Changes in the fair value of held-to-maturity securities are generally not recorded on the income statement. Held-to-maturity securities are a specific category of investments that companies intend to hold until maturity. They are typically recorded at amortized cost on the balance sheet, and changes in their fair value are not recognized in the income statement under normal circumstances. Instead, the accounting treatment for held-to-maturity securities focuses on their cost and interest income recognition.
Here’s how changes in the fair value of held-to-maturity securities are typically handled:
- Amortized Cost:
- Held-to-maturity securities are initially recorded at cost on the balance sheet.
- The carrying amount of these securities is adjusted for the amortization of any premium or discount over the life of the investment.
- Interest Income:
- Interest income is recognized on held-to-maturity securities based on their effective interest rate and the carrying amount of the investment.
- Interest income is reported in the income statement as part of operating income.
- No Fair Value Changes on Income Statement:
- Changes in the fair value of held-to-maturity securities are generally not recognized on the income statement.
- The focus is on recognizing interest income and ensuring the carrying amount aligns with the amortized cost.
- If there is evidence that an impairment loss has occurred on a held-to-maturity security, the loss is recognized in the income statement.
- Disclosure and Transparency:
- Companies provide disclosures in their financial statements about their held-to-maturity securities, including information about amortized cost and any impairment.
The primary goal of holding held-to-maturity securities is to generate predictable interest income and manage the company’s cash position. Recognizing changes in fair value on the income statement is not a common practice for held-to-maturity securities, as they are typically held until maturity. It’s important for companies to accurately account for these investments according to the relevant accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP), and to provide transparent disclosures about their financial position and the nature of their investments.