Companies invest in all kinds of debt securities to include government securities (federal or municipal), corporate bonds, notes, and commercial paper. How a company accounts for these investment in debt is based on the managements intentions for these investments.
Based on managements intentions, debt investments can be broken down into three categories.
- Held-to-maturity - The company wants to hold the debt to maturity.
- Trading - The debt is intend to be traded in the near term for small profit gains.
- Available-for-sale - The company intends to sell at some point in the future. It isn't intended to be held to maturity, but it also wasn't intended to be traded,
When we talk about trading, we are talking about very short-term buying and selling. If a debt was going to be bought with the intention of selling within an accounting period, a company could justify that it was intended for trading. Why the difference? Later on when we talk about income recognition the method that we account for the resulting income differs.
- 1498 reads
