What is the accounting treatment for trading securities?
Trading Securities
Firms sometimes purchase and sell debt and equity securities for the short-term profit potential—some would say for speculation. The term trading implies active and frequent buying and selling with the objective of generating profits from short-term changes in market prices. Acquisition and disposition of trading securities are usually operating activities. Investment banks, for example, often trade securities in different capital markets worldwide to take advantage of temporary differences in market prices. Other financial firms, such as thrift institutions, insurance companies, and brokerage firms, also trade securities. Manufacturers, retailers, and other nonfinancial firms also invest funds for trading purposes, but less frequently and in relatively smaller amounts than do financial services firms. Firms include trading securities in marketable securities in the current assets section of the balance sheet.
Firms initially record trading securities at fair value, excluding transactions costs (which firms expense as they incur them). U.S. GAAP and IFRS require firms to report trading securities at fair value on the balance sheet. For these securities, active securities markets provide objective measures of fair values, and fair values provide financial statement users with the most relevant information for assessing the success of a firm's trading activities over time.
The income statement reports the debit (loss) for decreases in the fair value and the credit (gain) for increases in the fair value of trading securities in an account with a title such as Unrealized Holding Loss (or Gain or Gains and Losses, net) on Trading Securities.
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