Investment Accounting and Classification

Investments are financial assets held by a company for income generation, capital appreciation, or strategic purposes.

Proper classification of investments affects their measurement, reporting, and how gains or losses are recognized in financial statements.

Under US GAAP (ASC 320/321) and IFRS (IFRS 9), investments are classified as held-to-maturity, trading, or available-for-sale (or similar categories).

Incorrect classification can lead to misstated earnings, improper valuation, and non-compliance with accounting standards.

Overview / Definition

Investments refer to financial assets such as stocks, bonds, mutual funds, and debt securities acquired for earning returns or strategic business purposes.

These assets can be classified based on management’s intent and the nature of the investment.

Common classifications include:

✦ Held-to-Maturity (HTM): Debt securities intended to be held until maturity.

✦ Trading Securities: Investments purchased for short-term resale and profit.

✦ Available-for-Sale (AFS): Investments not classified as HTM or trading; intended for sale but not in the immediate future.

Under IFRS 9, these categories are replaced with:

✦ Amortized Cost

✦ Fair Value Through Profit or Loss (FVTPL)

✦ Fair Value Through Other Comprehensive Income (FVOCI)

Recognition and Measurement

Initial Recognition:

✦ Investments are recorded at cost upon acquisition, including any directly attributable transaction costs.

Subsequent Measurement:

✦ Held-to-Maturity (HTM): Measured at amortized cost.

✦ Trading Securities: Measured at fair value, with changes recognized in net income.

✦ Available-for-Sale (AFS): Measured at fair value, but unrealized gains/losses recorded in Other Comprehensive Income (OCI).

Example – Purchase of Bonds (HTM):

• Face Value: $100,000

• Purchase Price: $98,000

• Coupon Rate: 5%

• Maturity: 5 Years

Initial Journal Entry:

debit Investment in Bonds – HTM – 98,000

credit Cash – 98,000

Annual Interest Income (Cash Basis):

debit Cash – 5,000

credit Interest Income – 5,000

Amortization of Discount (Effective Interest Method):

debit Investment in Bonds – HTM – 400

credit Interest Income – 400

Example – Trading Securities (Fair Value Adjustment):

• Investment in Stock: $50,000

At Period-End, Fair Value Increases to $55,000.

Journal Entry:

debit Investment in Trading Securities – 5,000

credit Unrealized Gain on Investments (P&L) – 5,000

Journal Entry Examples

1. Purchase of Equity Securities (Trading):

debit Investment in Trading Securities – 20,000

credit Cash – 20,000

2. Fair Value Increase (Trading Securities):

debit Investment in Trading Securities – 3,000

credit Unrealized Gain on Investments (P&L) – 3,000

3. Dividend Income Received:

debit Cash – 1,000

credit Dividend Income – 1,000

4. Sale of Trading Securities at a Gain:

debit Cash – 25,000

credit Investment in Trading Securities – 20,000

credit Gain on Sale of Investments – 5,000

Disclosure Requirements

Companies must disclose:

✦ The types of investments held and their classification.

✦ The valuation methods used to measure fair value.

✦ Unrealized gains and losses, and where they are reported (P&L or OCI).

✦ Any impairment losses recognized during the period.

Disclosures typically appear in the financial statement notes under the Investments section.

IFRS Comparison

Criteria	US GAAP (ASC 320/321)	IFRS (IFRS 9)
Classification	HTM, Trading, AFS	Amortized Cost, FVTPL, FVOCI
Equity Investments	FV through Net Income	FVTPL or FVOCI (Irrevocable Choice)
Debt Investments	HTM, AFS, Trading	Amortized Cost or FVOCI
Fair Value Measurement	Required for Trading & AFS	Required for FVTPL and FVOCI
Impairment Assessment	Required for AFS/HTM	Expected Credit Loss Model

IFRS has eliminated the Available-for-Sale category and requires companies to use a more forward-looking Expected Credit Loss (ECL) model for impairment.

Common Errors

✦ Misclassification of Investments: Incorrectly categorizing investments, affecting the timing and location of gain/loss recognition.

✦ Ignoring Impairment Requirements: Failing to assess and recognize permanent declines in the value of investments.

✦ Not Applying the Fair Value Option Consistently: Changing measurement bases without proper disclosure and justification.

✦ Improper Presentation of Unrealized Gains/Losses: Recording unrealized changes incorrectly in P&L or OCI.

✦ Insufficient Disclosures: Omitting key information about investment holdings, valuation methods, and impairment assessments.