Accounting for Trading Securities
Trading securities (also called held-for-trading securities/investments) are equity or debt securities held by a company for active buying and selling. They are carried at their fair value and any gains or losses and dividend or interest income are recognized in profit or loss.
Trading securities are also called short-term marketable securities.
Only US GAAP uses the trading securities classification. Under IFRS, such securities are classified in the ‘fair value through profit or loss’ category.
Presentation in balance sheet and income statement
In the balance sheet, trading securities are classified as current assets and their carrying value is updated on each reporting date to reflect the latest fair value. Any increase or decrease in fair value is recognized in profit or loss as unrealized gain or loss, respectively.
When trading securities are ultimately sold off, the gain or loss is recalculated (based on the selling price) and reclassified to realized gain or loss.
Any interest or dividend income on trading securities is recognized as income in the period in which it accrues.
Example and journal entries
On 1 January 20X2, HTI Ltd. acquired 10,000 shares of FV Ltd. at $55 per share. During the quarter ending 31 March 20X2, FV Ltd. declared a dividend of $0.9 per share and the market value dropped to $49 per share. On 30 April 20X2, the securities were sold for $58 per share.
The acquisition of securities shall be recorded through the following journal entry:
|Investment in HTI - trading securities||550,000|
In the 1 January 20X2 balance sheet, the investment shall be reported at $550,000.
The dividend income in the first quarter of 20X2 shall be recognized in profit or loss as follows:
HTI shall also update the fair value by recognizing an unrealized gain or loss. In the balance sheet as at 31 March 20X2, the investments shall appear at $490,000 and a loss of $60,000 [=($55-$49) × 10,000] shall be recognized in profit or loss.
|Unrealized gain or loss||60,000|
|Investment in HTI||60,000|
On 30 April 20X2, when the securities are actually sold, the gain or loss is recalculated as follows:
|Cash ($58 × 10,000)||$580,000|
|Investment in HTI||$490,000|
|Unrealized gain or loss||$60,000|
|Realized gain or loss||$30,000|