Accounting for Investment Securities

Graziano Stefanelli
Jul 21
2 min read

Investment securities represent financial assets acquired with the intention of generating returns through interest, dividends, or capital appreciation. These holdings may include bonds, common stocks, preferred shares, or other marketable securities. The classification, measurement, and reporting of investment securities have a direct impact on both the balance sheet and the income statement, and require careful consideration of management’s intent and the nature of the instruments held.

Classification of Investment Securities

Investment securities are classified based on management’s intent and the ability to trade or hold the assets:

Trading securities: Bought primarily for short-term profit through active buying and selling. Reported at fair value with unrealized gains and losses included in net income.
Available-for-sale (AFS) securities: Not classified as trading or held-to-maturity. Reported at fair value, but unrealized gains and losses are recorded in other comprehensive income (OCI) until realized.
Held-to-maturity (HTM) securities: Debt securities the entity has the positive intent and ability to hold to maturity. Reported at amortized cost; unrealized gains and losses are not recognized.

Equity securities are typically measured at fair value through net income unless a practical expedient or exception applies.

Initial Measurement

All investment securities are initially measured at acquisition cost, which includes the purchase price and any directly attributable transaction costs (for AFS and HTM).

Journal Entry at Purchase:

Dr. Investment in Securities

Cr. Cash

Subsequent Measurement and Income Recognition

Trading securities:
- Adjusted to fair value at each reporting date.
- Changes in fair value (unrealized gains/losses) are included in earnings.
Available-for-sale securities:
- Adjusted to fair value.
- Unrealized gains/losses recognized in OCI; reclassified to earnings upon sale.
Held-to-maturity securities:
- Amortized cost basis; interest income recognized using the effective interest method.

Dividends and Interest:

Dividends on equity securities and interest on debt securities are recognized in income when earned.

Sale of Investment Securities

On sale, realized gains or losses are calculated as the difference between the sale proceeds and the carrying amount of the security. For AFS securities, amounts previously recognized in OCI are reclassified to net income.

Journal Entry at Sale:

Dr. Cash

Dr. (or Cr.) Loss (or Gain) on Sale

Cr. Investment in Securities

Impairment and Fair Value Adjustments

Equity securities: All changes in fair value generally run through earnings.
Debt securities: If a decline in fair value is judged to be other-than-temporary, a loss is recognized in earnings and the carrying amount is adjusted.

Disclosures and Presentation

Financial statements must disclose:

Classification and carrying amounts by category
Fair value hierarchy levels for measured securities
Methods and significant assumptions used to estimate fair values
Amounts reclassified from OCI to earnings
Information about impairment losses

Summary Table: Investment Securities Accounting

Type	Measurement	Unrealized Gains/Losses	Interest/Dividends
Trading	Fair value	Net income	Net income
Available-for-sale	Fair value	OCI (until realized)	Net income
Held-to-maturity	Amortized cost	Not recognized	Net income (using effective rate)

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DATA STUDIOS

datastudios.org