What is an Available-for-Sale Security? 🌟💰
An available-for-sale (AFS) security is a debt or equity security bought with the intent of selling before it reaches maturity or holding it for a longer period if it has no maturity date. Companies must classify purchased investments as either held-to-maturity, held-for-trading, or available-for-sale according to accounting standards. AFS securities are reported at fair value, and changes in value between accounting periods are included in accumulated other comprehensive income in the equity section of the balance sheet.
✨ Key Highlights
- AFS securities are intended to be sold before maturity.
- Reported at fair value.
- Unrealized gains and losses affect accumulated other comprehensive income within the equity section of the balance sheet.
- Investments in securities need to be classified as one of held-to-maturity, held-for-trading, or AFS at the time of purchase.
How Available-for-Sale Securities Work 🔎📊
AFS securities are debt or equity securities not classified as held-for-trading or held-to-maturity. They are nonstrategic and typically have a readily available market price. Gains and losses from AFS securities do not affect net income, unlike trading investments, but are instead reflected in other comprehensive income (OCI) until they are sold.
Net income reflects cumulative accounting periods and impacts retained earnings on the balance sheet. Conversely, OCI, representing unrealized gains and losses from AFS securities, is reported below retained earnings as accumulated other comprehensive income in the equity section of the balance sheet.
AFS vs. Held-for-Trading vs. Held-to-Maturity 💼📉📅
There are three classification types for securities: available-for-sale, held-for-trading, and held-to-maturity. Held-for-trading securities are acquired for short-term profit, with gains or losses appearing directly in operating income on the income statement. Held-to-maturity securities are investments in debt that the firm holds until their maturity date, such as certificates of deposit (CDs).
AFS is the catch-all category, inclusive of securities that are planned to be held for some time but may also be sold. Unlike trading securities, changes in fair value for AFS securities are reported as unrealized gains or losses in OCI.
Recording an Available-for-Sale Security 📝💵
When a company buys AFS securities with cash, the entire purchase price is recorded as a debit to AFS securities while crediting cash by the purchase amount. For example, if an investment’s value diminishes, it is credited equivalent to its decreased value with the decline recorded as a debit in OCI. Any rise in value sees increased entries in OCI even if the asset remains unsold.
Is Available-for-Sale a Current Asset? 🏦💥
Available-for-sale securities qualify as current assets if held for under one year. For securities held longer, they are classified as long-term assets.
Distinguishing Held-to-Maturity from Available-for-Sale 📜💸
Held-to-maturity (HTM) securities are held undisturbed until maturity and recorded at cost minus impairment. Conversely, AFS securities may be sold anytime before maturity and are recorded at fair value.
What is an HTM Strategy? 🛡🤝
An HTM strategy involves retaining certain investment securities until their maturity. This approach hedges against adverse interest rates, diversifies portfolios, and generates small, consistent returns on low-risk securities.
Conclusion 🔚📈
Companies must classify investment securities as held-to-maturity, held-for-trading, or available-for-sale based on accounting standards. AFS securities are investments likely to be sold before maturation, and their unrealized gains and losses impact accumulated other comprehensive income until their eventual sale.
Related Terms: Held-to-maturity securities, Held-for-trading securities, Comprehensive income, Retained earnings, Current assets.
