CPA FAR: Assets - Investments - Trading, AFS, HTM Securities, Recognition and Measurement

What Is It?

This topic, Investments: Trading, AFS, HTM Securities — Recognition and Measurement, deals with the identification, classification, and valuation of investments held by a business. It's tested in the FAR exam to ensure accountants can accurately record and report investments in financial statements.

Why Does the Exam Ask This?

This topic measures the professional judgment and compliance logic required to classify and value investments, which is essential for financial reporting and decision-making.

What Do I Need to Know First?

• Prerequisites: Financial Statement Preparation, Accounting Standards Codification (ASC), and Financial Instruments.
• Concepts: Trading Securities, Available-for-Sale (AFS) Securities, Held-to-Maturity (HTM) Securities, and Fair Value.

Topic Snapshot

This topic fits within the CPA FAR exam's Assets section and is crucial for accounting professionals to accurately record and report investments in financial statements, ensuring compliance with accounting standards and regulatory requirements.

Exam / Job / Audit Weighting

• Frequency: Medium
• Difficulty Rating: Intermediate
• Question Type: Multiple Choice, Calculation, and Short Answer

Difficulty Level

Intermediate

Must-Know Rules, Formulas, Standards, or Principles

• ASC 320: Investments in Debt and Equity Securities
• Classification criteria for Trading, AFS, and HTM Securities
• Fair Value measurement and disclosure requirements

Misconceptions

• Trading Securities are always recorded at cost.
• AFS Securities are always recorded at cost.
• HTM Securities are always recorded at cost.

Common Mistakes

• Failing to classify securities correctly.
• Incorrectly applying fair value measurement and disclosure requirements.
• Ignoring ASC 320 requirements.

The Common Trap

The most common trap is misclassifying securities as Trading or AFS, which can lead to incorrect financial statement presentation and disclosure.

Terms to Remember

• Trading Securities: securities bought and held for sale in the near term.
• Available-for-Sale (AFS) Securities: securities not classified as Trading or HTM.
• Held-to-Maturity (HTM) Securities: securities held to maturity.
• Fair Value: the price that would be received to sell an asset or paid to transfer a liability.

Step-by-Step Process

1. Identify the type of security (Trading, AFS, or HTM).
2. Classify the security based on the classification criteria.
3. Measure the security's fair value.
4. Record and disclose the security in the financial statements.

Exam Answer Builder

1-mark Question

• What is the primary purpose of classifying securities?
• Example Question: What is the primary purpose of classifying securities as Trading or AFS?
• Key Tip: Classify securities based on the classification criteria to ensure accurate financial statement presentation.

2-mark Question

• What is the difference between Trading and AFS Securities?
• Example Question: What is the difference between Trading and AFS Securities in terms of classification and measurement?
• Key Tip: Identify the key differences between Trading and AFS Securities to ensure accurate classification and measurement.

5-mark Question

• Describe the process for classifying and measuring AFS Securities.
• Example Question: Describe the process for classifying and measuring AFS Securities, including the requirements for fair value measurement and disclosure.
• Key Tip: Ensure accurate classification and measurement of AFS Securities by following the ASC 320 requirements.

Case Study

• A business has purchased 10,000 shares of stock with a cost of $100,000. The current market price is $120,000. Classify the stock as Trading or AFS and explain why.
• Example Question: Classify the stock as Trading or AFS and explain why.
• Key Tip: Classify the stock based on the classification criteria and ensure accurate financial statement presentation.

This vs That

Compare this topic with Investments: Debt Securities — Recognition and Measurement.

Time-Saver Hack

Use the classification criteria to quickly identify the type of security (Trading, AFS, or HTM).

Mini Scenarios

Basic Scenario

• A business buys 1,000 shares of stock with a cost of $10,000. The current market price is $10,000. Classify the stock as Trading or AFS.
• What is happening: The business has purchased stock at a price equal to the current market price.
• What to notice: The stock is classified as Trading because it was bought and held for sale in the near term.

Applied Scenario

• A business buys 10,000 shares of stock with a cost of $100,000. The current market price is $120,000. Classify the stock as Trading or AFS and explain why.
• What is happening: The business has purchased stock at a price lower than the current market price.
• What to notice: The stock is classified as AFS because it was not bought and held for sale in the near term.

Tricky Scenario

• A business buys 10,000 shares of stock with a cost of $100,000. The current market price is $80,000. Classify the stock as Trading or AFS and explain why.
• What is happening: The business has purchased stock at a price higher than the current market price.
• What to notice: The stock is classified as Trading because it was bought and held for sale in the near term, despite the current market price being lower than the cost.

Diagnostic MCQ Bank

Question 1

What is the primary purpose of classifying securities? A) To determine the cost of the security B) To determine the fair value of the security C) To determine the classification of the security D) To determine the type of security

Options

A) To determine the cost of the security B) To determine the fair value of the security C) To determine the classification of the security D) To determine the type of security

Correct Answer

C) To determine the classification of the security

Explanation

The primary purpose of classifying securities is to determine the classification of the security, which is essential for accurate financial statement presentation and disclosure.

Why the correct answer is right

The correct answer is right because classifying securities is essential for determining the type of security, which affects the financial statement presentation and disclosure.

Why the trap option is tempting

The trap option is tempting because it is a common misconception that the primary purpose of classifying securities is to determine the cost or fair value of the security.

Question 2

What is the difference between Trading and AFS Securities? A) Trading Securities are always recorded at cost, while AFS Securities are always recorded at fair value. B) Trading Securities are always recorded at fair value, while AFS Securities are always recorded at cost. C) Trading Securities are bought and held for sale in the near term, while AFS Securities are not. D) Trading Securities are not bought and held for sale in the near term, while AFS Securities are.

