Public Securities are the financial instruments that one can trade in the market. Also known as marketable securities, these instruments can either be Equity or Debt instrument.
An Equity instrument is the stock of the companies that look to raise money from the public by offering them a share in the company. A debt instrument such as bonds or debentures is also a way to raise money from the public. The company needs to pay a certain amount of interest to the debt holders.
Types of Public Securities
As an investor, you could select from a different type of equity or debt instrument on the basis of your risk-taking capacity.
These are the shares that are traded in the secondary market. Investors of the common stocks are eligible for voting rights and dividend payout. However, to pay dividends is entirely the company’s decision.
Preference shares are a type of equity instrument but are relatively less risky. In some ways, preference share is similar to those of debts. However, preference shareholders don’t get voting rights. Also, preference shareholders get a fixed rate of dividend and get preference over other equity shareholders. In the event of company liquidation, Preference Shareholders come after paying the debt.
Investors often get confused between Debentures and Bonds. Both debentures and bondholders get a fixed return and help to raise capital. However, the company issue debentures to raise capital for a specific project that the company would start in the future. So, it won’t be wrong to say that while all debentures are bonds, not all the bonds can be classified as debentures.
Accounting Treatment of Public Securities
For accounting purposes, investment in public securities can be divided into three categories:-
- Held to Maturity
- Available for sale
- Held for Trading
An investor needs to define the accounting classification of their asset. However, one can also decide their accounting treatment on the basis of an investor’s investment history.
Let’s understand each one of them and their accounting treatments separately.
As the name suggests, these securities are held till maturity and are not meant for trade. The primary objective of investing in these securities is the protection against interest rate fluctuation. Usually, government debts and corporate bonds are securities that are held to maturity.
One major benefit of such securities is that they are low risk, and there is a guarantee of returns.
Talking of its accounting treatment, one must record these securities at the original purchase cost. Meaning that the value of such securities remains the same on the Balance Sheet from one accounting period to another. One must also consider the profit or loss from the fluctuation in the interest rate at the time of maturity.
Available for Sale Securities
Investors or companies primarily deal in such securities to fend off some portion of the risk in their investment portfolio. The main intention behind purchasing such securities is not to sell them for short-term gains.
Investors usually want to keep their portfolios as diversified as possible. A diversified portfolio ensures that the capital is safe in case of a downturn in one industry. Contrary to the belief, one can hold available-for-sale-securities for long-term gain.
Talking of their account treatment, an accountant records these securities under a separate head, “Unrealized gain/loss in other comprehensive income.”
Trading Securities or Held-for-Trading
The primary reason to invest in these securities is to realize a short-term profit. However, the risk (and the return) is comparatively higher as the volatility in security is more in the short run.
Under the Accounting Policies, one must record these securities using a fair value method or equivalent to their current market value. Such securities will come in the current assets section under the “Short term investments.” Also, it would be offset under the “Unrealized Proceeds from the sale of Short term investments.”
In the income statement, one needs to record these securities at the time of sale. And, any loss or gain on the sale of the security must come under a new head, “Gain (Loss) on Sale of Trading Securities.”