FAR, Financial Accounting and Reporting
Sources for Investments: Debt Securities
Last reviewed
The standards and authorities behind PocketCPA's FAR lessons on Investments: Debt Securities. The topic rests on ASC 320.
About this topic
A company that buys a bond has to decide what it plans to do with it. That single decision sets the accounting for the whole life of the security.
ASC 320 governs an entity's investments in debt securities. The Topic reaches bonds, notes, government and municipal obligations, and securitized instruments such as mortgage-backed securities.
Key points
- Debt securities are classified as trading (fair value through income), available-for-sale (fair value through OCI), or held-to-maturity (amortized cost).
- HTM classification requires both positive intent and ability to hold to maturity; intent to sell or the need to sell disqualifies.
- AFS unrealized gains and losses go to OCI, not net income, until the security is sold or impaired.
- A transfer between categories is accounted for at fair value on the transfer date.
What the lessons cover
- The three classification categories and the measurement map (ASC 320-10-25-1)
- Trading securities: fair value through net income (ASC 320-10-35-1)
- Available-for-sale: fair value through OCI (ASC 320-10-35-1)
- Held-to-maturity and the effective interest method (ASC 320-10-35-4)
- Transfers between categories and HTM tainting (ASC 320-10-35-10)
- Credit losses and the ASC 326 cross-reference (ASC 326-30-35-2)
- Presentation and disclosure (ASC 320-10-45-2)
Authoritative references
- ASC 320-10-25-1 and 25-2, the three classification categories, with each security placed in exactly one and the choice documented contemporaneously.
- ASC 320-10-25-6 and 25-9, the changes in circumstances treated as consistent with the original intent of a held-to-maturity security, and the sale of an HTM security before maturity that can taint the portfolio.
- ASC 320-10-35-1, initial recording at the cost of the consideration given, then measurement by category.
- ASC 320-10-35-4, interest income recognized in earnings for all three categories.
- ASC 320-10-35-5, reassessment of the classification at every reporting date.
- ASC 320-10-35-10, 35-10A and 35-10B, transfers between categories: reversal of the outgoing category's allowance in earnings, and AOCI that stays in AOCI and is amortized as a yield adjustment.
- ASC 320-10-35-15, the amortized cost basis that carries over for continued premium or discount amortization.
- ASC 320-10-40-1 and 40-2, sale of a security, and reclassification of the accumulated gain or loss out of AOCI into net income.
- ASC 320-10-45-1 and 45-2, separate presentation of available-for-sale and trading securities, and the current and noncurrent split.
- ASC 320-10-45-7 and 45-8B, gains and losses on a transferred security, and presentation of allowance reversals and establishments on the income statement.
- ASC 320-10-50-2 and 50-3, disclosure of fair value and of maturity information, which may be combined in appropriate groupings.
- ASC 320-10-50-7, the former disclosure superseded by ASU 2016-13.
- ASC 320-10-55-25, the illustrative amortization, with Subtopic 310-20 governing the real computation.
- ASC 326-20-30-1, the credit loss allowance an HTM debt security carries under the CECL model.
- ASC 326-30-35-1 and 35-2, impairment of an available-for-sale debt security, which exists only when fair value is below amortized cost and runs through earnings while the security is held.
- ASC 326-30-35-10, 35-12 and 35-13, the intent-or-requirement-to-sell steps, the limit on reversal of the allowance below zero, and write-offs and recoveries.
- ASC 326-30-45-1, presentation at fair value with the amortized cost basis and the allowance shown parenthetically.
- ASC 326-30-50-4 and 50-5, aging of unrealized losses for available-for-sale securities with no allowance.
Related requirements outside the Topic:
- Equity securities at fair value through net income, ASC 321-10-35-1, and the measurement alternative at ASC 321-10-35-2.
- Credit losses on HTM securities, ASC 326-20.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.