A marketable security is a holding that trades in a public market, so the holder can sell it quickly at a price the market already quotes rather than at a price it has to negotiate. Two rulebooks decide whether a particular holding qualifies, and they ask different questions about different property. Financial reporting asks whether prices or quotations for an equity security are currently available. The Internal Revenue Code, when a partnership distributes one, asks whether a financial instrument or a foreign currency was actively traded that day.
What Makes a Security Marketable in Financial Reporting
In financial reporting the test carries a name of its own, readily determinable fair value, and it is asked about equity securities. The fair value of an equity security is readily determinable if sales prices or bid-and-ask quotations are currently available on a securities exchange registered with the US Securities and Exchange Commission (SEC) or in the over-the-counter market, meaning trading between dealers rather than on an exchange, provided those over-the-counter prices or quotations are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc. (FASB Accounting Standards Update 2016-01, Master Glossary).
Two extensions sit under the same term. An equity security traded only in a foreign market qualifies where that foreign market is of a breadth and scope comparable to one of the US markets in that first condition, and an investment in a mutual fund, or in a structure similar to a mutual fund, meaning a limited partnership or a venture capital entity, qualifies where the fair value per share or unit is determined and published and is the basis for current transactions (ASU 2016-01, Master Glossary).
Restricted stock is the trap, and it is a trap set by where the rule is written rather than by any change in it. The wording in force says restricted stock meets the definition if the restriction terminates within one year (ASU 2016-01, Master Glossary). The original statement reads the opposite way on its face, saying restricted stock does not meet the definition, and then carries the same carve-out in its own footnote, which defines restricted stock as equity securities whose sale is restricted by governmental or contractual requirement, other than in connection with being pledged as collateral, except where that requirement terminates within one year or the holder has the power by contract or otherwise to cause it to be met within one year. That footnote then cuts the block up rather than leaving it whole: any portion of the security that can be reasonably expected to qualify for sale within one year, such as may be the case under Rule 144 or similar rules of the SEC, is not considered restricted (FASB Statement of Financial Accounting Standards No. 115, paragraph 3 and footnote 2). Read the paragraph without the footnote and a block of shares that comes free in months gets classified wrongly, and so does a block whose only restraint is that it has been pledged.
Debt securities never had to clear that test at all. The Statement that introduced the test, except as indicated in its paragraph 4, establishes standards of financial accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities (FASB Statement of Financial Accounting Standards No. 115, paragraph 3). That carve-out is live work, not boilerplate. The Statement does not apply to equity securities accounted for under the equity method, to investments in consolidated subsidiaries, to not-for-profit organizations, or to enterprises whose specialized accounting practices already carry substantially all investments in debt and equity securities at market or fair value, brokers and dealers in securities, defined benefit pension plans and investment companies among them (FAS 115, paragraph 4).
The Tax Code Runs a Different Test
For partnership distributions the term is defined in the Internal Revenue Code, and it turns on trading activity on a date rather than on the availability of a quote. The term marketable securities means financial instruments and foreign currencies which are, as of the date of the distribution, actively traded within the meaning of section 1092(d)(1) (26 U.S.C. 731(c)(2)(A)). Financial instrument is defined broadly for that purpose, taking in stocks and other equity interests, evidences of indebtedness, options, forward or futures contracts, notional principal contracts and derivatives (26 U.S.C. 731(c)(2)(C)).
The Code then reaches property that no reporting definition of a security would touch. Two pooled vehicles count on their own: a common trust fund, and a regulated investment company that is offering for sale or has outstanding any redeemable security of which it is the issuer. So does any financial instrument readily convertible into, or exchangeable for, money or marketable securities, and any financial instrument whose value is determined substantially by reference to marketable securities. Except to the extent regulations provide otherwise, an interest in an actively traded precious metal counts unless the partnership produced, used or held that metal in the active conduct of a trade or business. And except as regulations otherwise provide, so do interests in any entity substantially all of whose assets consist, directly or indirectly, of marketable securities, money, or both. The list does not stop at that all-or-nothing line. To the extent regulations provide, an interest in an entity that falls short of the substantially-all test counts too, but only up to the value of that interest attributable to marketable securities, money, or both (26 U.S.C. 731(c)(2)(B)).
