Essay Sample on Investment Securities

Introduction

Securities are a vital investment aspect for many companies. It is imperative for every company to understand the state and stance of the securities they plan to trade in before they take such a venture. The other most important factors are knowing the current market value of the securities when to sell them and the company's financial standing.

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Trading securities are owed investments or equity for which an organization's management plans to trade within an active manner to make a profit in the current duration. They are the stocks or bonds that the administration of an organization makes plans to buy and later sell to make profits in the short-term basis. Many companies do like investing in such securities, and they only take that venture when they have a guarantee of making a profit (Kidwell et al. 2016).

Trading securities find their treatment in accounting using the fair value method. Their value of the balance sheet of the company is equal to their value on the current value in the market. Companies record them in the current assets section below the account with short term investments and later offset in the shareholder's equity section account. When recording trading securities on an income statement, recording happens during sale time. Profits or losses that a company realizes due to these securities get an attribute to the operating income of the company.

An available for sale security is equity security bought by a company to trade it before it realizes its maturity. They are securities that a company keeps on hold, and they can sell them any time. The primary intent of these securities is not to sell them but to hold them.

From an accounting point of view, available for sale securities are recorded at fair value in the unrealized gains and losses in other comprehensive income accounts. This account is in the shareholder's debt section of the balance sheet of the company. Like other securities, available for sale securities can either result in a gain or loss for a company (Hornuf & Schwienbacher, 2017).

Held to maturity securities are securities bought by a company to own until they attain maturity. It is a no derivative financial asset with either a fixed or determinable payment and a set timeline. A company with this kind of security has both the capacity and intention to hold the investments until maturity. Companies use these securities to safeguard themselves from fluctuations in interest rates. They also use them in the diversification of their investment portfolios and to achieve small capital with low risks over more extended periods.

In accounting, companies record held to maturity securities at their original cost at purchase time which is contrary to other types of securities. The value of these securities remains constant in a company's balance sheet over the different accounting periods (Blanchard, Mauro & Acalin, 2016).

Due to their significant effect on financial statements, a company must place them into either current or noncurrent portions to allow the accounting of the right and correct equity, earnings, or the debt of the stakeholder. Timely determination of these securities is imperative as companies hold and trade them for financial GAAP standards. For instance, held to maturity security is non-current security since a company owns it until it attains maturity implying that a company must plan for amortization effects.

Often, trading securities and available for sale securities find consideration as earnings or stakeholder's equity because of their current nature. The other reason a company perceives as gains are because a company holds the hope that they will sell them promptly. If in any way this happens not to be the case, a company will still need to give an account of trading and available for sale securities in another different form (Laux, 2016). Either way, accounting for these securities must happen. If their account does not occur, they become overtime securities which are subject to change because of many accumulations in the company.

It is not difficult to account for all current value securities. The accounting of current value securities is a more natural activity because they are all fall under fair or current values. They are also securities craved for by many companies with the desire to make quick earnings. If handled in the right and correct manner, they end up becoming short term evaluations as well as turnovers that guarantees better and strong standings for companies that make investments in their direction. However, this does not mean that it is not crucial for companies to manage their earnings and resolve to trade in securities ( Chen, Lo, Tsang & Zhang, 2015). Not at all. The underlying meaning is that securities are more of a shortcut to a quick and short-term way of a company to earn profits. Many companies always make a rush to buy securities especially when they are running low on finances. Since the idea of making a profit from these securities is not a guarantee, a loss may also occur. This, therefore, calls for proper handling of these securities especially to give a significant concern in their timing and market trends analysis. For considerable successes in trading in these securities, an overall change in their handling is necessary. Although they have proved useful for many companies, a breakdown is also a possibility.

The idea of treating trading securities, available for sale, and held to maturity securities is an excellent way to handle a company's profits. The unpredictable nature of these securities and their market nature dictates that companies work with the current value and current market characteristics to plan on what to do with the shares. For instance, when held to maturity securities reach their maturity, a company holding them is supposed to sell them immediately without further delay. After they mature, there is no point in telling what will happen to their price. Like many shares and securities in the stock exchange market, their price may shoot to the advantage of the company. This is, however, not always the case.

