Accounting for Investment Securities (Essay Sample)

Accounting for investment securities
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Accounting for investment securities
Investment securities are financial assets that can be traded, and they include equities of fixed income instruments. Tradable financial assets are usually made with one objective to make long-term profits. There are other forms of investment securities as far as equities are concerned. For example, debt securities which entail loans and bonds which are issued by business enterprises and governments. Derivatives are also forms of investment securities, and they usually involve stocks and futures contracts.
Accounting under GAAP
GAAP (Generally Accepted accounting principles) can be described as a collection of accounting guidelines that are established by FASB (Financial Accounting Standard Board). GAAP policy requires all public traded companies in the USA t comply with the set accounting guidelines (Michael, 2020). Typically, GAAP provides a controlled environment to enable transparency and accountability in recording financial information. The primary objectives are to help companies comply with accounting principles, protect the interests of investors and other stakeholders. In this case, the accounting principles ensure that the financial statements are coherent, transparent, and comparable. Over the years, most companies have engaged in fraudulent activities, such as insider trading, making the stock market and financial equities volatile. There several fundamental concepts under GAAP (Michael, 2020).
Regularity and consistency are very vital in accounting, and GAAP requires companies to apply the principles throughout the reporting period. In this case, all the information provided should be verifiable with an explanation to back the data provided. The methods applied in the process of the financial recording should be consistent and permanent. IFRS (International Financial Reporting Standards) is also a global body that sets accounting principles that effectively guide companies to report and record financial information. IFRS is used around the globe, with more than 110 countries applying the concepts. It is used in Asia and Europe while GAAP accounting principles are only applied in the USA; in this case, IFRS is global while GAAP is local (Gebhardt & Novotny-Farkas, 2011). GAAP principles are based on rules, while IFRS is controlled by principles that require organizations to make undisputable judgments when recording financial transactions. Most often, IFRS does allow companies to re-evaluate properties and inventories to attain fair value.
On the other hand, GAAP accounting principles do not allow for re-evaluation (Dinh, Nhung, & Charles, 2014). Moreover, both GAAP and IFRS leave room for impaired losses, especially on long-term assets. However, GAAP restricts the aspect of reversal on impaired losses while IFRS gives room for reversal on the impaired losses. Intangible assets can be described as internal costs, and they are usually capitalized according to the IFRS principles. On the contrary, GAAP developmental costs are usually reported as incurred costs, and they are capitalized using different software. The aspect of fixed assets is also put into account by the two accounting bodies. For example, fixed assets such as equipment and buildings are valued with the principle of historic costs since they depreciate with time. However, under IFRS accounting principles, they are usually valued at a cost since they depreciate differently. GAAP does not have a particular category for investments in properties; IFRS has a category that is defined as property investment and can be valued depending on the market value of the property (Dinh, Nhung, & Charles, 2014). IFRS allows exceptions on lease with low value, while GAAP only excludes leases on intangible assets.
GAAP on investment securities
GAAP has flexible terms and is local, which means there is a high level of scrutiny for the companies within the USA. Mostly, the stock market is becoming volatile, and companies may engage in financial malpractices, especially when international bodies rule them. Due to the nature of the markets choosing GAAP for financial equities, bonds and futures would be the best alternative (Larry, 2013). It provides security for the investors and shareholders in the company; for example, all the companies have to file financial reports that reflect their financial health. Although IFRS demands all c