Historically, accounting for marketable investments in debt securities was not well developed in the professional literature. In fact, the principal guidance concerning long‐term investments in debt instruments was found in ARB 43, which stipulated that the amortized cost method be used, absent a substantial, other than temporary decline in value.
FAS 115 applies to both equity and debt instruments held as investments, and prescribes fair value accounting for all except debt instruments being held to maturity. For those investments, amortized historical cost is generally preserved as the measurement principle.
FAS 115 requires that investments in debt securities be classified upon acquisition as belonging to one of three portfolios: trading, available‐for‐sale, or held‐to‐maturity. The first of these is characterized by frequent purchase and sale activities, with the general objective of realizing profits from short‐term price movements, which in the case of investments in debt instruments will largely be the result of changes in market interest rates but which may also be affected by market perceptions of credit risk. Since intention is the prime criterion applied, even a paucity of sales activity does not necessarily mean that specific debt securities acquired during a period do not belong in the trading portfolio.
The held‐to‐maturity category is the most restrictive of the three; debt instruments can be so classified only if the ...