August 05, 2015
Balance sheet presentation of available-for-sale securities?
I have had a couple of questions come through regarding the appropriate balance sheet presentation of available-for-sale securities. Are they considered current assets or non-current assets? First thing’s first, let’s assume that you’ve correctly understood the definition of a security, and that you’ve classified it correctly (held to maturity, trading, or available for sale). If a maturity exists, and it is less than one year, then the answer is pretty clear. What about others though?
Balance sheet presentation is covered by ASC 320-10-45-1 through 45-2.
45-1 An entity shall report its investments in available-for-sale securities and trading securities separately from similar assets that are subsequently measured using another measurement attribute on the face of the statement of financial position. To accomplish that, an entity shall do either of the following:
- Present the aggregate of those fair value and non-fair-value amounts in the same line item and parenthetically disclose the amount of fair value included in the aggregate amount
- Present two separate line items to display the fair value and non-fair-value carrying amounts.45-2 An entity that presents a classified statement of financial position shall report individual held-to-maturity securities, individual available-for-sale securities, and individual trading securities as either current or noncurrent, as appropriate, under the guidance of Section 210-10-45.
In typical FASB fashion, we need to jump through to ASC 210-10-45 to find the guidance.
45-1 Current assets generally include all of the following:
- Cash available for current operations and items that are cash equivalents
- Inventories of merchandise, raw materials, goods in process, finished goods, operating supplies, and ordinary maintenance material and part
- Trade accounts, notes, and acceptances receivable
- Receivables from officers, employees, affiliates, and others, if collectible in the ordinary course of business within a year
- Installment or deferred accounts and notes receivable if they conform generally to normal trade practices and terms within the business
- Marketable securities representing the investment of cash available for current operations, including investments in debt and equity securities classified as trading securities under Subtopic 320-10
- Prepaid expenses such as the following:
- Unused royalties
- Current paid advertising service not yet received
- Operating supplies.45-2 Prepaid expenses are not current assets in the sense that they will be converted into cash but in the sense that, if not paid in advance, they would require the use of current assets during the operating cycle. An asset representing the overfunded status of a single-employer defined benefit pension or postretirement plan shall be classified pursuant to Section 715-20-45.45-3 A one-year time period shall be used as a basis for the segregation of current assets in cases where there are several operating cycles occurring within a year. However, if the period of the operating cycle is more than 12 months, as in, for instance, the tobacco, distillery, and lumber businesses, the longer period shall be used. If a particular entity has no clearly defined operating cycle, the one-year rule shall govern.
Also, ASC 210-20 (Glossary) defines current assets as follows:
Current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.
Based on the above, it would seem that if we have AFS investments with a maturity of shorter than a year, then it would clearly meet the definition of current as it would be “reasonably expected to be realized in cash … during the normal operating cycle of the business.” But what about an investment with a maturity longer than one year? Can these ever be classified as current?
PwC’s point of view is that you can use one of two approaches under ASC 210. The first is that the determination should be based on Management’s intent and ability to convert (or not convert) the securities to cash during the normal operating cycle (or year if there is more than one operating cycle during the year). If during the year/operating cycle, classify as current, else non-current. The second approach is to determine whether the investment represents an investment of funds available for current operations as defined by ASC 210-10-45-1 through 45-2 (see bolded 45-1(f) above). The key for this approach is that the investments have to be available for use if needed for current operations (i.e., they must be marketable as the guidance states). Therefore, based on this approach, you could have 5 year T-Bills classify as short term due to the fact that the company could view this as a place to “park” its liquid assets. PwC’s position is that Management does not need to have a specific plan to sell within a year in order to be classified as current. For PwC’s most up-to-date position, refer to their Accounting and Reporting Manual (ARM) 5010.51.
Further, Accounting Research Manager states that “Classification under ASC 210-10-45 is based on management’s intended holding period and the realizability of the asset, not the stated maturity of a debt security.
Ernst and Young, in their publication Certain investments in debt and equity securities, EY states:
Debt securities classified as available-for-sale generally should be classified as current or noncurrent, based on maturities and the entity’s expectations of sales and redemptions in the following year. ASC 210-10-45-1(f) states that in determining current versus noncurrent, entities should generally classify as current assets marketable securities representing the investment of cash available for current operations, including investments in debt and equity securities classified as trading securities under ASC 320-10, unless those securities were classified as trading solely for better operating statement matching purposes. Thus, we believe that if an entity views its available-for-sale portfolio as available for use in its current operations, it may classify marketable equity securities as current, even if it does not necessarily intend to dispose of the securities in the following year.
My own experience with large multi-billion dollar companies in the tech industry has been that I’ve always seen Management assert that investments in marketable securities are always classified as current assets, regardless of maturity date. As such, it would seem that we have PopularAccounting (cheesy I know, but what the hell). EY, PwC, CCH (AccountingResearchManager.com), and my experience all agree that management intentions are the main driving factor so long as ability follows intent.
So it looks like we have a clear accounting consensus on the matter. The presentation on the balance sheet is driven