Chartered Financial Analyst (CFA) Practice Exam Level 2

What is true regarding the classification of investments?

1. Can be changed at any time

2. Once classified, it cannot be changed

3. Requires annual re-evaluation

4. Must be reported at historical cost

The correct answer is: Once classified, it cannot be changed

The classification of investments is a critical aspect of financial reporting and accounting. Once investments are classified, the characteristics that define that classification may not allow for arbitrary changes to be made freely. For example, certain classifications might be contingent on adherence to specific criteria or performance metrics that are established at the time of classification. The correct assertion emphasizes the importance of consistency and the need for justification when it comes to reclassifying investments. Investment classifications, such as held-to-maturity, trading, or available-for-sale, are determined based on intent and the nature of the investment. Changing these classifications often requires a compelling rationale, making it less straightforward than simply deciding to reclassify at will. In practice, while some adjustments may indeed be made, this typically involves rigorous evaluation against specific guidelines and accounting standards. Thus, once an investment has been classified, it is not simply a matter of changing it at will; the original classification holds significant weight in terms of financial reporting and often entails a deeper evaluation and understanding of the investment's purpose.