Hey Friends. Today, I’ll post with regard to a specific account found on many balance sheets, especially on the balance sheets of financial companies. The account is Investment (in Marketable Securities).

Specifically, today’s post considers accounting for Investments in Debt Securities (e.g. Bonds). It seems a fitting topic, given the present highly-charged interest rate environment. Bond prices bear an inverse relationship to interest rates. As rates rise, bond values decrease. A company that has a large portfolio of investments in bonds has likely seen steep declines in the market value of its portfolio.

Investments in bonds, per current accounting standards, are carried on the balance sheet either at current value or at cost (amortized cost). If the intention of the investing company is to hold the bonds till they mature, the investment is classified as “held to maturity” and carried at amortized cost and not adjusted to current value at each reporting date.

Many bond portfolios include significant bond positions intended to be held to maturity and therefore are accounted for without any adjustments for the impact of changing interest rates. Go here to read more on Investments in Debt Securities — just scroll down to find the section for this.

Any company may carry Investments as an asset on the balance sheet. It will be a key asset on the balance sheets of financial institutions like banks or insurance companies. Usually a large component of their Investments in Debt Securities (like bonds) will be classified as “held to maturity,” a category denoting the intent to hold until maturity. Since accounting rules dictate that investments classified this way remain valued based on their original cost on the balance sheet, a person has to dig deep into the disclosures (notes to the financial statements) to find the current worth of these investments. Further, since interest rates have risen so much over a relatively short period of time, the value on the balance sheet of such investments is likely to be significantly overstated.

A blog post like this can’t really do justice to its topic today. Hopefully, it’s contributed something, though.

See you next time.