FASB ASC 320: Guidelines For Investment In Debt And Equity Securities

Trading Securities

Discuss about the Marketable Securities for Economics and Business Administration.

Financial Accounting Standard Board ASC 320 states some guidelines for the companies who want to invest in debt securities and in equity securities which can be determined at their fair value. It explains all three categories of the securities and also states their accounting treatment. In addition to this, assign them the current and non-current status is also explained in ASC 320. According to FASB ASC 320, companies are required to make their investments in following securities:

As per the statement given by Financial Accounting Standards Board (FASB), trading securities are the one which include both debt and equity securities that are bought with an intention to sell or trade them in near time period. They are generally reported at their fair value in company’s financial statements and the unrealized gains and losses are already included in earnings. In other words, trading securities belong to a category of security that involves both debt and equity, purchase by an entity with an aim to sell the same in short term. The purpose behind such trading is to receive the amount of profit which derives from the increase in prices of securities (FASB. 2016).

Trading securities are generally exercised from a recognized stock exchange, which act as a mediator between the seller and buyer. These are considered as a type of marketable securities and are always shown as a current asset in company’s balance sheet. Any change in the price of such securities is reported as a gain or loss in the income statement of the company (Albrecht, et. al., 2007). 

FASB issued a statement no. 115 which shows the accounting for certain investments in debt and equity securities. As per this statement, there are three categories of securities and each one of them have a different accounting treatment. In case of securities that are trading, they are been reported at their fair value and changes in the value are displayed in company’s financial statements (Fasb.org. 1993). The losses and gains which are unrecognized for trading securities are included in the earnings and they reflect the change in fair value which occurs due to unpaid interest income earned or unpaid accrued dividend. The cash flow for purchase of trading securities is shown under the head cash flow from operating activities (Fasb.org. 2018).

• Securities available for sale

Securities which are neither trading nor held-to maturity are considered under the category named as available-for-sale securities. They also consists of both debt and equity and are purchased with a motive of selling them before it reaches to maturity. The AFS securities are non-strategic and their gains or losses are not shown in net income (Nikolai, Bazley & Jones, 2009). These types of securities are generally the ones which lie between trading securities and HTM securities. Just like trading, they are also recorded at their fair value in company’s statement of financial position.

Available-for-Sale Securities

As per the new standard, for AFS securities the value of unrealized gains and losses is not included in the earnings and is reported separately as a part of shareholders’ equity. This method of treatment is significantly different from the present practice for marketable securities which are classified as current assets. Also, cash flow from purchasing AFS securities is considered under the head cash flows from investing activities (Kieso, Weygandt & Warfield, 2010). 

• Held-to-maturity securities

Such securities generally include debt and are bought by the investors with an intention to keep them till maturity. The investors are generally corporations who buy the debt security which has a specific maturity date and is kept on hold till that date. The temporary price change in these securities does not appear in corporate accounting standards. These securities are generally in form of bonds and are shown at amortized cost (Georgiades, 2008). Entities are pretty much confident and has ability to hold such types of securities. In addition to this, fair value accounting is not considered as an appropriate and suitable method for the bonds or debt securities which are hold till maturity.

The debt securities which are considered to be HTM are measured at amortized cost and presented in the balance sheet. The fair value concept for these securities is not relevant and any kind of interim unrealized gains and losses will reverse. As per the decision taken by FASB, such securities are carried out at amortized cost in the final accounts of the company. As a result of which, the unrealized gains or losses for debt securities held to maturity are not recognized in the financial statements. Basically, there is no point in adjusting their value in the accounting records as they are sold at their maturity date (Warren, Reeve & Duchac, 2008). 

Companies that have made investments in the above discussed three types of securities are required to exercise current and non-current options and assign them to each category. In case of trading securities, they are represented as current assets on the balance sheet of the company. As these are those financial instruments which can be easily converted into cash and are required to be sold within a year. They are not kept for the longer term and thus shown under the current asset option by the companies (Apexcpe.com. 2014).

As far as available-for –sale securities are considered, then they are those type of securities which lie between trading and held-to maturity categories. They are neither held till maturity nor for short term to attain benefits or profits. Therefore, they are presented in balance sheet either under the current asset option or non-current asset option. They are reported at fair value and are usually listed as non-current assets (Ragbunandan, 1993). The choice of option totally depends upon their maturity dates. If AFS securities are sold within a year, then they are treated as current assets. Furthermore, if they are used in current operations, then also they are listed as current assets by the companies. So companies can exercise both the current and non-current options for available-for-sale securities (FASB. 2007).

