FAS 115, the FASB statement issued in 1993 on accounting for debt and equity securities, still shapes how companies report these investments, but its guidance now lives inside the Accounting Standards Codification, split across two topics. Debt securities are governed by ASC 320 and continue to use the original three-category model of held-to-maturity, trading, and available-for-sale. Equity securities were pulled out of that model by ASU 2016-01 and now sit under ASC 321, measured at fair value with all changes running through earnings. Classification drives everything that follows: balance sheet measurement, whether market swings hit reported income, and how credit losses are recognized.
Where FAS 115 Lives Today
When FASB released Statement No. 115, it covered all debt securities and any equity securities with readily determinable fair values, sorting them into the same three buckets. That structure still applies to debt under ASC Topic 320. Equity investments no longer follow it. Since 2018 for public companies, equity securities that don’t qualify for equity method accounting or trigger consolidation are measured under ASC Topic 321, and the trading and available-for-sale labels no longer apply to them.
ASC 320 also has boundaries worth naming up front. Investments giving the holder significant influence over the issuer, generally 20% or more of voting stock, fall outside the standard and are accounted for under the equity method in ASC 323. Investments that result in consolidation of the investee are also excluded.
The Three Debt Security Classifications
Held-to-Maturity
A debt security earns held-to-maturity (HTM) treatment only when the company has both the genuine intent and the financial ability to hold it until its contractual maturity date. Intent and ability must be documented at acquisition and reassessed at every reporting date. Only debt instruments qualify, because equity securities have no maturity date to hold to.
HTM securities are carried at amortized cost. The original purchase price is adjusted over the life of the security for any premium or discount using the effective interest method. A premium amortizes downward, a discount amortizes upward, and the carrying amount converges toward face value by maturity.
Day-to-day market swings are ignored. Unrealized gains and losses from fair value fluctuations are not recognized in net income or in other comprehensive income. That makes HTM the most stable classification from an earnings-volatility standpoint, which is why banks and insurance companies rely on it heavily.
Trading
Trading securities are debt investments bought with the intent to sell in the near term to capture short-term price movements. They are carried at fair value, and every change in that value flows straight through the income statement each reporting period. There is no buffer. A $500,000 drop in the trading portfolio during the quarter reduces reported earnings by $500,000 immediately, and a gain shows up just as fast. This treatment is appropriate because the company is actively speculating on price. Financial institutions with dedicated trading desks hold the bulk of securities classified this way.
Available-for-Sale
Available-for-sale (AFS) is the default category for debt securities that fit neither HTM nor trading. A company might hold AFS securities for liquidity management, interest income, or broader portfolio strategy where selling before maturity is possible but not the primary objective.
AFS securities are also carried at fair value, but unrealized gains and losses bypass the income statement and are recorded in other comprehensive income (OCI), a separate component of shareholders’ equity. Reported earnings stay shielded from market-driven fluctuations while investors still see the current value of the portfolio. When the security is actually sold, the accumulated unrealized gain or loss sitting in OCI gets reclassified into net income as a realized gain or loss. This recycling mechanism connects fair value balance sheet reporting to the income statement, so the full economic result is recognized when the position closes.
Tainting the HTM Portfolio
The stability of HTM classification comes with a strict enforcement mechanism. Selling or transferring an HTM security before maturity, outside a narrow set of exceptions, taints the entire HTM portfolio. All remaining HTM securities must be reclassified to available-for-sale, and the company is effectively barred from using HTM for roughly two years while it reestablishes credibility.
The exceptions are limited to genuine changes in circumstances outside the company’s control:
- A significant deterioration in the issuer’s creditworthiness, such as a published rating downgrade.
- A change in tax law that eliminates or reduces the security’s tax-exempt status (not merely a change in marginal tax rates).
- A major business combination or disposition requiring HTM sales to maintain the company’s interest rate or credit risk position.
- Regulatory changes that significantly alter what qualifies as a permissible investment or that impose higher capital requirements.
- A sale close enough to maturity or the call date (for example, within three months) that interest rate risk is essentially gone as a pricing factor.
