Help needed

Barry

I wondered if anyone here can help resolve an argument. There is a client who has a portfolio of financial instruments and the guidelines say that between 30 and 50 % of the total portfolio value of the equity exposure should be limited. The clients portfolio manager balances the portfolio by buying and selling equity and debt instruments.
I know from my research that these instruments can be classed as available for sale but the audit manager has said they are not and should be classed as held for trading, but I don't see why. Can anyone shed and light on it?

PGM

The explaination of these headings aren't too clear.. The wording "held for trading" determines it?!

From what you've said it doesn't sound like your client trades these, as its held for them by a portfolio manager that balances the investment.

The advantage of held for trading is that increases in fair value go through the P&L, whereas avialable for sale go through other comprehensive income.

This explains it a little more;

http://www2.accaglobal.com/members/publications/accounting_business/CPD/2780406

PGM

Forgot to mention; derivatives must be classed as held for trading.

Steve Collings

Whether your client is allowed to classify the instruments as available-for-sale depends on their past practice. If the portfolio manager is authorised to buy and sell the financial instruments in attempts to balance the portfolio BUT there is no intention to trade, and there is also no past practice of trading for short-term profit then they can be classified as available-for-sale. However, you need to be careful here because if the portfolio manager actively buys and sells instruments to generate short-term profits, you've got to classify them as held-for-trading which I think is where your audit manager is coming from - hence you need to check out your client's intention with this portfolio.

Kind regards
Steve

Barry

Thanks both. Steve it seems you were right but my manager thought the classification as held for trading was for a different reason but after further investigation it was found your reasons were right. Thanks again.