Assets - Choosing the Appropriate Accounting Method For Investment Securities


LOS 29.b: Discuss the role of key financial statements (income statement, balance sheet, statement of cash flows, and statement of changes in owners' equity) in evaluating a company's performance and financial position

Classification & accounting treatment

  • Trading securities - These are securities held by a company that it intends to buy and sell for a short-term profit. These securities are reported at their fair market value. Gains and losses will be included on the income statement. They are classified as unrealized holding gains or losses on the income statement, and the counter account on the balance sheet is allowance for adjusted short-term investments to market.
  • Available for sale - This is generally a default category. The accounting for available-for-sale securities looks quite similar to the accounting-for-trading securities. There is one big difference between the accounting-for-trading securities and available-for-sale securities. This difference pertains to the recognition of the changes in value. For trading securities, the changes in value are recorded in operating income. However, for available-for-sale securities the changes in value go into a special account, which is called "unrealized gain/loss in other comprehensive income", which is located in stockholders' equity. The income statement will be unaffected. The counter account to unrealized gain/loss in other comprehensive income is short-term available-for-sales fair market adjustment.
  • Held to maturity - These are securities held by a company that it intends to buy and hold to maturity. These securities are recorded at cost (Purchase price + communions or other fees) and gains or losses are only recognized after the company has sold the securities.
Accounting Impact
Classification Assessment Guidelines Initially Subsequently
Trading Intent to buy/sell for short-term profits Record at fair market value Attribute gains and losses to operating income
Available for Sale Default Category Record at fair market value Attribute gains and losses to stockholders' equity
Held to Maturity Intent to buy and hold until fixed future maturity date Original cost No record
Accounting for Credit Transactions


Related Articles
  1. Investing Basics

    What is an Available-for-Sale Security?

    Available-for-sale securities are debt or equity securities that are held for indefinite periods of time.
  2. Professionals

    Balance Sheet Components - Marketable & Nonmarketable Instruments

    CFA Level 1 - Balance Sheet Components - Liabilities. Learn about the different types of liabilities. A top down approach into the components of long-term and current liabilities.
  3. Term

    What's Accumulated Other Comprehensive Income?

    Accumulated other comprehensive income lists gains and losses a firm has yet to settle.
  4. Investing Basics

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  5. Forex Education

    Accounting Basics: Financial Statements

    By Bob Schneider Financial statements present the results of operations and the financial position of the company. Four statements are commonly prepared by publicly-traded companies: balance ...
  6. Investing Basics

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  7. Fundamental Analysis

    Accounting For Intercorporate Investments

    Understanding these investments is key to determining the value and future prospects of any business.
  8. Fundamental Analysis

    Understanding Short-Term Investments

    These are investments that have a maturity date of less than one year, or will be liquidated within a year.
  9. Investing Basics

    12 Things You Need To Know About Financial Statements

    Discover how to keep score of companies to increase your chances of choosing a winner.
  10. Professionals

    The Income Statement

    Income Statement
RELATED TERMS
  1. Available-For-Sale Security

    A debt or equity security that is purchased with the intent of ...
  2. Held To Maturity Security

    Accounting standards necessitate that companies classify any ...
  3. Accumulated Other Comprehensive ...

    Expenses, gains, and losses reported in the stockholder’s equity ...
  4. Held-For-Trading Security

    Debt and equity investments that are purchased with the intent ...
  5. Common Size Income Statement

    An income statement in which each account is expressed as a percentage ...
  6. Unrealized Gain

    A profit that exists on paper, resulting from any type of investment. ...
RELATED FAQS
  1. How do marketable securities impact a company's financial statements?

    Understand how the various components of the financial statements are impacted by investments in marketable securities owned ... Read Answer >>
  2. What are the differences between comprehensive income and other comprehensive income?

    Learn what the accounting terms "comprehensive income" and "other comprehensive income" can tell an investor's financial ... Read Answer >>
  3. How are the three major financial statements related to each other?

    Learn why investors analyze a company's financial statements, and how the income statement, balance sheet and cash flow statement ... Read Answer >>
  4. What are some examples of items that count as comprehensive income?

    Take a look at some of the more common examples of other comprehensive income, or OCI, and learn how OCI differs from standard ... Read Answer >>
  5. What's the difference between an income statement and a balance sheet approach?

    Understand more about the principle purposes and primary differences between a company's income statement and its balance ... Read Answer >>
  6. Which financial accounting statement contains information on a company's net sales?

    Find out which accounting statement contains information on a company's net sales as well as other key statements analysts ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center