top of page
Search

Accounting for Investments: HTM, Trading Securities, and AFS Securities

ree

In financial accounting, investments in debt and equity instruments are classified based on management’s intent and the nature of the instrument.


These classifications — Held-to-Maturity (HTM), Trading Securities (TS), and Available-for-Sale (AFS) — determine how the investment is measured, where unrealized gains and losses are reported, and how changes in value affect net income and equity.


This article explains how these investment categories are defined under U.S. GAAP (ASC 320), how they are accounted for, and how they affect financial reporting — complete with step-by-step examples.


1. Overview of Investment Classifications

Under ASC 320, debt investments are classified into three categories...


✦ Held-to-Maturity (HTM): Debt securities that the investor has the positive intent and ability to hold until maturity


✦ Trading Securities (TS): Debt or equity securities that are bought primarily for short-term profit


✦ Available-for-Sale (AFS): Debt securities not classified as HTM or TS.


They may be held for indefinite periods and sold as needed.

Note: Equity securities are no longer classified as AFS under U.S. GAAP. Most equity investments are measured at fair value through net income under ASC 321.

2. Held-to-Maturity (HTM) Securities

Definition:

HTM securities are debt instruments (e.g., bonds) that a company intends and is able to hold to maturity.


Accounting Treatment

  • Initial recognition: At cost, including transaction costs

  • Subsequent measurement: At amortized cost

  • Unrealized gains/losses: Not recognized unless impaired

  • Interest income: Recognized using the effective interest method


Balance Sheet: Reported as non-current assets, unless maturing within 12 months.


Example:

A company purchases a 5-year bond for $97,000, with a face value of $100,000 and a 5% annual coupon. The market rate is 6%.

  • Coupon = $100,000 × 5% = $5,000 per year

  • Effective yield = 6%

  • Interest income is recognized using amortized cost method, increasing the bond’s book value each year until it reaches $100,000.


3. Trading Securities (TS)


Definition:

Trading securities are debt or equity instruments that are bought with the intent to resell in the short term (typically within 3 months to 1 year).


Accounting Treatment:

  • Initial recognition: At purchase price

  • Subsequent measurement: At fair value

  • Unrealized gains/losses: Recognized in net income

  • Interest and dividends: Recognized as income


Balance Sheet: Classified as current assets


Example:

A company buys 1,000 shares of stock at $20 each ($20,000) intending to sell within a quarter.

  • At quarter-end, the stock trades at $23.

  • Fair value = $23,000

  • Unrealized gain = $3,000 recognized in net income


Journal Entry at Period-End:

ree

4. Available-for-Sale (AFS) Securities


Definition:

AFS applies to debt securities that are not held for trading nor intended to be held to maturity. They are held for liquidity management or strategic purposes.


Accounting Treatment:

  • Initial recognition: At cost

  • Subsequent measurement: At fair value

  • Unrealized gains/losses: Reported in Other Comprehensive Income (OCI)

  • Realized gains/losses: Reported in net income when sold

  • Interest income: Recognized using the effective interest method


Balance Sheet: Reported as either current or non-current assets depending on intent and maturity


Example:

A company buys a $100,000 bond at par. At year-end, its fair value rises to $105,000. No sale is made.

  • Unrealized gain = $5,000

  • Recorded in OCI, not income


Journal Entry:


ree
ree

At that point, the accumulated OCI gain is reclassified into net income.


5. Comparison Table

Feature

HTM

Trading

AFS

Asset Type

Debt only

Debt or Equity

Debt only

Measurement

Amortized cost

Fair value

Fair value

Unrealized Gains/Losses

Not recognized

In net income

In OCI

Realized Gains/Losses

In net income

In net income

In net income

Interest Income

Effective interest method

As earned

Effective interest method

Balance Sheet Classification

Non-current or current

Current

Current or non-current


6. Impairment Considerations

For HTM and AFS securities, impairment must be evaluated under the Current Expected Credit Loss (CECL) model (for HTM) or fair value impairment (for AFS).


  • If decline in value is other than temporary, a loss must be recognized in net income.

  • AFS securities require separation of credit-related and non-credit-related impairment.


7. Reclassification Between Categories

Reclassification between categories is restricted and must meet strict criteria:

  • HTM to AFS or trading: Allowed, with unrealized gains/losses recognized appropriately

  • AFS to HTM: Allowed only if new intent and ability are demonstrated

  • Trading to other categories: Rare and typically discouraged


Frequent reclassifications may call intent into question and lead to regulatory scrutiny.


____________________

Proper classification and accounting of investments into HTM, TS, and AFS categories ensures that financial statements reflect:

  • The economic intent of the investor

  • Accurate measurement of assets and income

  • Consistent and transparent reporting of fair value changes

bottom of page