When an organization buys equity securities for trading purposes, it means that these securities are classified as trading securities. According to International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP):
Trading securities are measured at fair value.
Unrealized gains and losses from changes in fair value are recognized in net income, not in shareholders' equity.
A. At fair value with changes reported in the shareholders' equity section. (Incorrect)
This treatment applies to available-for-sale (AFS) securities under previous GAAP rules, but not to trading securities.
Under IFRS 9, AFS classification has been removed, and most equity investments are recorded at fair value through profit or loss (FVTPL).
B. At fair value with changes reported in net income. (Correct)
This is the correct treatment for trading securities, as per IFRS 9 and ASC 320 (FASB).
C. At amortized cost in the income statement. (Incorrect)
Amortized cost is used for held-to-maturity (HTM) debt securities, not for equity securities held for trading.
D. As current assets in the balance sheet. (Partially Correct but Incomplete)
While trading securities are usually classified as current assets, this answer does not address valuation and reporting of changes in fair value.
IIA Practice Guide: Auditing Investments highlights the importance of correctly valuing securities based on accounting standards.
IFRS 9 – Financial Instruments mandates fair value measurement for trading securities with gains/losses reported in profit or loss.
GAAP ASC 320 – Investments – Debt and Equity Securities aligns with IFRS, requiring fair value reporting through net income.
Explanation of Answer Choices:IIA References:Thus, the correct answer is B. At fair value with changes reported in net income.
