Debt investment balance sheet classification is based on the type of investment and its maturity date. Some investments are held until maturity while others are available for trading. As a result, a debt investment’s balance sheet classification differs from an equity investment. There are three basic types of debt investment: equity investment, held-to-maturity securities, and trading investments.
A debt investment is an investment that represents a creditor relationship with an entity. Some examples of this type of investment include corporate bonds, municipal bonds, U.S. Treasury securities, government agency securities, and some preferred stock. These types of investments must be classified properly at each reporting date. Moreover, determining whether an investment is held-to-maturity requires significant judgment, and all facts and circumstances must be considered.
Generally, an investment is held-to-maturity if an entity is planning to hold it until maturity. However, if an investor exercises a put option on a security, the investment may not qualify as a held-to-maturity asset. A puttable debt investment may not qualify for this classification because the investor intends to sell the security before maturity.
Trading securities are investments that are purchased with the intention of selling them at a later date. This is the best way to categorize these assets. These investments will always be sold at a fair value. If a reporting entity has no immediate plans to sell these securities, then they will be classified as available for sale.
In addition to marketable securities, there are short-term available-for-sale securities. These investments are often referred to as “marketable securities.” For example, Brothers Quartet, Inc. has investments that are classified as “trading securities.” Since the investments are classified as “trading securities,” it will have to make an adjustment of $9,000 in order to record them at fair market value.
Hold-to-maturity assets do not change their value on a balance sheet as often as trading securities do. In addition, they do not affect a company’s earnings due to price changes and non-material changes in the market value. In the next section, we’ll look at the implications of this type of asset on an income statement.
Investments in associated companies are also reported here. These investments represent the costs paid at the time of acquisition. Any permanent impairment of these investments may be reflected through charges in the profit and loss classification 8100. The account also includes equity in un-distributed earnings. Likewise, dividends and other investment income of investor-controlled companies is reported in account 1270 Accounts Receivable.
In addition to this, a debt investment’s classification may also change if the investor accepts a tender offer. In a tender offer, the issuer will offer to purchase the security from the investor, usually for cash or a premium. The investor can choose to accept the offer or decline it. However, it’s important to understand that a tender offer is not the same as holding the security to maturity.