So a client can satisfy one definition and fail the other. An interest in a fund holding almost nothing but traded securities is a marketable security for that distribution rule, while it carries no readily determinable fair value for reporting unless a per-unit value is determined, published and used for current transactions.
Where the Caption Sits in a Firm’s Work
Caption 2 of the current asset block on a balance sheet filed with the SEC carries a disclosure duty of its own, and it falls on every current marketable security except the equity ones, whose accounting and disclosure requirements the rule leaves to generally accepted accounting principles, where the readily determinable fair value test sits. With respect to all other current marketable securities, the filer states, parenthetically or otherwise, the basis of determining the aggregate amount shown in the balance sheet, along with the alternatives of the aggregate cost or the aggregate market value at the balance sheet date (17 CFR 210.5-02). A bare number in that caption misses it, and a cost basis and a market basis are not the same number.
Marketability alone does not earn the holding a place in that block: it belongs there only where it represents the investment of cash available for current operations, a condition current assets works out along with what the class excludes. How the holding is measured afterwards, and where the unrealized mark lands, is in mark to market.
Marketable and Nonmarketable Treasury Holdings
The US Treasury uses the word in its plain transfer sense, and a client’s government holdings can fall on either side of it. Marketable means the security can be transferred to someone else and sold before it matures, and five types are issued on that basis: Treasury bills, Treasury notes, Treasury bonds, Treasury Inflation-Protected Securities and floating rate notes (TreasuryDirect, About Treasury Marketable Securities).
US savings bonds sit on the other side. Each is registered to one person’s social security number, so it cannot be sold or transferred, which is what makes it nonmarketable (TreasuryDirect, About Treasury Marketable Securities).
A Marketable Security Is Not a Cash Equivalent
Tradability and cash equivalence are different tests, and neither one implies the other. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates, and generally only investments with original maturities of three months or less qualify (FASB, Statement of Financial Accounting Standards No. 95, paragraph 8).
The two classes overlap without matching. Treasury bills sit on both lists, because the same Statement names them among the items commonly considered to be cash equivalents (FAS 95, paragraph 9). A Treasury note bought at issue trades every day and is still not a cash equivalent, because that test runs on original maturity rather than on how readily the instrument sells, while a short-dated nonnegotiable bank deposit can qualify from the day it is bought without ever trading anywhere. Both mechanics are worked out in certificate of deposit accounting.
Common Questions
Treasury bills, notes and bonds are the standard government examples (TreasuryDirect, About Treasury Marketable Securities). On the corporate side, an equity security whose sales prices or bid-and-ask quotations are currently available on an SEC-registered exchange or publicly reported in the over-the-counter market, and a mutual fund holding whose published per-unit value is the basis for current transactions (ASU 2016-01, Master Glossary).
Whether the holder can pass the instrument on. A savings bond registered to one person cannot be sold or transferred, so it is nonmarketable however safe or liquid the issuer is (TreasuryDirect, About Treasury Marketable Securities).
An asset, and only on the books of whoever holds it. The same instrument sits on the issuer’s books as its own obligation or its own equity, never as an asset. Whether the holder’s side of it is a current asset is a further question, one current assets settles.
There is no clean synonym, because each rulebook names the thing differently. Regulation S-X still uses the caption (17 CFR 210.5-02). Accounting standards moved off the phrase when FASB Statement No. 115 superseded FASB Statement No. 12, Accounting for Certain Marketable Securities, and recast the holdings by the entity’s intent instead of by their marketability (FASB Statement of Financial Accounting Standards No. 115, paragraphs 5 and 6). In liquidity work the same line is counted among the quick assets, which quick ratio sets out.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own investment classification and disclosure work through a trial task before any client file depends on it.
