Accounting for Fixed Income Investments

Overview

The treatment of fixed income investments in the books is somewhat subjective. That is, the accountants have a choice as to how to account for their fixed income securities. This is similar to the ability of accountants to choose the method of accounting for inventory.

The treatment of fixed income is tied to how that investment is viewed and how and when that investment would be sold prior to maturity. Some companies, such as banks, make loans that they intend to hold to the maturity date, primarily making money from the interest received. Other firms will buy fixed income securities with the plan to sell them to clients, or to profit out of a rise in price by selling the security and taking profits. These differences in the view of the function of the asset on the companies books dictates the nature of the accounting treatment.

Treatments

Held to Maturity: securities are investments that are purchased primarily to receive the interest from the investment, with no intent to sell the security prior to maturity. Available for Sale: are securities that are not necessarily intended to be traded, but also viewed as possibly being traded given the right circumstances. Fair Value through Profit and Loss: are securities that are purchased with the intent to be traded prior to maturity.