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Investments in Securities

Companies that have excess cash will often put some cash away in short-term investments. This is because while deciding what to do with excess cash, company's will temporarily invest this money in order to earn some profit (interest) instead of letting it sit idle in an interest-free chequing account. 

Cash equivalents:
Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity date that they present an insignificant risk of changes in value because of changes in interest rates.1 Cash equivalents are typically presented along with cash, not short-term investments, on the balance sheet

Investments in debt and equity securities:
Investments in debt and equity securities are grouped into three categories at acquisition for measurement (valuation) and presentation. The classification must be documented.2 

Held-to-maturity: These are debt securities that the company intends to hold to maturity and has the ability to do so. These secutiries are measured at their amortized cost . Depending on the length of the maturity date, these securities can either be classified as current or non-current assets. 

Held-for-trading: Held-for-trading securities are current assets that are measured at fair value where readily determinable fair values exist. Holding gains and losses for held-for-trading securities are included in earnings.3 These are financial instruments that have any of the following characteristics and are not loans or receivables.
     
1. They are acquired for the purpose of selling them in the near term. 
2. They are 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. 
3. They are derivatives

Available-for-sale: Debt and equity securities that are not classified as held-to-maturity or held-for-trading. Available-for-sale securities are measured at fair value. Holding gains and losses from these securities are included in other comprehesive income until realized unless. However, if the securities are part of a fair value hedge then holding gains or losses are recognized in the same period as the hedge.3 

Balance sheet classification:
These securities may be classified as either current or non-current assets depending on managements intent and the nature of the investments:

An entity that presents a classified statement of financial position shall report individual held-to-maturity securities, individual available for sale
 securities, and individual trading securities as either corrent or noncurrent.4

The U.S. GAAP for determining whether an item should be classified as either current or non-current is found under balance sheet resentation matters.5 


References:

1. FAS ASC Glossary
2. FASB ASC 320-10-25-1
3. 
FAS ASC 320-10-35-1
4. FAS ASC 310-10-45-2
5. FAS ASC 210-10-45

 

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