I keep comming back to this reading and I just can’t get it. It’s not clicking for me at all. Have any of you guys found any ways to remember and make sense of the differing accounting treatments, and would like to share? The only thing I understand is why held-to-maturity is on the books at cost. I’m having trouble remembering anything about what goes where under the different methods. I wish Marc from the equity Kaplan videos did the video for this one.
Held to Maturity Securities : Bonds that you plan (and are able) to hold to maturity. Reported at cost with any premium or discount amortized over the remaining life. Coupon payments go through the income statement. If sold (or put option or conversion option exercised) prematurely, any gain or loss goes through the income statement; this may lead to tainting the category if a significant portion is sold prematurely.
Trading Securities : Stocks or bonds that you plan to sell in the near future. Reported at fair market value. Realized and unrealized gains/losses go through the income statement; realized gain/loss is the difference between the selling price and the last mark-to-market price (or the purchase price if never marked to market). Cash flows (coupons and dividends) go through the income statement.
Available-for-Sale Securities : Stocks or bonds you do not plan to sell in the near future. Reported at fair market value.Realized gains/losses go through the income statement; unrealized gains/losses (net of taxes) go direct to equity (OCI). When sold, any (net) unrealized gain/loss in OCI is reversed; realized gain/loss is the difference between the selling price and the purchase price. Cash flows (coupons and dividends) go through the income statement.
Designated at Fair Value Securities : Stocks or bonds that you do not plan to sell in the near future. Reporting is the same as for Trading Securities.