Trade date accounting is the method of recording a purchase or sale of a financial asset on the trade date, the day on which an entity commits itself to buy or sell, instead of on the day the asset and cash actually change hands. On the trade date the buyer recognises the asset together with a liability to pay for it; the seller removes the asset, records a receivable for the proceeds and recognises any gain or loss on disposal.
The method matters because most securities do not settle immediately. Shares and bonds are delivered one or two business days after the trade, depending on the market's settlement cycle, and an accounting period may end in between. The alternative is settlement date accounting, which records the asset on the day it is delivered. Under International Financial Reporting Standards, the choice between the two is governed by IFRS 9.
The rule under IFRS 9
IFRS 9 allows either method for what it calls a regular way purchase or sale: a transaction under a contract whose terms require delivery of the asset within the time frame generally set by regulation or convention in the marketplace concerned. An entity must apply the method it chooses consistently to all purchases and sales of financial assets that are classified in the same way.
The exception exists for practical reasons. Between trade date and settlement date, a contract to buy a security at a fixed price is, strictly, a forward contract, and would otherwise have to be accounted for as a derivative. Because the period is short and standard, the standard does not require this for regular way trades. A contract that settles later than the market convention, or that can be settled net in cash, falls outside the exception and is treated as a derivative until settlement.
Worked example
A company commits on 30 December to buy a bond for 1,000, settling on 2 January. Its financial year ends on 31 December, when the bond's fair value is 1,010. The bond is measured at fair value through profit or loss.
Under trade date accounting, the company records the bond at 1,000 and a payable of 1,000 on 30 December. At year end it remeasures the bond to 1,010 and recognises a gain of 10. On 2 January it pays cash and the payable is cleared.
Under settlement date accounting, nothing is recorded on 30 December. At year end the company still recognises the 10 change in value, as a receivable and a gain, because IFRS 9 requires changes in fair value between trade date and settlement date to be accounted for in the same way as the acquired asset will be. On 2 January the bond is recorded at 1,010 against cash of 1,000 and the receivable of 10.
Profit is therefore the same under both methods. What differs is the balance sheet: trade date accounting shows the full asset and the matching payable during the settlement period, while settlement date accounting shows only the change in value. For an asset carried at amortised cost, no change in value is recognised between the two dates under either method.
Sales
On a sale, trade date accounting removes the asset and recognises the gain or loss on the day the sale is agreed, with a receivable from the buyer or broker until cash arrives. Under settlement date accounting the asset stays on the books until delivery, but the seller stops recognising changes in its fair value from the trade date, because its right to further changes ended when the price was fixed.
Use in practice
Trade date accounting is the more common choice for trading and investment portfolios, because it shows positions and market exposure as soon as they are taken on. Investment funds generally record portfolio transactions on trade date so that the net asset value calculation reflects every position the fund is committed to, and fund accounting systems carry unsettled purchases and sales as payables and receivables. Dealers and banks follow the same approach for their trading books. Under US accounting standards, investment companies and broker-dealers are likewise required to record securities transactions on a trade date basis.
Settlement date accounting remains common for loans and for some banking book portfolios, where the settlement systems that drive the ledger record movements only when cash moves. Custodians typically report positions on both bases: a traded position, including pending trades, and a settled position.
The choice affects several other areas. Interest on a bond accrues to the buyer from the settlement date, not the trade date, whichever accounting method is used. Entitlement to a dividend depends on the ex-dividend date relative to the trade date. Unsettled trade balances carry counterparty risk and must be monitored; trades that fail to settle on time stay in receivables or payables and are followed up through settlement fail management.
At period end, finance teams check that all trades executed up to the closing date have been captured, since a trade booked late would understate both assets and liabilities under trade date accounting. Reconciling the accounting records with custodian statements, which may be on a settled basis, requires pending trades to be identified as reconciling items, a routine part of custody account reconciliation. The method chosen is disclosed in the accounting policies of the financial statements.