Held-to-maturity securities, also known as HTMs, refer to debt investments that a company intends to hold until their maturity date. These securities are typically bonds or other fixed-income instruments that pay a specified interest rate over a set period of time. Held-to-maturity securities are classified as non-derivative financial assets and are reported at amortized cost on the balance sheet.
Explanation:
Held-to-maturity securities play a crucial role in the portfolio management strategy of many corporations. Unlike trading or available-for-sale securities, which are bought and sold for short-term gains, held-to-maturity securities are acquired with the intent to hold them until they mature. This strategy allows companies to earn a predictable stream of income from interest payments while preserving their principal investment.
To classify a security as held-to-maturity, several conditions must be met. Firstly, the company must have the positive intent and ability to hold the security until maturity. This means that the company does not have the intention or need to sell the security before its maturity date, except in rare circumstances. Secondly, the security must have a fixed maturity date. This implies that the exact date when the principal amount will be repaid is known at the time of acquisition. Lastly, the company should have the resources needed to hold the security until maturity, including the financial capability to absorb any potential losses.
Held-to-maturity securities offer several benefits to companies. The regular interest payments provide a steady cash flow, helping to meet ongoing financial obligations. Moreover, the fixed-income nature of these investments helps companies to manage interest rate risk. By holding securities with fixed interest rates, companies can mitigate the impact of fluctuations in market rates. This stability makes held-to-maturity securities an attractive option for risk-averse investors who prioritize steady income over short-term gains.
From an accounting standpoint, held-to-maturity securities are initially recorded on the balance sheet at their acquisition cost, which includes transaction fees and other directly attributable costs. Subsequently, these securities are carried at amortized cost, taking into account the amortization of discounts and premiums, if any. Interest income is recognized over the life of the security using the effective interest rate method. It is important to note that held-to-maturity securities are reported as long-term investments on the balance sheet, reflecting their intention to hold them until maturity.
It is worth mentioning that held-to-maturity securities have some restrictions. If a company decides to sell a held-to-maturity security before its maturity date, it is considered a violation of the accounting treatment. In such cases, the security needs to be reclassified as available-for-sale or held-for-trading, and any unrealized gains or losses need to be recognized in the income statement. Moreover, if a company’s intent to hold-to-maturity changes during the life of a security, it must be reclassified and reported accordingly in the financial statements.
In summary, held-to-maturity securities are debt investments intended to be held by a company until their maturity date. They provide a stable income stream and a means to manage interest rate risk. These securities are reported at amortized cost on the balance sheet and have specific accounting requirements. By carefully analyzing their investment objectives, risk tolerance, and cash flow needs, corporations can make informed decisions about including held-to-maturity securities in their investment portfolios.
