Held-For-Trading Security

What is a 'Held-For-Trading Security'

A held-for-trading security refers to debt and equity investments that are purchased with the intent of selling them within a short period of time, usually less than one year. Accounting standards necessitate that companies classify any investments in debt or equity securities when they are purchased, with options to classify as "held to maturity," "held for trading" or "available for sale." With a held-for-trading security, gains and losses resulting from changes in the investment's value are recorded on an income statement as gains and losses.

!--break--Held-for-trading securities can profit from short-term price changes when sold in the near term. Held-for-trading securities (or simply trading securities) are considered short-term assets, and their accounting is handled as such. These investments are reported at fair value, and unrealized gains and/or losses are included as earnings.

Original Cost vs. Fair Value

A held-for-trading security is initially recorded at its original purchase cost. Over time, market values of trading securities change. By the end of the first accounting period, a trading security's fair market value is compared to its original purchase cost to determine any unrealized gain or loss. A trading security's fair value at the end of one accounting period is later compared to the fair value at the end of the next accounting period, with any gain or loss reported as income for the period in between.

Fair Value Adjustment

Any increase or decrease in the fair value of a held-for-trading security is added to or subtracted from the security's previously reported value. An accountant achieves this by debiting an increase or crediting a decrease in the fair-value change to an account called "securities fair value adjustment (trading)," which is a sub-account of the asset account for trading securities. A debit or a credit to the account of securities fair value adjustment is an accumulation or deficit, respectively, to the fair value of the trading security.

For example, suppose a trading security had a fair value of $1,000 as last reported, and by the end of the current accounting period, it is trading for $1,200 in the market. The fair-value-adjustment accounting requires that a debit of $200 be made to the securities-fair-value-adjustment account, adding to the $1,000 in the trading-security account to arrive at a $1,200 fair value for the security at the period end.

Unrealized Gain or Loss

Any change in the fair value of a held-for-trading security from one period to another becomes an unrealized gain or loss to net income. A debit to the account of securities fair value adjustment from an increase in the security's fair value requires a credit to record the unrealized gain that adds to net income. Conversely, a credit to the account of securities fair value adjustment from a decrease in the security's fair value requires a debit to record the unrealized loss that reduces net income. For actively traded securities, companies should report any fair value change and unrealized gain or loss in the period in which they occur.

BREAKING DOWN 'Held-For-Trading Security'

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