Securities

What it means

Securities are instruments or register entries that carry a right for the holder: a stake in a company for a share, a claim on the issuer for a bond, a slice of a fund for a unit certificate.

In accounting the type of paper matters less than the intent of the entity. Whether it is held for trading, to maturity or for influence over another company decides between short-term and long-term financial assets, and the measurement with it.

Securities should be distinguished from a business share in an s. r. o., which is not a security, even though it also sits among financial assets in the books. A business share passes by contract and a change to the commercial register entry, a registered paper share by endorsement and an entry in the list of shareholders, a book-entry share by registration of the transfer at the central depository.

How it works in practice

On acquisition they are carried at cost including direct charges such as broker fees. At the balance sheet date trading securities are remeasured to fair value through profit or loss, available-for-sale securities through equity, and held-to-maturity securities are not remeasured to fair value at all.

Book-entry securities are held by the central depository and its members, not by the ledger of the company, and the account statement of the holder is the evidence for the stocktake. Income from them, meaning dividends and interest, follows its own tax rules.

When an s. r. o. puts spare cash into a mutual fund or into bonds through a broker, we ask the client not only for statements but also for the confirmation of each trade. Every purchase and sale is booked from its confirmation, because the monthly statement shows only the position, and the cost of individual purchases cannot be recovered from it later.

What to watch out for

On a sale the entry often captures only the net amount that landed in the bank. It is two entries, the proceeds and the derecognition at carrying amount, and without them neither profit nor the tax base holds, because a loss on the sale is not always deductible.

Securities in a foreign currency are remeasured at the reporting date for both the exchange rate and the market price. If the effect of exchange differences is not tracked apart from the price change, the two merge into one entry, and in a tax audit it is hard to explain which part of the result is currency and which is the market.