Investing in financial securities is a core strategy for businesses, but understanding how to account for these investments under U.S. GAAP can be complex. ASC 320 provides essential guidance on the classification, measurement, and reporting of debt and certain equity securities, ensuring accurate financial statement presentation. 

Whether you're an accountant, financial analyst, or business owner, mastering ASC 320 is crucial to avoid compliance risks, make informed investment decisions, and ensure transparent financial reporting.

Overview of ASC 320

ASC 320, part of the Financial Accounting Standards Codification (FASB ASC), governs the accounting and reporting of debt and certain equity securities under U.S. GAAP. The primary objective of ASC 320 is to provide a clear framework for classifying and measuring investment securities, ensuring that financial statements reflect their economic realities.

Historically, ASC 320 covered both debt and equity securities, but following ASU 2016-01, most equity securities are now accounted for under ASC 321 (Investments—Equity Securities). ASC 320 remains relevant for debt securities, requiring businesses to categorize investments based on their intent and ability to hold them.

Classification of Investments under ASC 320

ASC 320 requires management to classify investments at the time of acquisition into one of three categories:

1. Held-to-Maturity (HTM) Securities

Definition: Debt securities that the entity has the intent and ability to hold until maturity.

Measurement: Amortized cost (not adjusted for fair value changes).

Income Statement Impact: Interest income recognized using the effective interest method.

Balance Sheet Impact: Reported at amortized cost, with no fair value adjustments.

Risk Consideration: If a company sells or reclassifies HTM securities before maturity, it could taint its ability to use the HTM classification in the future.

2. Available-for-Sale (AFS) Securities

Definition: Debt securities that are neither HTM nor Trading—securities that may be sold in response to changes in market conditions, liquidity needs, or risk management strategies.

Measurement: Fair value (adjusted each reporting period).

Income Statement Impact:

  • Interest income recognized.
  • Unrealized gains/losses recorded in Other Comprehensive Income (OCI).
  • Realized gains/losses recognized in Net Income upon sale.

Balance Sheet Impact: Reported at fair value, with unrealized gains/losses recognized in OCI.

3. Trading Securities

Definition: Debt securities bought for short-term trading or active management.

Measurement: Fair value (adjusted each reporting period).

Income Statement Impact: All unrealized gains and losses recorded in net income.

Balance Sheet Impact: Reported at fair value, with changes affecting earnings directly.

Accounting Treatment for Debt and Equity Securities

Once classified, investments must be measured and accounted for based on their category:

Held-to-Maturity (HTM) Securities

  • Measured at amortized cost (purchase price adjusted for premium/discount amortization).
  • No fair value adjustments recorded in financial statements.
  • Interest income recognized using the effective interest method.
  • Impairment losses recorded in earnings if a decline in value is considered permanent.

Available-for-Sale (AFS) Securities

  • Measured at fair value, with unrealized gains/losses recorded in OCI.
  • Realized gains/losses from sales recorded in net income.
  • Interest income recorded based on the effective interest method.
  • Impairment assessed under ASC 326 (CECL model)—credit losses recognized in net income.

Trading Securities

  • Measured at fair value.
  • Unrealized gains/losses recorded in net income every period.
  • Interest income recorded based on the effective interest method.
  • More volatility in financial statements due to direct net income impact.

Fair Value and Impairment Considerations

One of the most critical aspects of ASC 320 is fair value measurement and impairment assessment.

Fair Value Measurement

AFS and Trading securities are measured using ASC 820 (Fair Value Measurement).

  • Level 1 Inputs: Quoted market prices (e.g., stock exchange prices).
  • Level 2 Inputs: Observable market data (e.g., bond pricing models).
  • Level 3 Inputs: Unobservable inputs requiring significant judgment.

Impairment of Debt Securities

If the fair value of a debt security drops below its amortized cost, management must evaluate whether the impairment is:

Temporary → Unrealized losses stay in OCI (for AFS).

Other-Than-Temporary (OTTI) → Losses are recognized in earnings if:

  • The company intends to sell the security.
  • The company will be forced to sell before recovery.
  • There is credit-related impairment, meaning the issuer cannot meet obligations.

Impairment of Equity Securities (Now ASC 321)

  • Equity securities are no longer covered under ASC 320 (since ASU 2016-01).
  • Most equity investments are recorded at fair value through net income (FVTNI).
  • Any declines in fair value immediately affect net income.

Disclosure Requirements

ASC 320 mandates extensive disclosures to provide transparency into investment portfolios:

  • Carrying amounts, fair values, and unrealized gains/losses (by category).
  • Gross realized gains/losses on sales of AFS/trading securities.
  • Interest income recognized for HTM, AFS, and Trading securities.
  • Impairment losses and methodology for assessing OTTI.
  • Fair value hierarchy levels for investment securities (Level 1, 2, 3).

Why It Matters: Investors and stakeholders need accurate disclosures to assess financial risk, liquidity, and market exposure in a company’s investment portfolio.

ASC 320 vs. Other GAAP Investment Standards

While ASC 320 provides guidance on debt securities, other investment-related standards under U.S. GAAP address different types of investments. Understanding these differences is essential for proper classification and accounting treatment.

1. ASC 321 – Investments in Equity Securities

Applies to: Equity investments (stocks) where the investor does not have significant influence (typically <20% ownership).

Key Change: Previously, ASC 320 allowed classification of equity securities as AFS (recognized in OCI). However, ASU 2016-01 eliminated this option.

Current Treatment: Most equity investments are recorded at fair value through net income (FVTNI), meaning all unrealized gains and losses affect earnings immediately.

Practicability Exception: For equity securities without readily determinable fair values, companies may elect a measurement alternative (cost minus impairment plus observable price changes).

2. ASC 323 – Equity Method Investments

Applies to: Investments where the investor has significant influence (typically 20-50% ownership).

Accounting Treatment:

  • Instead of fair value, the investor recognizes its share of the investee’s net income/loss.
  • Dividends reduce the investment balance rather than being recorded as income.
  • Fair value option available but not commonly used.

3. ASC 326 – Credit Losses (CECL Model for AFS/HTM)

Key Impact: ASC 326 introduced the Current Expected Credit Loss (CECL) model, affecting how businesses recognize impairment for AFS and HTM securities.

HTM Securities: Companies must estimate expected credit losses over the security’s life and recognize a credit loss allowance.

AFS Securities: Expected credit losses must be recognized through an allowance account, rather than directly writing down the investment.

4. IFRS 9 vs. ASC 320

IFRS 9 (International Standards) follows a business model approach for classifying financial assets:

  • Amortized Cost (like HTM in ASC 320)
  • Fair Value through Other Comprehensive Income (FVOCI) (similar to AFS under ASC 320)
  • Fair Value through Profit or Loss (FVTPL) (like Trading in ASC 320)

Key Difference: Under IFRS 9, companies can classify certain equity investments at FVOCI, but in U.S. GAAP, equity securities must be at fair value through net income.

Summary

ASC 320 provides essential guidance for classifying and measuring debt securities under U.S. GAAP, categorizing them as Held-to-Maturity (HTM), Available-for-Sale (AFS), or Trading based on intent and ability. While HTM securities are recorded at amortized cost, AFS and Trading securities follow fair value accounting, with unrealized gains/losses impacting OCI or net income, respectively. 

Equity securities are no longer included in ASC 320 and are now covered under ASC 321, requiring fair value through net income. Impairment assessments follow ASC 326 (CECL model), ensuring timely recognition of credit losses. 

With strict disclosure requirements, companies must provide transparent reporting on fair value measurements, investment classifications, and impairment considerations.