Explain the accounting for marketable securities

Answer 1

MARKETABLE SECURITIES

Firms sometimes acquire bonds or capital stock of other entities for their expected returns
(through interest, dividends, and price appreciation) without any intent to exert influence
or control over the other entity. U.S. GAAP and IFRS presume that the acquisition of any
amount of bonds, and the acquisition of less than 20% of the voting stock of another entity
implies an inability to exert significant influence or control. Firms account for such securities
as passive investments. Firms classify such securities into three categories:

1 . Debt securities held to maturity (IFRS uses the term held-to-maturity investments).
2 . Trading securities (IFRS uses the term financial assets at fair value through profit or loss).
3 . Securities available for sale (IFRS uses the term available-for-sale financial assets).
Securities with an expected holding period of less than one year appear in current assets
on the balance sheet, usually labeled Marketable Securities, and those with an expected holding
period longer than one year appear in noncurrent assets, usually labeled either Marketable
Securities or Investments in Securities.

U.S. GAAP and IFRS prescribe the following accounting for marketable securities:
1 . Debt securities held to maturity: amortized acquisition cost, subject to impairment.
2 . Trading securities: fair value, with unrealized gains and losses recognized in net income.
3 . Securities available for sale: fair value, with unrealized gains and losses recognized in
other comprehensive income as fair values change and realized gains and losses, measured
as disposal proceeds less amortized acquisition cost, recognized in net income at
the time of sale. Net income also includes impairment losses.

Firms can apply the fair value option to marketable securities, in which case firms account
for debt securities held to maturity and securities available for sale as if they were trading
securities. Firms remeasure these securities to fair value each period and recognize unrealized
gains and losses in net income, not other comprehensive income.