C » Topics » Debt Securities Reclassified to Available for Sale and Held to Maturity

These excerpts taken from the C 10-K filed Feb 27, 2009.

Debt Securities Reclassified to Available for Sale and Held to Maturity

FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), requires that, at acquisition, an enterprise classify debt securities into one of three categories: trading, available for sale (AFS) or held to maturity (HTM). Trading securities are carried at fair value on the balance sheet with unrealized holding gains and losses recognized in earnings currently. AFS securities are carried at fair value on the balance sheet, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity in Accumulated other comprehensive income (AOCI). HTM debt securities are measured at amortized cost. Both AFS and HTM are subject to review for other-than-temporary impairment (see discussion on page 128).

SFAS 115 states that transfers of securities out of the trading category are expected to be rare. During the fourth quarter of 2008, Citigroup made a number of transfers out of the trading category in order to better reflect the revised intentions of the Company in response to the significant deterioration in market conditions, which was especially acute during the fourth quarter. These market conditions were not foreseen at the initial purchase date of the securities. Most of the debt securities previously classified as trading were bought and held principally for the purpose of selling them in the short term, many in the context of Citigroup’s acting as a market maker. At the date of acquisition, most of these positions were liquid and the Company expected active and frequent buying and selling with the objective of generating profits on short-term differences in price. However, subsequent declines in value of these securities are primarily related to the ongoing widening of market credit spreads reflecting increased risk and liquidity premiums that buyers are currently demanding. As market liquidity has decreased, the primary buyers for these securities have typically demanded a return on investment that is significantly higher than previously experienced.

Despite depressed market prices, the Company determined through credit analysis that the cash recovery levels of these securities is expected to be significantly higher than current market prices might indicate.

 


 

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Reclassifications of debt securities were made at fair value on the date of transfer. The impact of the transfers executed during the fourth quarter of 2008 is detailed in the following table followed by a, summarized by type of securities:

 

In millions of dollars   Carrying value at
December 31, 2008

Debt securities reclassified from Trading account assets to held-to-maturity investment

  $ 33,258

Debt securities reclassified from available-for-sale investments to held-to-maturity investments

    27,005

Total debt securities reclassified to held-to-maturity investments

  $ 60,263

Debt and equity securities reclassified from Trading account assets to available-for-sale investments

  $ 4,654

 

In millions of dollars   Amortized cost(1)    Carrying value at
December 31,
2008(2)
   Fair value at
December 31,
2008(2)

Debt securities reclassified to held-to-maturity investments

       

Mortgage-backed securities

  $ 37,719    $ 30,738    $ 27,751

State and municipal

    4,898      4,548      4,327

Other debt securities

    25,665      24,977      24,432

Total debt securities reclassified to held-to-maturity investments

  $ 68,282    $ 60,263    $ 56,510

Debt and equity securities reclassified to available-for-sale investments

       

Mortgage-backed securities

  $ 109    $ 72    $ 72

State and municipal

    2,235      2,111      2,111

Other debt and equity securities

    2,368      2,471      2,471

Total debt and equity securities reclassified to available-for-sale investments

  $ 4,712    $ 4,654    $ 4,654

 

(1) For securities transferred to held-to-maturity from Trading account assets, amortized cost is defined as the fair value amount of the securities at the date of transfer. For securities transferred to held-to-maturity from available-for-sale, amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of interest, less any impairment previously recognized in earnings.
(2) The difference between the carrying value and fair value at December 31, 2008 for those securities reclassified to HTM is not recognized in the Company’s financial statements, while the difference for securities reclassified from Trading account assets to AFS is recognized with the change recorded in AOCI.
(3) Excluded from these tables is $4.2 billion of HTM securities that were purchased during the fourth quarter of 2008, in accordance with prior commitments. These purchases consisted of $1.3 billion of auction-rate securities and $2.9 billion of auto note securities.

 

 

The net unrealized losses arising prior to the reclassification date and classified in AOCI of $8.0 billion as of December 31, 2008, for debt securities reclassified from AFS investments to HTM investments have been segregated within AOCI. This balance will be amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the

accretion of discount on the same transferred debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding loss reported in equity will offset the effect on the interest income of the accretion of the discount on these securities.


