CFA Level 1 - Choosing the Appropriate Accounting Method

CHOOSING THE APPROPRIATE ACCOUNTING METHOD

Choosing the appropriate accounting method for investment securities

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 record at cost (Purchase price + communions or other fees) and gain 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