shares than before. The question is did the issuing corporation distributed any assets? the answer is no. It has merely transfered a portion of retained earnings to capital stock.
Therefore, the recepient does not recognize any income for following reasons
1. their interest in issuing corporation is unchanged.
2. the issuing corporation has not distributed any of its assets to
them.
However, a memorandum entry should be made and costs of existing shares will be adjusted on their eventual disposition.
Again, FMV does not come into picture here.

Thnks





Edited by - Pervez on Jul 13 2003 64911 PM

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Edited by - Pervez on Jul 13 2003 70943 PM

[Paki]

thanks pervez, but my question had a little more than you answered. Let me put an example.
you acquire 10 shares, Jan 01 @ Rs. 12
10 more shares, Feb 01 @ Rs. 14
10 more shares again, March 01 @ Rs. 16
now, June 30 and you hold 30 shares cost Rs. 420 (its a coincidance, this Rs. 420 )
and at June 30 their fair value is Rs. 20 /share i.e. you carry your portfolio @ Rs. 600 that costs Rs. 420 i.e. 14 /share.
now the same date, or next, you sell 10 shares @ Rs. 20.
now how are you going to determind the cost of the 10 shares you sold???
is it 16 (following LIFO)
is it 12 (following FIFO)
or is it 14 (following average)
or are we going to determine how much profit we want to be routed to Income statement by determining the specific cost?? (it wont be practicable in CDC kept shares)
In the previous standard relating to investments, I guess they followed the LIFO method.

Me rulz

[Pervez]

Hi Pak!
Let us not change the rules in middle of the game. Your posting's heading is relating to Avialable for Sale securities. Since, by their very definition, these securities cannot be traded frequently, otherwise u have to classify them as tranding securities. So if u buy and sell the same securities within a fiscial year, there is nothing available for sale at the year end.
However, if u hold them for at least one balance sheet date and designate them as available for sale, then the rules r very clear in
IAS 39. May be we need to take a refresher course in English language, if we are having so much trouble understanding such trivial stuff. No offense intended. Thnks



Edited by - Pervez on Jul 15 2003 044111 AM

Edited by - Pervez on Jul 16 2003 044255 AM

[Paki]

well, none taken.
english has never been a matter of prestige, nor a source of trouble to me.
I dont think we are going to change the classification of AFS, just cause we have disposed off some part of it.
the emphasis in IAS is on intention. and intention for what??? for selling the securities to earn profits out of the fluctuations in their prices etc.
so we can dispose off some securities and keep them as AFS the same time.

my question still remains
regards

Me rulz