Accounting for Investments in Debt Securities

Investments in debt securities are common for corporations and financial institutions seeking to earn interest income or manage excess cash. Debt securities include bonds, notes, and other fixed-income instruments issued by corporations, governments, or other entities. The accounting treatment of these investments depends on the company’s intent, the security’s classification, and relevant accounting standards.

Types and Classification of Debt Securities

Debt securities are classified based on management’s intent and ability regarding their holding period and use:

• Held-to-Maturity (HTM): Debt securities the company has both the positive intent and ability to hold to maturity.

• Trading Securities: Debt securities bought for short-term profit; actively bought and sold.

• Available-for-Sale (AFS): Debt securities not classified as HTM or trading; may be sold before maturity but are not actively traded for profit.

The classification determines how changes in fair value and interest income are reported.

Initial Recognition and Measurement

When a debt security is purchased, it is initially recorded at cost, which includes the purchase price plus any directly attributable transaction costs (such as brokerage fees).

Example:

If a company buys a $100,000 bond at par, plus $500 in fees:

 Dr. Debt Investments ................. $100,500

  Cr. Cash .................................... $100,500

Subsequent Measurement: Held-to-Maturity Securities

HTM securities are reported at amortized cost, not fair value. The premium or discount on the purchase is amortized over the life of the bond using the effective interest method.

Example:

If a $100,000 bond is purchased at $98,000 (discount), the $2,000 discount is amortized to interest income over the bond’s life.

Subsequent Measurement: Trading and Available-for-Sale Securities

• Trading securities: Reported at fair value, with unrealized gains and losses recognized in net income.

• Available-for-sale (AFS) securities: Reported at fair value, with unrealized gains and losses recorded in other comprehensive income (OCI), not affecting net income until realized by sale or impairment.

Interest Income Recognition

Interest income on debt securities is recognized based on the effective interest rate, which spreads any discount or premium over the bond’s term.

Example Journal Entry:

 Dr. Cash (interest received)

 Dr./Cr. Debt Investment (for amortization)

  Cr. Interest Income

Sale or Maturity of Debt Securities

Upon sale or maturity, the difference between the sale proceeds (or maturity value) and the carrying amount is recognized as a gain or loss in net income.

Example for AFS security sale:

 Dr. Cash Dr./Cr. OCI (to reverse unrealized gain/loss)

  Cr. Debt Investments

  Cr./Dr. Gain or Loss on Sale

Impairment of Debt Securities

If it is probable that a holder will not collect all contractual amounts due (e.g., due to issuer default), an impairment loss must be recognized in earnings for both HTM and AFS securities under US GAAP (CECL model) and IFRS (expected credit loss model).

Presentation and Disclosure

• Balance Sheet: Debt securities are presented as current or noncurrent assets based on management’s intent.

• Income Statement: Interest income, realized gains/losses, and (for trading securities) unrealized gains/losses are shown in earnings. Unrealized AFS gains/losses appear in OCI.

• Notes: Disclose methods, carrying values, fair values, maturities, and impairment assessments.

US GAAP and IFRS References

• US GAAP: ASC 320 – Investments—Debt and Equity Securities; ASC 326 – Credit Losses

• IFRS: IFRS 9 – Financial Instruments

Summary Table: Debt Securities Classification

Classification	Measurement	Unrealized Gains/Losses	Where Reported
Held-to-Maturity	Amortized Cost	Not recognized	N/A
Trading	Fair Value	In net income	Income Statement
Available-for-Sale	Fair Value	In OCI (until realized)	Other Comp. Income

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