Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

CLASSIFICATION OF DEBT SECURITIES AS “FAIR VALUE THROUGH PROFIT OR LOSS”

As per US GAAP 320-1-25-1, an entity shall classify debt securities into “trading” if it is acquired with the intent of selling it within hours or days. However, at acquisition an entity is not precluded from classifying as “trading” a security it plans to hold for a longer period. Classification of a security as trading shall not be precluded simply because the entity does not intend to sell it in the near term. Investments that are classified as “trading” securities are classified under the “fair value through profit or loss” category.

Trading securities are normally held by banks and other financial institutions that engage in active buying and selling of securities with a view to making a gain on trading. The mark-to-market process values the securities at market rates, recording the unrealized gain/loss on such securities. The realized and unrealized gain/loss on those securities classified as trading securities is included in the income of the investor. Interest on such debt instruments are recognized as income periodically on the due date on which interest is payable.

A financial asset should be classified as held for trading if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. Even though the term “portfolio” is not explicitly defined in the accounting standard, the context ...