Many companies own securities issued by other companies, such as stock shares (equity) or bonds (debt). Such securities are added to the company's asset base, usually under the direction of senior financial officers or the Board of Directors. For accounting purposes (valuing and reporting), these securities are typically classified as either Marketable securities or Investment securities.
Marketable securities is the accounting term for securities purchased and held, which the company expects to convert into cash in the near term. Marketable securities are carried on the Balance Sheet as current assets, often in an account called Short term investments.
Investment securities are securities which the company intends to hold either for the long term (more than a year) or for an indefinite period (e.g., until market conditions justify selling, or until the company achieves control objectives with the company that issued the securities).
Marketable and investment securities may include, for instance, corporate and government bonds, treasuries, and stock shares, as well as derivative instruments such as options or swaps.
Investments for Companies Outisde the Investment Industry
Note that the investment discussion below refers to companies whose primary line of business is something other than financial investment. This discussion below, in other words, does not apply to holding companies, lending companies, investment companies, or companies that specialize in start up / entrepreneurial funding.
- What are marketable and investment securities?
- What are company objectives for securities investments?
- What are the primary classes of securities holdings?
- Example Balance sheet with securities assets.
- For detailed bookkeeping and accounting example methods for valuing and reporting securities assets, see the Business Encyclopedia article Lower of Cost or Market Rule.
- For an introduction to the asset structure concept, including the company's investment assets portfolio, see the Encyclopedia article Asset Structure.
- For coverage of financial metrics for evaluating securities investments, see the following Business Encyclopedia articles:
The highest level business objective for profit-making companies is often quoted simply as "To increase owner value." Companies pursue this objective by using assets to earn profits, which increase owner value in two ways:
- Profits can be paid directly to shareholder owners as dividends.
- Profits can be kept as retained earnings, thereby increasing owners equity.
The highest level objective for a company's senior financial officers can also be phrased in simple terms, such as "To make the best use of the company's assets." in this regard, the officer's responsibilities for asset use are, in this order:
- To sustain normal operations and meet short-term obligation needs, e.g., paying employee salaries and wages, or covering financing costs on loans.
- To make prudent investments that enable long-term survival and growth,e.g., investments in physical infrastructure, product research and development, marketing initiatives, or pursuit of other strategic objectives.
Pursuit of "other strategic objects" could, for instance, involve purchase of a controlling interest in a competitor or supplier.
- To invest proactively when the company has more than enough assets available to support responsibilities (1) and (2) above, e.g., when there is abundant surplus "Cash on hand."
In such cases, the responsibility is to put such surplus assets to work so as to bring the greatest possible returns. The alternative—letting cash that is truly surplus lie idle when it could be earning—is usually viewed as irresponsible financial practice.
Responsibilities (2) and (3) above may include a very wide range of actions, including buying stock shares or bonds from companies in completely different industries, buying bank certificates of deposit, or even investing in actions that contribute to "employee satisfaction" or "community good will."
Accountants classify most securities investments either as Investments in securities or marketable securities. In order for an investment asset to qualify as a marketable securities, both of the following conditions must:
- There must be an accessible, active market for the securities. If so, the securities can be considered liquid assets with a reliably assessed market value.
- The company is able to sell the securities when cash needs require it to do so, or if financial officer believe there is financial advantage in selling.
Absent either (1) or (2), financial auditors will assume:
- The securities were purchased for long term objectives, and they should be reported as long term assets.
- Securities are simply called Investments in Securities assets, not marketable securities.
For accounting purposes, Investment securities are further designated in 3 classes and Marketable securities in 4 classes, as shown in Exhibit 1 below.
For detailed examples showing valuing and reporting methods for each class, see the Encyclopedia article Lower of Cost or Market Rule.
|Securities Assets||Kind of securities||Class definition|
|Investments in Securities|
|Minority, passive investment||Equity||Company A owns less than 50% of the voting stock in Company B, and Company A does not attempt or intend to attempt to use its ownership to influence or control actions or decisions of company B. In this case, A is said to have a minority passive investment interest in B. In practice, however, the minority/passive designation is applied only when one company owns 20% or less of another. There is a presumption that 20% ownership or greater implies an "active" interest.|
|Minority, active investment||Equity||The classification minority active investment usually applies to companies owning between 20% and 50% of the voting stock in another company, and which do attempt to use this ownership to influence or control that company.|
|Majority, active investment||Equity||When company A owns more than 50% of Company B, A is in a position to exercise absolute control over B. In such cases, A is said to have a majority active interest in B. A is called the parent company, and B is a subsidiary of A.|
|Trading securities||Equity or debt||Securities assumed to be held for relatively short term gains are called trading securities. It is assumed that securities in this class will be actively traded.|
|Available for trading||Equity or debt||Securities which may or may not be held for long term gains are designated available for trading. Marketable securities in this class are
typically acquired and held for a while to meet a specific cash need
(e.g., to retire bonds the company has issued that will be coming due).
|Debt held to maturity||Debt||Debt securities (e.g., bonds) which the company has both the intent and ability to hold to maturity, and firm has both the positive intent & to hold to maturity.|
|Derivatives with available
|Derivative||Options, swaps, or futures, held by the company either as insurance or intended as profit making investments in their own right. If there is an open, accessible market for the derivatives, they may be called marketable securities|
|Derivative||Derivatives which are acquired through private negotiated contract, which are not traded on an open market, are classified as securities investments, but not classified as marketable securities.|
|Exhibit 1. The classification of securities assets for accounting purposes includes Investment securities (3 classes) and Marketable securities (4 classes). For detailed coverage of methods used for valuing and reporting each class, see the Encyclopedia article Lower of Cost or Market Rule.|
Securities assets are carried on the Balance sheet as assets. The Exhibit 2 sample balance sheet below highlights these assets in bold green.
On the Balance sheet, Marketable securities belong to Current assets, under a category named something like "Short term investments. " Securities that the firm holds for longer or indefinite periods appear Long term investments and funds. In Exhibit 2, for instance, these securities appear as holdings of stock shares and bonds.
|Grande Corporation Figures in $1,000's|
Balance Sheet at 31 December 20YY
Short term investments
Less allowance doubtful accts
Net accounts receivable
Notes receivable short term
Work in progress
Operating & office supplies
Prepaid exp, insurance, def taxes
Total Current Assets
|Long-Term Investments and Funds |
Common stock held
Preferred stock held
Bonds Held / Sinking funds
Other Long-Term Investments
Total Long-Term Investments
|Property, Plant & Equipment |
Factory Manufacturing Equipment
Less accumulated depreciation
Net factory mfr equipment
Store Equip / Selling Assets
Less accumulated depreciation
Net store/selling equipment
Less accumulated depreciation
Net computer systems
Total Property, Plant & Equip
|Intangible Assets |
Trademarks and Patents
Total Intangible Assets
|Other Assets |
Notes payable, short term
Current portion of long term debt
Accrued expenses, Interest payable
Taxes payable Other withholding
Total Current Liabilities
|Long Term Liabilities |
Bank notes payable
Bonds payable, other LT liabilities
Total Long Term Liabilities
|OWNERS EQUITY |
Contributed capital excess of par
Total Contributed Capital
Total Owners Equity
| Total Liabilities and Equities ||22,075|