The "marketable securities" line item on a company's balance sheet represents short-term investments in stocks, bonds and other financial instruments that can be converted to cash quickly. This may include shares in mutual funds — funds that pool money from multiple investors and then use that money to purchase a variety of securities.
Marketable securities are those that a company owns simply to make money off them —- either by buying and selling them at a profit or by collecting dividends and interest payments. They're passive investments rather than strategic investments. The latter are those made to gain influence over another company. Though it's possible for one company to influence another by owning a large stake in a mutual fund that, in turn, owns a large stake in the second company, it would be far simpler to just buy that second company's stock directly. Mutual funds on a company's books will typically go under marketable securities.
Companies classify their marketable securities as either "available for sale" or "trading." Available-for-sale securities are those that the company is holding for their income-producing potential but that it would sell if the price rose high enough. For example, shares in a fixed-income mutual fund that generates a healthy annual return might be classified as available for sale: The company is happy to collect the income from the fund but could be persuaded to sell the shares for a large profit. Trading securities, on the other hand, are those that the company doesn't intend to hold; it buys and sells them in an attempt to profit by timing the market. A company might classify a mutual fund investment as trading if the company expects the share price to spike in the near future, generating a quick profit.
Accounting rules require a company to report most of its assets at historical cost. The balance sheet shows the asset as worth whatever the company paid for it, minus any depreciation. Marketable securities are different. Since these securities can be readily converted to cash, and since their market value is always easily determined, accounting rules require them to be "marked to market." That means they're listed on the balance sheet at their current market value. So if a company owns $1 million worth of shares in a mutual fund, and the share price rises 10 percent, the company would increase the value of the asset on its books to $1.1 million.
Any cash generated by a company's investments in a mutual fund, such as stock dividends and bond interest passed along to the fund's shareholders, is reported on the company's income statement. The treatment of changes in the market value of mutual fund shares, however, depends on whether they're classified as trading or available for sale. If they're trading securities, changes in value are immediately reported as gains or losses on the income statement. If they are available-for-sale securities, the changes in value are reported only on the balance sheet; they don't appear on the income statement until the shares are actually sold.
- Financial Accounting for MBAs, Fourth Edition; Peter Easton et al; 2010
- Investopedia: Accounting for Intercorporate Investments
- Medioimages/Photodisc/Photodisc/Getty Images