CFA Level 1

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



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