What is a Held-For-Trading Security
A held-for-trading security is a debt and equity investment that investors purchase with the intent of selling within a short period of time, usually less than one year.
Because of accounting standards, companies have to classify investments in debt or equity securities when they are purchased. Other than held-for trading, other options include: held to maturity, held for trading or available for sale.
BREAKING DOWN Held-For-Trading Security
Held-for-trading securities can generate a profit from short-term price changes when investors sell them in the near term. They are short-term assets, and their accounting reflects that fact; the value of these investments re reported at fair value, and unrealized gains and/or losses are included as earnings.
The initial cost basis of these investments equals their fair value at the time of purchase. Over time, the market value of trading securities changes and investors must report any unrealized gains and/or losses as earnings. The calculation of those gains and losses involves comparing a trading security's fair market value to its original purchase cost basis.
Held-for-Trading Securities and Fair Value Adjustment
Any increase or decrease in the fair value of a held-for-trading security requires an accounting adjustment. One must add or subtract the change 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 a debit of $200 to the securities-fair-value-adjustment account. Given the original value of $1,000, the trading-security account for this particular security ends the period with a fair value of $1,200.
Changes in the fair value of a held-for-trading security from one period to another become 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.