ASC 320

Definition

ASC 320 is the Accounting Standards Codification section that addresses the accounting and reporting for investments in debt and equity securities. It outlines the classification of securities into three categories: held-to-maturity, trading, and available-for-sale, with specific rules on recognition, measurement, and reporting for each category. This framework is essential for understanding how to categorize securities and their implications for financial reporting.

5 Must Know Facts For Your Next Test

1. ASC 320 requires that held-to-maturity securities be reported at amortized cost rather than fair value on the balance sheet.
2. Available-for-sale securities are reported at fair value, with unrealized gains and losses recorded in other comprehensive income rather than directly in earnings.
3. The intent to hold a security until maturity is a key factor in classifying it as held-to-maturity under ASC 320.
4. When a security is classified as available-for-sale, it allows for more flexibility as it can be sold before maturity without affecting its accounting classification.
5. ASC 320 also requires regular assessments of investments for impairment to determine if their carrying values should be adjusted.

Review Questions

• How does ASC 320 differentiate between held-to-maturity and available-for-sale securities, and why is this distinction important?
  • ASC 320 differentiates between held-to-maturity and available-for-sale securities based on the investor's intent and ability to hold the security. Held-to-maturity securities are intended to be held until maturity and are recorded at amortized cost, while available-for-sale securities can be sold before maturity and are reported at fair value with unrealized gains or losses in other comprehensive income. This distinction is crucial because it affects how securities are valued on financial statements and impacts reported earnings.
• Discuss the implications of classifying a security as trading versus available-for-sale under ASC 320 regarding financial reporting.
  • Classifying a security as trading means it will be recorded at fair value with all unrealized gains or losses recognized in earnings, impacting net income directly. In contrast, available-for-sale securities also report at fair value but recognize unrealized gains and losses in other comprehensive income, which does not affect net income until realized. This classification affects how investors perceive a company's performance, risk exposure, and overall financial health.
• Evaluate how ASC 320's treatment of impairment influences investment decision-making for held-to-maturity versus available-for-sale securities.
  • ASC 320's treatment of impairment requires that both held-to-maturity and available-for-sale securities be assessed regularly for declines in value. For held-to-maturity securities, recognizing an impairment could force an investor to re-evaluate their investment strategy since these assets are supposed to be held until maturity. In contrast, for available-for-sale securities, recognizing impairment can influence decisions on whether to sell or hold onto the security based on its fair value performance. Therefore, understanding impairment under ASC 320 helps investors make informed choices about their portfolios' risk management.

Related terms

Held-to-Maturity Securities: Debt securities that the investor has the intent and ability to hold until maturity, which are recorded at amortized cost.

Trading Securities: Debt and equity securities that are bought and held primarily for sale in the near term, recorded at fair value with unrealized gains and losses recognized in earnings.

Impairment: A reduction in the carrying amount of a security below its cost, which must be assessed and reported according to specific criteria outlined in ASC 320.