An accounting rule that defines a situation (tainting) in which classification of an investment as held-to-maturity (HTM) is prohibited if the reporting entity, during the current reporting year or the two preceding years, has sold, transferred or exercised a put option on a significant amount of the investment, initially classified as held-to-maturity, before maturity date. The tainting rule prescribes a two year time-out period during which an entity is not allowed to classify any financial assets as held to maturity if the portfolio is found to have been tainted (a tainted portfolio) during the current financial year, or during the two preceding financial years.
However, there are certain exceptions to the tainting rule including:
- a situation where it is not expected that an asset’s fair value would be affected by changes in market rate (because a transaction is close to maturity date or a call exercise date).
- a sale that takes place after an entity has recovered most part of the principal.
In such cases, sales of certain assets from an existing portfolio (measured as held to maturity) will not taint the remainder of the portfolio, and therefore will not be constrained by the tainting rule.
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