Contrasting HTM (held to maturity) securities in which the holder has the intention to hold them until specific date of maturity, ‘Held for Trading’(HFT) investments are the securities that a holder purchases with the intent of selling them within a short period of time, with the sole intent of generating short term profits by taking advantage of short-term price / interest rate movements. Another key difference between HTM and HFT securities is that the investments classified under HTM need not be marked to market and will be carried at acquisition cost, as subsequent changes in market value are ignored because the return is predetermined. Whereas the scrip purchased under ‘Held for Trading’ category will be marked to market at monthly or at more frequent intervals and net depreciation, if any, shall be provided for and net appreciation if any, should be ignored. In the other words the gains for Held for Trading (HTM) securities are not reported on the income statement until such securities are sold. So, the book value of the individual securities in this category would also not undergo any change after marking to market.
The Inflation Indexed Bonds (IIBs) classified under AFS and HFT are valued at clean price quoted in the market at the time of acquisition. According to FIMMDA the price quoted in the market will be the real price and consideration for purchase and sale of the bond will be ((“Real Price x Index Ratio” which is clean price) + (Accrued Interest which is the Broken Period Interest). As per RBI Master Circular on Classification, Valuation and Investment Portfolio by banks, broken period interest should not be capitalized but treated as an item of expenditure. In order to be consistent with present valuation norms, only clean price may be considered as acquisition cost.
As regards the mark to market value, in the case of IIBs (Inflation indexed bonds) it is the quoted clean price if available. If it is unquoted, FIMMDA’s valuation methodology for arriving at the clean price as above should be followed. Once this market value has been determined, the standard accounting procedures as applicable to HFT/AFS may be applied.