Chartered Financial Analyst (CFA) Practice Exam Level 2

What primarily characterizes investments categorized as Held for Trading?

1. Carried at Amortized Cost

2. Recognized only at cost

3. Report gains and losses on the Income Statement

4. Realized gains are recognized on the Balance Sheet

The correct answer is: Report gains and losses on the Income Statement

Investments categorized as Held for Trading are primarily characterized by the requirement to report gains and losses on the Income Statement. This classification is applied to financial instruments that are acquired for the purpose of realizing short-term profits, typically through price fluctuations. Consequently, any changes in fair value—both gains and losses—are recognized immediately in the Income Statement, which reflects their impact on the earnings of the entity during the reporting period. This treatment aligns with the objective of trading securities, where the primary motivation is to profit from short-term market movements rather than to hold the assets for long-term investment. As a result, such trading activities can significantly affect the financial performance reported, leading to increased volatility in the income figures presented to stakeholders. Other characterizations noted in the choices, such as being carried at amortized cost or recognized only at cost, do not apply to Held for Trading investments. These characteristics are more relevant to other classifications of financial instruments, which may not be actively traded in the market. The recognition of realized gains on the Balance Sheet is also inaccurate, as it falls outside the definition of how Held for Trading investments are reported, further distinguishing these from other types of securities. Thus, the correct identification of the income statement impacts underscores the nature of these financial instruments