[jperkins112]

If a company has no intention of selling these, why are they available-for-sale? Wouldn’t that logically be held to maturity? This question has plagued me for years.

[J]

HTM cannot feasibly exist for equity securities… think about it… when is the maturity date for a share of stock? It doesn't exist.

In terms of classifying debt securities as either Trading or AFS, think of the intent. Trading would be your equivalent of a day trader, who is looking to make a quick profit. AFS simply means that the company is not actively looking to trade the security, but would do so if the right conditions exist.

For example (using equities), I bought Apple stock at $500 a year ago. If I were to classify it as Trading, I would probably sell it immediately when it went up to $550. If I were to classify it as AFS, my plans would be to hold the stock and allow it to grow, but I might have sold it when it went past $700 and then I heard there were supply problems, no new product lines, etc.

Regardless, it's not a big deal in terms of the CPA… they're always going to tell you how the company has classified the security.

[jperkins112]

Thank you! Yes, it's irrelevant, but it's always bothered me. That explanation is perfect.

[Spur]

I was going to post this as a new topic but it falls in the same category here. Why do some of the FAR questions talks about “Marketable Securities”???????? This one always gets me. The Wiley book or Yaeger do not mention this term. I assume they mean AFS? Or does it also encompass trading securities?

FAR - Bad Fail '11, Fail '12, Fail '13, PASS It's a miracle!
AUD - Fail, PASS!!!!!!!!!!!!!!!!!!!!!!!
BEC - PASS!!!!!!!!
REG - PASS!!!!!!!! And I'm done!

[Anonymous]

The way I understand it is if it is available for sale then it is tradable.

[J]

Any classification of securities – debt and equity – can be marketable; as long as an active market exists. Therefore all marketable securities are trade-able, even if they are classified as HTM. Just remember that securities are classified by INTENT at the time of purchase (and yes, they can change classification and respective accounting treatment). A company can classify a debt security as HTM and then go out and sell it the next day because it badly needs cash, finds a better investment, whatever… there's no rule against that. It just means that the company had the intent to hold it to maturity.

[Getting a CPA]

I keep seeing the word “indefinitely” attached to AFSs also, so keep that in mind. Equity securities held indefinitely are AFS, but when debt is HTM, they are usually pretty clear about it in questions.

[J]

The key is to understand the accounting treatment, where unrealized gains/losses go, and how to do reclassification adjustments for AFS. You should go over the treatment if classification is changed (i.e. HTM to AFS), but that's not as important as what I mentioned in the first sentence. It's really quite simple to summarize:

Debt: Trading, AFS, HTM

Equity: Trading, AFS

Trading: Record at Cost, adjust at FMV… all unrealized gains and losses and realized gains and losses go to N.I.

AFS: Record at Cost, adjust at FMV… unrealized gains/losses to OCI; realized gains and losses to N.I., and you have to reclassify any previous unrealized gains/losses when disposed.

HTM: Record at Cost, adjust using Amortized Cost… no unrealized gains/losses; realized gains and losses to N.I.

If a company selects the FV option, all unrealized gains/losses and realized gains/losses are included in Net Income irrespective of classification.

Beyond all this, I would highly recommend spending sufficient time with the equity method for significant influence.

[Getting a CPA]

@InterFC1 – great explanation! You should teach a course 🙂

[Author]

Replies