- A sale after at least 85% of the outstanding principal has already been collected through prepayments or scheduled installments.
Reclassifying even one security at the wrong time can force a company to mark its entire HTM portfolio to fair value, producing the balance sheet volatility HTM classification was specifically meant to avoid.
How Equity Securities Are Treated Now
This is where the modern framework diverges most sharply from the original FAS 115. Under ASU 2016-01, equity securities with readily determinable fair values are no longer classified as trading or available-for-sale. All equity investments that don’t qualify for equity method accounting or result in consolidation are measured at fair value, with all changes recognized directly in earnings. There is no OCI buffer for equity securities anymore. A publicly traded stock that drops 15% in a quarter puts that loss on the income statement.
The Measurement Alternative for Equity Without a Quoted Price
Not every equity investment has a readily determinable fair value. For equity securities that lack a quoted market price, such as privately held company stock or certain partnership interests, ASC 321 offers an optional measurement alternative. Under this election, the investment is carried at cost, minus impairment, and adjusted up or down only when an observable transaction in an identical or similar security of the same issuer provides a new pricing reference.
The election is made investment by investment. The company continues using the alternative until the security either develops a readily determinable fair value (for instance, the issuer goes public) or becomes eligible for a net asset value practical expedient. Eligibility is reassessed at each reporting period.
Transfers Between Debt Security Categories
Companies sometimes need to move a debt security from one classification to another. The rules are designed to prevent gaming of the classification system.
- HTM to AFS: the security is measured at fair value on the transfer date, and any unrealized gain or loss is reported in accumulated OCI. The transfer also triggers a tainting analysis for the rest of the HTM portfolio.
- AFS to HTM: the security transfers at fair value, which becomes the new amortized cost basis. Any unrealized gain or loss already sitting in accumulated OCI stays there and is amortized over the remaining life as a yield adjustment.
- Into or out of trading: the security is recorded at fair value on the transfer date, with any unrealized gain or loss at that point recognized in earnings.
Regardless of direction, any existing allowance for credit losses on the security is reversed through earnings on the transfer date, and a new allowance assessment is performed under the rules of the destination category.
Impairment and Credit Losses
Deciding when an investment has lost value due to credit problems, rather than temporary market movement, is one of the more judgment-intensive areas of securities accounting. The approach differs between HTM and AFS debt securities.
HTM: The CECL Model
Held-to-maturity securities fall under the Current Expected Credit Loss (CECL) model in ASC Topic 326. CECL requires a company to estimate and record an allowance for expected credit losses over the entire remaining life of each security from the moment it is acquired. It is a forward-looking model, so the company doesn’t wait for a loss to occur or become probable. Historical data, current conditions, and reasonable forecasts feed a lifetime loss estimate that is booked immediately.
The allowance is recognized as an expense in net income and updated each reporting period. If conditions improve and expected losses decrease, the allowance can be reduced, with the reversal flowing back through earnings.
AFS: A Separate Impairment Framework
Available-for-sale securities follow a different impairment model, also housed in ASC 326. When an AFS security’s fair value drops below its amortized cost, the company must determine how much of the decline is credit-related and how much stems from other factors, such as rising interest rates.
The credit-related portion is recognized in earnings through an allowance for credit losses, capped at the total amount by which fair value is below amortized cost. The non-credit portion stays in OCI, consistent with normal AFS treatment. This split keeps interest rate volatility from distorting credit loss accounting.
Unlike the old pre-CECL rules, which required a permanent write-down of cost basis, the allowance approach under ASC 326 is reversible. If credit conditions improve, the allowance is adjusted downward and a credit loss reversal is recorded in earnings. The allowance can never go below zero.
One exception matters. If the company intends to sell the AFS security, or it is more likely than not that it will be required to sell before recovering its cost basis, the allowance is written off and the full difference between amortized cost and fair value is recognized as a loss in earnings. At that point the credit-versus-non-credit distinction no longer matters, because the company won’t hold the security long enough for it to play out.