Review the following case study: FASB ASC 320 requires companies to assign their

Question

Review the following case study:

FASB ASC 320 requires companies to assign their portfolio of investment securities into:

Trading securities.

Securities available for sale.

Held-to-maturity securities.

Write a response of no more than 1,500 words in which you answer the following:

Define each of these categories of securities and discuss the accounting treatment for each category.

Discuss how companies are required to assign each category of securities into its current and noncurrent portions.

Discuss the arguments for each position. Some individuals maintain that the only proper accounting treatment for all marketable securities is current value. Others maintain that this treatment might allow companies to "manage earnings".

Explanation / Answer

Answer :-

1). Trading securities :- A financial asset is held for trading is the one that is -

a). acquired principally for the purpose of selling it in the near term.

b). part of a portfolio for which there is an evidence of a recent pattern of short-term profit-taking.

c). a derivative unless it is designated as an effective hedging instrument be accounted for as per hedge accounting.

Trading assets include debt and equity securities and loans and receivables acquired by the entity with the intention of making a short-term profit from price or dealer's margin.

2). Held-to-maturity securities :- These are non-derivative financial assets with fixed or determinable payments and fixed maturity (example, debt securities and redeemable preference shares) that an entity has the positive intent and ability to hold to maturity. Equity securities can not be classified as held-to-maturity because they do not have a fixed maturity date.

A financial asset whose maturity is fixed but payments are not determinable does not quality as held-to-maturity. Held-to-maturity securities do not include those that :-

i). The entity designates as the available for sale.

ii). The entity upon initial recognition designates as at fair value through profit or loss.

3). Available for sale securities (Securities available for sale) :- All financial assets that are not classified as trading securities / held-to-maturity securities / loans and receivables etc. are classified as securities available for sale. The available for sale category includes all equity securities other than those classified as at fair value through income.

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