What must occur when a security is transferred from the trading category?

When a security is transferred from the trading category, the unrealized holding gain or loss must be recognized in earnings, which is why this answer is correct. Securities classified as trading are measured at fair value, and any changes in fair value affect the profit and loss statement. Therefore, when a security moves out of this category—whether to available-for-sale or held-to-maturity—recognizing the unrealized gains or losses in earnings is necessary to reflect the current economic situation accurately.

Transferring a security from trading to another category involves a significant accounting treatment, where prior unrealized gains or losses, which were previously recognized in earnings, become crucial for accurate reporting. This recognition aligns with the standards set by accounting principles, where financial statements need to present a true and fair view of the company’s financial position.

The other options do not align with the accounting requirements for security categories. For example, the asset does not have to be sold immediately; it can remain in the portfolio but must be documented and assessed according to its new classification. The historical cost approach is not relevant for securities that are moved out of trading, as their value at transfer should reflect current fair value. Lastly, while changes must be documented, they cannot simply be noted without recognition