Held-to-maturity (HTM) debt securities

Held-to-maturity (HTM) securities are debt investments that an entity has the positive intent and ability to hold until maturity. Because the investor does not plan to sell these securities prior to maturity, the accounting focuses on the collection of contractual cash flows rather than changes in market value.

As a result, HTM securities follow an amortized cost model, which provides stability in financial reporting.

Definitions

Held-to-maturity (HTM) securities

Debt securities that the entity has the positive intent and ability to hold until maturity (ASC 320).

Key characteristics

HTM securities have the following defining features:

• Intent to hold to maturity
  The investor plans to retain the investment until the principal is repaid.
• Ability to hold
  The entity must have sufficient financial capacity and no constraints preventing it from holding the investment.
• Predictable cash flows
  Returns are based on contractual interest and principal payments.
• No exposure to income volatility from market prices
  Fair value changes are not recognized in earnings or OCI.

Measurement and recognition

Initial recognition

HTM securities are initially recorded at their purchase price (fair value at acquisition), with transaction costs capitalized.

Subsequent measurement

After acquisition, HTM securities are measured at amortized cost, not fair value.

This means:

• The investment is adjusted over time for premium or discount amortization
• Market value changes are ignored for accounting purposes

HTM securities do not recognize unrealized gains or losses from market price changes, neither in net income nor in OCI.

Common pitfall: “Amortized cost, no fair value adjustments” doesn’t mean HTM securities can never affect net income. Under ASC 326 (CECL), HTM debt securities are still evaluated for expected credit losses. Any impairment is recorded through an allowance for credit losses, and the related credit loss expense (or reversal) does flow through net income - it’s only fair value changes that are ignored, not credit losses.

Item	Treatment
Measurement	Amortized cost
Fair value changes	Not recognized (disclosed only)
Interest income	Net income (effective interest method)

Interest income recognition

Interest income for HTM securities is recognized using the effective interest method, which reflects the true economic yield of the investment.

This method:

• Accounts for discounts and premiums
• Allocates interest income over time
• Ensures the carrying value converges to face value at maturity

Because HTM securities are measured at amortized cost, the effective interest method is required and central to their accounting.

Journal entries

To illustrate the accounting for HTM securities, consider the following example.

Company Gamma purchases a bond with the following characteristics:

• Face value: $100,000
• Coupon rate: 5% annually
• Purchase price: $95,000 (discount)
• Market rate: 6%

The investment is classified as HTM because:

• The company has the intent to hold the bond until maturity, and
• The company has the financial ability to do so

Initial recognition

Account	Debit	Credit
Investment in HTM securities	95,000
Cash		95,000

Interest income (effective interest method)

• Cash received = 5% × $100,000 = $5,000
• Interest income = 6% × $95,000 = $5,700
• Discount amortization = $700

Account	Debit	Credit
Cash	5,000
Investment in HTM securities	700
Interest income		5,700

No fair value adjustment

Even if the fair value changes during the period:

• No entry is recorded
• The investment remains at amortized cost

Maturity of the bond

At maturity, the carrying amount equals the face value.

Account	Debit	Credit
Cash	100,000
Investment in HTM securities		100,000

Financial statement impact

Balance sheet

HTM securities are reported at amortized cost, which reflects the original purchase price adjusted for discount or premium amortization.

Held-to-maturity (HTM) securities are classified as current or noncurrent based on their remaining contractual maturity from the balance sheet date.

• Those maturing within one year (or the operating cycle, if longer) are presented as current assets
• Those maturing beyond one year are noncurrent assets

If HTM securities have staggered maturities (receivable on different dates), the current and noncurrent portions are typically split accordingly.

Unlike trading and AFS securities, HTM investments are not adjusted to fair value. As a result, the balance sheet reflects a stable carrying amount that gradually converges to the bond’s face value over time.

Income statement

The income statement reflects only the economic return from holding the investment, rather than changes in market value.

Specifically, it includes:

• Interest income, recognized using the effective interest method, and
• The effects of discount or premium amortization, which are embedded within interest income

Importantly, no unrealized gains or losses from market price movements are recognized, even if market interest rates change significantly - though, as noted above, expected credit losses are still recognized in earnings through the allowance for credit losses.

This results in stable and predictable earnings, in contrast to trading or AFS securities.

Statement of comprehensive income

HTM securities do not affect other comprehensive income (OCI).

Because fair value changes are not recognized, there are:

• No unrealized gains or losses recorded in OCI
• No accumulated OCI balances related to HTM securities