Trading Securities: Definition, Accounting, and Financial Reporting

Trading securities are investments in debt or equity instruments that a company buys primarily for the purpose of selling them in the short term to generate profits from short-term price fluctuations.

These securities are marked by frequent buying and selling, aiming to capitalize on market movements rather than holding for income or strategic reasons.

This article explains the definition, accounting treatment, valuation, and disclosure requirements for Trading Securities under U.S. GAAP (ASC 320) and IFRS (IFRS 9), with practical examples and journal entries.

1. What Are Trading Securities?

Trading Securities are:

✦ Debt or equity investments

✦ Acquired with the intent to resell in the near term (typically within a few months)

✦ Marked to fair value at each reporting date

✦ Recorded with unrealized gains and losses impacting net income immediately

Examples include:

✦ Stocks actively traded by a company’s treasury department

✦ Short-term government or corporate bonds held for speculation

✦ Mutual fund investments held temporarily for yield arbitrage

2. Classification Criteria

A security must be classified as "trading" if:

✦ It is bought principally for the purpose of selling in the near term, or

✦ It is part of a portfolio actively managed for short-term profit.

This classification must be established at acquisition and is not easily changed unless business strategy fundamentally shifts.

3. Initial Recognition and Measurement

Upon acquisition:

✦ Trading securities are recorded at cost (purchase price plus transaction costs).

Journal Entry at Purchase:

Debit: Trading Securities – Purchase Cost

Credit: Cash – Purchase Cost

4. Subsequent Measurement

At each reporting period:

✦ Trading securities are remeasured at fair value.

✦ Unrealized gains and losses are recognized directly in net income (not in OCI).

✦ Carrying amount is adjusted to match fair value.

This ensures that the balance sheet and income statement reflect current market conditions.

Example – Fair Value Adjustment:

A company buys a trading security for $50,000. At year-end, the fair value increases to $55,000.

Unrealized gain = $5,000

Journal Entry:

Debit: Trading Securities – $5,000

Credit: Unrealized Gain on Trading Securities (Income) – $5,000

The gain increases net income immediately.

5. Sale of Trading Securities

When a trading security is sold:

✦ Realize gains or losses based on the difference between selling price and carrying amount.

Example – Sale of Trading Security:

Suppose the carrying value is $55,000, and the company sells it for $58,000.

✦ Realized gain = $58,000 – $55,000 = $3,000

Journal Entry:

Debit: Cash – $58,000

Credit: Trading Securities – $55,000

Credit: Realized Gain on Trading Securities (Income) – $3,000

The gain appears directly in net income.

6. Impairment of Trading Securities

Since trading securities are marked to fair value every period with changes flowing through net income, there is no separate impairment accounting.

Unlike AFS or HTM securities, trading securities automatically reflect market impairments each period.

7. IFRS Treatment for Trading-Type Securities

Under IFRS 9, similar instruments are classified as:

✦ Fair Value Through Profit or Loss (FVTPL)

Accounting treatment:

✦ Recognize fair value changes immediately in profit or loss

✦ No distinction between trading and other FVTPL investments unless relevant for disclosure

Thus, IFRS aligns very closely with U.S. GAAP in treating short-term, speculative investments.

8. Presentation in Financial Statements

• Balance Sheet:

  ✦ Trading securities are reported at fair value within current assets, due to their short-term nature.

• Income Statement:

  ✦ Unrealized and realized gains and losses are included within other income or a similar line.

• Cash Flow Statement:

  ✦ Purchases and sales of trading securities are typically classified within operating activities, unless treated otherwise for certain industries (e.g., investment companies).

9. Disclosure Requirements

Entities must disclose:

✦ The fair value of trading securities at the reporting date

✦ Total unrealized gains and losses included in net income

✦ Any concentration of risk (e.g., large holdings in one industry or issuer)

Disclosures enhance transparency about market risk and investment strategy.

10. Trading Securities vs. Other Investment Categories

Feature	Trading Securities	AFS Securities	HTM Securities
Purpose	Short-term profit	Flexibility, possible sale later	Hold until maturity
Valuation Basis	Fair value	Fair value (OCI)	Amortized cost
Unrealized Gains/Losses Impact	Net income	OCI	Not recognized
Income Volatility	High	Moderate	Low