Question

What are the differences between the following types of financial securities investments a company can make: 1) trading securities, 2) available-for-sale, 3) held-to-maturity? How is the classification determined?

Answer 1

1.Trading Securities:

Both debt and equity securities can be classified as trading securities. Trading securities are bought and sold for the purpose of generating profits on the short-term appreciation of stock or bond prices. They are usually traded within three months of when they are acquired. Trading securities are reported on the investor’s balance sheet at their fair value on the investor’s fiscal closing date.

2. Available-for-Sale Securities

All marketable securities that are not classified as held-to-maturity or trading securities must be classified as available-for-sale securities. These securities are also reported on the investor’s balance sheet at fair value as of the investor’s fiscal closing date.

3. Held-to-Maturity Securities

Since equity securities representing ownership interests have no maturity date, the held-to-maturity classification applies only to debt securities. Debt securities should be classified as held-to-maturity securities if the investor has a positive intent and the ability to hold the securities until the maturity date. Held-to-maturity securities are reported on the balance sheet at amortized historical cost.