Held-to-Maturity Securities

In case of held-to maturity-securities, same thing follows as for AFS securities. Generally, it is assumed that these securities are to be held till maturity by the company and therefore they are been reported as non-current assets on the statement of financial position. However, if these securities are getting matured within a year, then they are treated as current assets by the companies (Epstein, Nach & Bragg, 2009). Overall it can be said that, the choice of exercising the option of current and non-current depends upon the maturity dates of AFS and held-to maturity securities and intent of the management in respect of converting these securities.

The individuals who support the notion that for marketable securities, the proper accounting treatment is current value are focused on maintaining all the gains and losses that affect the company during a specific period of time. According to them all such gains and losses must be recorded and reported in the final accounts of the firm. As it is very much clear that the current value of marketable securities is easily available and accessible, the people who supports this argument holds that these values must be reported in the annual financial statements of the company (Weil, Schipper & Francis, 2013).  One can easily access the current value of all the marketable securities by critically examining the recent market transactions. Moreover, the proponents argued that reporting at the fair value give more relevant accounting information regarding securities. Reporting the marketable securities at current value enables the investors to properly study the financial markets and their efficiency. Also the prevailing price of the securities are the reliable measures according to the individuals who are in support of current value accounting (Harvard Business Review. 2013).

Moreover the marketable securities which are reported at fair value such as trading securities enables the companies to record the unrealized gains and losses separately in their income statement. In addition to this, the change in current value is also shown or reported in the statement of profit and loss of the entity.

Some individuals argue about the fact that current value accounting might allow the companies to manage earnings are basically concerned about gains trading. A manager that applies gains trading strategy to its business will transfer the securities which have decreasing value to a long term asset account and retain those securities whose value is increased under the temporary investment category (Liu & Yu, 2013). With the help of fair value accounting, companies can easily manage their securities and can earn gains on them by efficient management. Current value allows the managers to know about the exact value of a security and to predict the same in future. This enables them to manage their marketable securities by selling out the one whose prices are increasing and holding the one whose prices are decreasing. Hence, it can be said that accounting treatment of marketable securities at current value do allow the companies to manage their earnings efficiently and cover their losses timely (Barth, Gómez-Biscarri, & Kasznik, 2012). 

References

Albrecht, W., Stice, J., Stice, E. & Swain, M. (2007). Accounting: concepts and applications (10^th ed). USA: Cengage Learning.

Apexcpe.com. (2014). Accounting for Investments. Retrieved from: https://www.apexcpe.com/Publications/171036.pdf

Barth, M.E., Gómez-Biscarri, J. & Kasznik, R. (2012). Fair value accounting, earnings management and the use of available-for-sale instruments by bank managers (No. 05/12). School of Economics and Business Administration, University of Navarra.

Epstein, B.J., Nach, R. & Bragg, S.M. (2009). Wiley GAAP 2010: Interpretation and application of generally accepted accounting principles. New Jersey: John Wiley & Sons.

FASB. (2007). Statement of Financial Accounting Standards No. 159. Retrieved from: https://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820919488&blobheader=application.pdf

FASB. (2016). Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. Retrieved from: https://asc.fasb.org/imageRoot/33/77884633.pdf

Fasb.org. (1993). Statement of Financial Accounting Standards No. 115. Retrieved from: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220123971&acceptedDisclaimer=true

Fasb.org. (2018). ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (ISSUED 5/93). Retrieved from: https://www.fasb.org/summary/stsum115.shtml

Georgiades, G. (2008). GAAP Financial Statement Disclosures Manual. Chicago: CCH.

Harvard Business Review. (2013). Why “Fair Value” Is the Rule. Retrieved from: https://hbr.org/2013/03/why-fair-value-is-the-rule

Kieso, D.E., Weygandt, J.J. & Warfield, T.D. (2010). Intermediate accounting: IFRS edition (4^th ed). New Jersey: John Wiley & Sons.

Liu, X. & Yu, Y. (2013). Impact in Earnings Management of Fair Value Measurement Based on Electric Power Industry. International Business Research, 6(8), p.49.

Nikolai, L.A., Bazley, J.D. & Jones, J.P. (2009). Intermediate Accounting (11^th ed). USA: Cengage Learning.

Ragbunandan, K. (1993). Accounting for investments in debt and equity securities. CPA JOURNAL, 63, pp.34-34. Retrieved from: https://archives.cpajournal.com/old/14469497.htm

Warren, C.S., Reeve, J.M. & Duchac, J. (2008). Accounting (23^rd ed). USA: South-western Cengage Learning.

Weil, R.L., Schipper, K. & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses (14^th ed). USA: Cengage Learning.