In most cases, overdue securities find their prices dropping drastically (Edwards, Magee, & Bassetti, 2018). This possibility implies that a company with these securities will sell them at a throwaway price leading to more significant losses realization. A further holding of these securities makes them useless to the company as their time has elapsed and they do not have a higher value in the current market.

Similarly, trading securities are purely current value equity. It is not advisable to roll them over to the next fiscal period. Just like held to maturity securities, one cannot tell what will happen to its value in the next fiscal year or period depending on how a company operates and updates its financial statements. If a company is depending entirely on trading securities to make earnings, which is a rare situation, working on the current value is the best strategy. It is an excellent way to secure and manage their profits. If this does not happen, it is difficult to predict the outcome. Security markets are often associated with uncertainties and risks. With the current value being in the knowledge of a company, taking the shot is advisable and significantly prudent ( Bandyopadhyay, Chen, & Wolfe, 2017). Even though the current value results in low earnings, they are earnings nevertheless. Low incomes are better than making huge losses or realizing a complete company breakdown.

Available for sale securities must always not wait for their maturity. Companies should sell them at the first opportune moment that avails itself. Selling them must not necessarily come from a need to do so. Companies sell them based on the company's standing on account of their finances. This means that companies must treat them based on their current value. Speculation of prices must not happen when dealing with available for sale securities. Past or future prices are not relevant in this case if a company wants to realize a profit and manage its earnings accordingly.

Conclusion

Different companies have different ways of handling securities. In most cases, the direction that companies take in dealing with securities is determined by their financial standing. Market trends, current security values and external factors from third parties are the other determinants of how companies handle security investments. However, many commentators argue that companies that want to manage their earnings should treat securities as current values. They reason based on the fact that the securities market has a lot of risks and uncertainties, hence the need to tread with complete care. Treating securities as current values assure substantial gains for many companies, and it reduces their chances of realizing losses with far higher margins.

References

Bandyopadhyay, S. P., Chen, C., & Wolfe, M. (2017). The predictive ability of investment property fair value adjustments under IFRS and the role of accounting conservatism. Advances in accounting, 38, 1-14. Retrieved from https://www.sciencedirect.com/science/article/pii/S0882611015300328

Blanchard, O., Mauro, P., & Acalin, J. (2016). The case for growth-indexed bonds in advanced economies today. Peterson Institute for International Economics Policy Brief, (16-2). Retrieved from www.piie.com/publications/pb/pb16-2.pdf

Chen, C., Lo, K., Tsang, D., & Zhang, J. (2015, July). Earnings management, firm Location, and financial reporting discretion: An analysis of fair value reporting for investment property in an emerging market. In CEUR Workshop Proceedings (Vol. 1542). Retrieved from www.ires.nus.edu.sg/researchpapers/Visitors/Chen_Lo_Tsang_Zhang.pdf

Edwards, R. D., Magee, J., & Bassetti, W. C. (2018). Technical analysis of stock trends. CRC press. Retrieved from https://www.taylorfrancis.com/books/e/9781351496247

Hornuf, L., & Schwienbacher, A. (2017). Should securities regulation promote equity crowdfunding?. Small Business Economics, 49(3), 579-593. Retrieved from https://link.springer.com/article/10.1007/s11187-017-9839-9

Kidwell, D. S., Blackwell, D. W., Sias, R. W., & Whidbee, D. A. (2016). Financial institutions, markets, and money. John Wiley & Sons. Retrieved from https://books.google.co.ke/books?hl=en&lr=&id=WaKVDQAAQBAJ&oi=fnd&pg=PA5&dq=trading+securities+only+when+sure+to+make+profit&ots=jixBAuYIUg&sig=8u91q11wuGwUcTRrbt_XZ1GEV_Y&redir_esc=y#v=onepage&q&f=false

Laux, C. (2016). The economic consequences of extending the use of fair value accounting in regulatory capital calculations: A discussion. Journal of Accounting and Economics, 62(2-3), 204-208. Retrieved from https://www.sciencedirect.com/science/article/pii/S0165410116300684