Question

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1. Based on your chapter reading, key point lecture notes, and study ppt slides, please state that the major difference in the accounting for a portfolio of "trading securities" vs. "available-for-sale securities" vs. "held-to-maturity"?

2. In other words, what are the main differences in accounting treatment among the three categorized investment holdings, trading securities, available-for-sale securities, and held-to-maturity (the accounting treatment rules, rationale behind, or underlying principle? (Do these rationales make sense to you?)

Answer 1

Trading securities are securities held for a short period of time (Less than a year) with the intention of making profit as soon as the prices rise. Unrealised profit / loss is recorded in the P&L and a fair value adjustment account is debited or credited to show the market value of the security in balance sheet.

Available for sale securities are securities wich are held for long term but with the intent to sell it before maturity. This is in between trading securities and held to maturity securities. Unrealised profit / loss on these securities is recognized as on the reporting date and the profit / loss is adjusted in other income and not in net income like trading securites.

Held to maturity securities are those equity / debt instruments which are to be held till its maturity date. Temporary price changes in the security is not changed in the financials. Interest income n these securities is recognized as interest incoem in the financials. The logic behind this is since these are to be held till maturity, the gains to be relaised are only of interest and any temporary price changes will not lead to any profit as the securities are not intended to be sold.