A portfolio of financial assets (a debt security portfolio) that gets tainted by a change in an entity’s intention and ability to hold its component assets (debt securities) to contractual maturity. In this case, the entire portfolio is tainted and must be classified from held-to-maturity to available for sale. By so doing, it would lose the held-to-maturity classification advantage- i.e., temporary changes in the fair value of these securities will have to be recognized in the financial statements, adding to unnecessary volatility in an entity’s other comprehensive income (OCI).

This change in classification occurs when more than an insignificant amount of held-to-maturity (HTM) investments has been sold or reclassified before maturity (this is dubbed the “tainting rule“).  The reclassification from held-to-maturity to available for sale means that the affected investments will be carried at fair value rather than at amortized cost.

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 during the current financial year, or during the two preceding financial years.