Question

When it comes to accounting for investments, why are there different categories?

Answer 1

- While recording an investment, it is necessary to understand the category of investment. Intention ofthe Organization should be clear at the time of buying since it affects the accounting process to be followed.

- As per standards, there are differences between treatment for different categories of investment.

- Held to Maturity Investments are bought with an intention not to sell-off. This is why there is no market value translation to these assets since there is no intention to sell these assets. Only Permanent Impairments are allowed.

- Trading Security: These investments are bought with an interntion to earn profit in short term. This is why market value translation to these assets is mandatory at the time of period close.

- Available for Sale: An investment apart from two category above are Available for sale.

Since the intenion can be different for a different investment, but same rules cannot be applied. An Investment made for held to maturity need not shown at fair value at the end of period close since it will not serve any purpose. Similarly we never take the market value for our fixed assets because they are also bought not with intention to sell but to operate.

An investment made for short-profit needs to be categorised separately since it is not of permanent nature.