What Is a Held-For-Trading Security?
A held-for-trading asset is a debt or equity instrument that investors buy with the intention of selling it within a short period of time, often less than a year. Within that time span, the investor wants to see the security’s value rise and sell it for a profit.
Companies are required by accounting requirements to categorize investments in debt or equity securities when they are bought. Other possibilities besides held-for-trading include held-to-maturity and offered for sale.
- A held-for-trading security is a debt or equity investment obtained for short-term profit.
- Any profits or losses on a held-for-trading securities throughout its holding term must be disclosed on the trading firm’s balance sheet.
- On the balance sheet, securities kept for trade are classified as current assets.
- Securities held for trade are reported at fair value, and unrealized/gains or losses are recognized in earnings.
- When debt or equity securities are bought, they must be categorised according to accounting rules. Other categories besides held-for-trading include held-to-maturity and available for selling.
Understanding a Held-For-Trading Security
When investors sell held-for-trading assets in the near term, they may benefit from short-term price movements. They are short-term assets, and their accounting reflects this; the value of these investments is reported at fair value, with unrealized profits and/or losses reflected in earnings.
These assets’ original cost basis matches their fair value at the moment of acquisition. The market value of trading assets fluctuates over time, and investors must declare any unrealized profits and/or losses as earnings. The computation of such gains and losses entails comparing the fair market value of a securities to its initial acquisition cost basis.
Securities held for trading are classed as current assets since they will be sold within a year, and the cash flows generated by these securities are considered operational cash flows. Cash flows from securities held to maturity and available for sale are cash flows from investing.
Held-For-Trading Security and Fair Value Adjustment
Any change in the fair value of a securities held for trade necessitates an accounting adjustment. On the financial statements, the change from the security’s previously reported value must be added or subtracted.
An accountant does this by debiting or crediting an increase or reduction in the fair-value change to a sub-account of the asset account called “securities fair value adjustment (trading).” A debit or credit to the account of securities fair value adjustment is an increase or decrease in the trading security’s fair value.
Changes in the fair value of a traded investment from one period to the next result in an unrealized gain or loss to profits.
A debit to the account of securities fair value adjustment due to a rise in the fair value of the security necessitates a credit to record the unrealized gain that contributes to net income. A credit to the account of securities fair value adjustment from a fall in the security’s fair value, on the other hand, necessitates a debit to record the unrealized loss, which affects net income.
Example of a Held-For-Trading Security
Assume Company ABC bought a security with the intention of selling it within a year. When the security was purchased, its purchase price was recorded.
Assume that nine months have passed and the security still has a fair value of $1,000 as disclosed on its financial statements. By the conclusion of the current accounting period in the next quarter, the security is trading in the market for $1,200, which is its fair value.
According to accounting regulations, the corporation must reflect the revised fair value of the security in its quarterly reports. The securities-fair-value-adjustment account must be debited $200 under fair-value-adjustment accounting.
Given the initial value of $1,000, the trading-security account for this specific asset has a fair value of $1,200 at the conclusion of the time. The $200 is an unrealized gain that is also represented in profits.
When the following accounting period approaches and the security’s new fair value must be recorded, the computation calculating an increase or reduction will begin at $1,200.
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