When accounting for the initial recognition of investment securities, there are two critical dates to consider: the trade date and the settlement date. What is the difference? And why are these dates important? In this blog post, let’s take a closer look at trade date versus settlement date accounting.

Accounting for Investment Securities

There are two main FASB codification topics that cover accounting for investment securities. ASC 320 covers accounting for investments in debt securities while ASC 321 covers the accounting for investments in equity securities. Investments can fall outside of the scope of these two topics, in which case other GAAP should be applied, but in this blog, we will focus our attention on the initial recognition of investment securities within the scope of ASC 320 and ASC 321.

Both ASC 320 and 321 provide clear guidance on the subsequent measurement and accounting for debt and equity securities but are generally silent regarding initial recognition. This is where the issue of trade date and settlement date comes in.

The trade date of a security is the date the agreement is entered into where elements of the transaction including the security description, quantity, price, and delivery terms are set. The date the securities must be delivered and payment received is referred to as the settlement date.

Generally, investments are initially recorded on the balance sheet at fair value. If you recall, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The distinction between trade date and settlement date is an important one, as the initial recognition of a security is different under trade date accounting versus settlement date accounting.

Let’s take a look at an example.

On March 1, Baxter Co. purchases 10,000 shares of Tesla for $600 per share. In accordance with generally established exchange regulations and conventions, the trade settles two days after the trade order is submitted. On the settlement date, the fair value of Tesla is $575 per share.

The security in this example is an investment in an equity security. Under ASC 321, if accounting is done based on a trade date basis, the following entries would be recorded:

March 1 (Trade date):

Dr. Investment in Equity Securities              $6,000,000

            Cr. Payable                                                          $6,000,000                                       

March 3 (Settlement date):

Dr. Payable                                                  $6,000,000

            Cr. Cash                                                              $6,000,000

(Note: Subsequent measurement under ASC 321 would take place where the equity security is marked to fair value but is not shown in the entries above as the focus of this blog post is on the entries related to initial recognition.)

On the other hand, if accounting is done on a settlement date basis, the accounting would be as follows:

March 1 (Trade date):

No entry recorded.

March 3 (Settlement date):

Dr. Investment in equity securities              $5,750,000

Dr. Loss                                                          $250,000

            Cr. Cash                                                              $6,000,000

So, the obvious question that arises is, under U.S. GAAP, should investments be accounted for on a trade date basis or a settlement date basis?

Well, for general industries, U.S. GAAP does not specify whether trade date or settlement date is required. As such, an entity should elect an accounting policy to account for purchases and sales of securities on a trade date or settlement date basis.

But U.S. GAAP does provide specific guidance for financial institutions.

• For depository and lending institutions, ASC 942-325-25-2 indicates that, “Regular-way purchases and sales of securities shall be recorded on the trade date. Gains and losses from regular-way security sales or disposals shall be recognized as of the trade date in the statement of operations for the period in which securities are sold or otherwise disposed of.”
• For brokers and dealers, ASC 940-320-25-1 indicates, “The statement of financial condition shall reflect all regular-way trades on an accrual or trade-date basis. Risk, benefits, and economic potentials are created and conveyed at the trade date (that is, the inception of the contract), which is when the major terms have been agreed to by the parties. To properly reflect the economic effects of purchase and sale transactions for financial instruments (that is, to reflect the assumption of the risks and rewards resulting from changes in the value of financial instruments), broker-dealers shall account for the changes in value relating to all proprietary or principal transactions on a trade-date basis.”
• For investment companies, ASC 946-320-25-1 indicates, “An investment company shall record security purchases and sales as of the trade date, the date on which the investment company agrees to purchase or sell the securities, so that the effects of all securities trades entered into by or for the account of the investment company to the date of a financial report are included in the financial report.”

Thus, depository and lending financial institutions, as well as broker and dealers in securities and investment companies, are required to record securities (regular way security trades) on the trade date.

If you are interested in training on accounting for investment securities, consider taking our eLearning courses on ASC 320 Investments: Debt Securities or ASC 321 Investments: Equity Securities. 

Additionally, we also provide industry-specific accounting and reporting training for the Banking Industry and Investment Companies. Our Banking Industry Fundamentals learning path consists of 9 eLearning courses (total of 11.5 CPE credits) that provide an in-depth understanding of the banking industry including industry-specific topics applicable to these entities. Our Investment Management Industry Fundamentals learning path consists of 7 eLearning courses (totaling 10.0 CPE credits) that explore the investment management industry, including how investment funds operate, their investing strategies, and the unique accounting and reporting considerations these entities face.

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