Question

What adjustment must be made at the end of the accounting period for trading investments and available-for-sale investments ?

Answer 1

Firstly, it is very important to understand the difference between Trading Investments & Available-for-sale (AFS) investments. Trading Investments are bought with an intention of making short term profits whereas Available-for-sale investments are not bought for short-term period rather the same is bought for unspecified time with an intention of continuously receiving interest over the periods.

AFS can be retained for longer period but if the management decide, they can sell it too anytime as these are readily saleable.

Accounting Treatment at End of Accounting Period

• Trading Investments : To be reported at a Fair Value at the end of accounting period by adjusting the difference in income statement. Since, the initial booking of investment had been made at buying cost, the accounting adjustment in the first year would be comparison of Fair Value at the end of accounting period with the buying cost & the difference has to be adjusted with the Invesment Value by debiting the increase or crediting the decrease to a sub-account under the asset called 'Fair Value Adjustment Account - Trading Securities". The second treatment of unrealized gain of increase or unrealized loss of decrease is to be recored under Income Statement. The similar fair value adjustment in subsequent accounting period ends is to be done by comparing the fair value of current period close with fair value of last period close.

For eg - Trading Securities bought at $ 1000. The fair value at the end of first accounting year is $ 1200, then the increase of $ 200 is to be debited to Fair Value Adjustment Account & credited to net income. If in the next year, the fair value is decreased to $ 1100, then the Fair Value Adjustment Account will be credited by $ 100 & net income will be debited by $ 100.

• Available for Sale Securities: To be reported at a Fair Value at the end of accounting period by adjusting the difference in Other Comprehensive Income (OCI) which forms part of Shareholders equity & hence no impact of unrealized gain / loss on Income Statement. This is the only difference with respect to Trading Securities where the unrealized gain / loss is recorded under Income Statement.