 

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Table of Contents

 

Debt Securities Reclassified to Available for Sale and Held to Maturity

FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), requires that, at acquisition, an enterprise classify debt securities into one of three categories: trading, available for sale (AFS) or held to maturity (HTM). Trading securities are carried at fair value on the balance sheet with unrealized holding gains and losses recognized in earnings currently. AFS securities are carried at fair value on the balance sheet, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity in Accumulated other comprehensive income (AOCI). HTM debt securities are measured at amortized cost. Both AFS and HTM are subject to review for other-than-temporary impairment (see discussion on page 128).

SFAS 115 states that transfers of securities out of the trading category are expected to be rare. During the fourth quarter of 2008, Citigroup made a number of transfers out of the trading category in order to better reflect the revised intentions of the Company in response to the significant deterioration in market conditions, which was especially acute during the fourth quarter. These market conditions were not foreseen at the initial purchase date of the securities. Most of the debt securities previously classified as trading were bought and held principally for the purpose of selling them in the short term, many in the context of Citigroup’s acting as a market maker. At the date of acquisition, most of these positions were liquid and the Company expected active and frequent buying and selling with the objective of generating profits on short-term differences in price. However, subsequent declines in value of these securities are primarily related to the ongoing widening of market credit spreads reflecting increased risk and liquidity premiums that buyers are currently demanding. As market liquidity has decreased, the primary buyers for these securities have typically demanded a return on investment that is significantly higher than previously experienced.

Despite depressed market prices, the Company determined through credit analysis that the cash recovery levels of these securities is expected to be significantly higher than current market prices might indicate.

 


 

87


Table of Contents

 

Reclassifications of debt securities were made at fair value on the date of transfer. The impact of the transfers executed during the fourth quarter of 2008 is detailed in the following table followed by a, summarized by type of securities:

 

In millions of dollars   Carrying value at
December 31, 2008

Debt securities reclassified from Trading account assets to held-to-maturity investment

  $ 33,258

Debt securities reclassified from available-for-sale investments to held-to-maturity investments

    27,005

Total debt securities reclassified to held-to-maturity investments

  $ 60,263

Debt and equity securities reclassified from Trading account assets to available-for-sale investments

  $ 4,654

 

In millions of dollars   Amortized cost(1)    Carrying value at
December 31,
2008(2)
   Fair value at
December 31,
2008(2)

Debt securities reclassified to held-to-maturity investments

       

Mortgage-backed securities

  $ 37,719    $ 30,738    $ 27,751

State and municipal

    4,898      4,548      4,327

Other debt securities

    25,665      24,977      24,432

Total debt securities reclassified to held-to-maturity investments

  $ 68,282    $ 60,263    $ 56,510

Debt and equity securities reclassified to available-for-sale investments

       

Mortgage-backed securities

  $ 109    $ 72    $ 72

State and municipal

    2,235      2,111      2,111

Other debt and equity securities

    2,368      2,471      2,471

Total debt and equity securities reclassified to available-for-sale investments

  $ 4,712    $ 4,654    $ 4,654

 

(1) For securities transferred to held-to-maturity from Trading account assets, amortized cost is defined as the fair value amount of the securities at the date of transfer. For securities transferred to held-to-maturity from available-for-sale, amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of interest, less any impairment previously recognized in earnings.
(2) The difference between the carrying value and fair value at December 31, 2008 for those securities reclassified to HTM is not recognized in the Company’s financial statements, while the difference for securities reclassified from Trading account assets to AFS is recognized with the change recorded in AOCI.
(3) Excluded from these tables is $4.2 billion of HTM securities that were purchased during the fourth quarter of 2008, in accordance with prior commitments. These purchases consisted of $1.3 billion of auction-rate securities and $2.9 billion of auto note securities.

 

 

The net unrealized losses arising prior to the reclassification date and classified in AOCI of $8.0 billion as of December 31, 2008, for debt securities reclassified from AFS investments to HTM investments have been segregated within AOCI. This balance will be amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the

accretion of discount on the same transferred debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding loss reported in equity will offset the effect on the interest income of the accretion of the discount on these securities.


 

88


Table of Contents

 

EXCERPTS ON THIS PAGE:

10-K (2 sections)
Feb 27, 2009
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