What is the basis for transferring a marketable debt security from trading to AFS?

When a marketable debt security is transferred from the trading category to the available-for-sale (AFS) category, it is transferred at fair value. This fair value at the date of transfer becomes the new basis for the security.

This treatment is important because it reflects the current market conditions at the time of the transfer, ensuring that the financial statements accurately represent the value of the securities held. By establishing the new basis as fair value, any subsequent gains or losses when the security is sold or otherwise disposed of can be appropriately recognized in the financial statements.

The fair value measurement aligns with the requirements of accounting standards, which prioritize the reporting of accurate and relevant information based on prevailing market conditions. This approach also affects the way unrealized gains and losses are reported since, under the AFS classification, they are typically recorded in other comprehensive income rather than impacting net income directly. Thus, recognizing the new basis at fair value ensures a clear alignment with these principles of financial reporting.