Options

A) Trading Securities are always recorded at cost, while AFS Securities are always recorded at fair value. B) Trading Securities are always recorded at fair value, while AFS Securities are always recorded at cost. C) Trading Securities are bought and held for sale in the near term, while AFS Securities are not. D) Trading Securities are not bought and held for sale in the near term, while AFS Securities are.

Correct Answer

C) Trading Securities are bought and held for sale in the near term, while AFS Securities are not.

Explanation

The correct answer is right because Trading Securities are bought and held for sale in the near term, while AFS Securities are not.

Why the correct answer is right

The correct answer is right because the classification criteria for Trading and AFS Securities are based on the intention to sell the security in the near term.

Why the trap option is tempting

The trap option is tempting because it is a common misconception that Trading Securities are always recorded at cost or fair value, or that AFS Securities are always recorded at cost or fair value.

Question 3

What is the process for classifying and measuring AFS Securities? A) Classify AFS Securities as Trading or HTM, and measure fair value using the current market price. B) Classify AFS Securities as Trading or HTM, and measure fair value using the cost of the security. C) Classify AFS Securities as Trading or HTM, and measure fair value using the current market price or cost of the security. D) Classify AFS Securities as Trading, and measure fair value using the current market price or cost of the security.

Options

A) Classify AFS Securities as Trading or HTM, and measure fair value using the current market price. B) Classify AFS Securities as Trading or HTM, and measure fair value using the cost of the security. C) Classify AFS Securities as Trading or HTM, and measure fair value using the current market price or cost of the security. D) Classify AFS Securities as Trading, and measure fair value using the current market price or cost of the security.

Correct Answer

C) Classify AFS Securities as Trading or HTM, and measure fair value using the current market price or cost of the security.

Explanation

The correct answer is right because AFS Securities are classified as Trading or HTM, and measured using the current market price or cost of the security.

Why the correct answer is right

The correct answer is right because the classification criteria for AFS Securities are based on the intention to sell the security in the near term, and the measurement of fair value is based on the current market price or cost of the security.

Why the trap option is tempting

The trap option is tempting because it is a common misconception that AFS Securities are always classified as Trading or HTM, or that the measurement of fair value is based on the current market price or cost of the security.

Question 4

What is the primary purpose of fair value measurement and disclosure? A) To determine the cost of the security B) To determine the classification of the security C) To determine the fair value of the security D) To determine the type of security

Options

A) To determine the cost of the security B) To determine the classification of the security C) To determine the fair value of the security D) To determine the type of security

Correct Answer

C) To determine the fair value of the security

Explanation

The primary purpose of fair value measurement and disclosure is to determine the fair value of the security, which is essential for accurate financial statement presentation and disclosure.

Why the correct answer is right

The correct answer is right because fair value measurement and disclosure are essential for determining the fair value of the security, which affects the financial statement presentation and disclosure.

Why the trap option is tempting

The trap option is tempting because it is a common misconception that the primary purpose of fair value measurement and disclosure is to determine the cost or classification of the security.

Question 5

What is the difference between Trading and HTM Securities? A) Trading Securities are always recorded at cost, while HTM Securities are always recorded at fair value. B) Trading Securities are always recorded at fair value, while HTM Securities are always recorded at cost. C) Trading Securities are bought and held for sale in the near term, while HTM Securities are not. D) Trading Securities are not bought and held for sale in the near term, while HTM Securities are.

Options

A) Trading Securities are always recorded at cost, while HTM Securities are always recorded at fair value. B) Trading Securities are always recorded at fair value, while HTM Securities are always recorded at cost. C) Trading Securities are bought and held for sale in the near term, while HTM Securities are not. D) Trading Securities are not bought and held for sale in the near term, while HTM Securities are.

Correct Answer

C) Trading Securities are bought and held for sale in the near term, while HTM Securities are not.

Explanation

The correct answer is right because Trading Securities are bought and held for sale in the near term, while HTM Securities are not.

Why the correct answer is right

The correct answer is right because the classification criteria for Trading and HTM Securities are based on the intention to sell the security in the near term.

Why the trap option is tempting

The trap option is tempting because it is a common misconception that Trading Securities are always recorded at cost or fair value, or that HTM Securities are always recorded at cost or fair value.

Real-World Patterns

1. A business purchases 10,000 shares of stock with a cost of $100,000. The current market price is $120,000. The business classifies the stock as AFS and measures fair value using the current market price.
2. A business purchases 10,000 shares of stock with a cost of $100,000. The current market price is $80,000. The business classifies the stock as Trading and measures fair value using the current market price or cost of the security.
3. A business purchases 10,000 shares of stock with a cost of $100,000. The current market price is $120,000. The business classifies the stock as HTM and measures fair value using the cost of the security.

30-Second Cheat Sheet

1. Classify securities as Trading, AFS, or HTM based on the classification criteria.
2. Measure fair value using the current market price or cost of the security.
3. Record and disclose the security in the financial statements.
4. Classify AFS Securities as Trading or HTM.
5. Measure fair value using the current market price or cost of the security.

Related Concepts

• Investments: Debt Securities — Recognition and Measurement
• Financial Instruments: Classification and Valuation
• Accounting Standards Codification (ASC) 320: Investments in Debt and Equity Securities

Verified Source List

• Accounting Standards Codification (ASC) 320: Investments in Debt and Equity Securities
• Financial Accounting Standards Board (FASB)
• Securities and Exchange Commission (SEC)
• American Institute of Certified Public Accountants (AICPA)
• Institute of Internal Auditors (IIA)