What Is an Available-for-Sale Security?
An available-for-sale security (AFS) is a debt or equity security purchased with the intent of selling before it reaches maturityor holding it for a long period should it not have a maturity date. Accounting standards necessitate that companies classify any investments in debt or equity securities when they are purchased as held-to-maturity, held-for-trading, or available-for-sale. Available-for-sale securities are reported at fair value; changes in value between accounting periods are included in accumulated other comprehensive income in the equity section of the balance sheet.
Key Takeaways
- Available-for-sale securities (AFS) are debt or equity securities purchased with the intent of selling before they reach maturity.
- Available-for-sale securities are reported at fair value.
- Unrealized gains and losses are included in accumulated other comprehensive income within the equity section of the balance sheet.
- Investments in debt or equity securities purchased must be classified as held-to-maturity, held-for-trading, or available-for-sale.
:max_bytes(150000):strip_icc()/TermDefinitions_Availableforsalesecuritycopy-db184c56f56d4593aaac87cf4beec3fb.jpg "Available-for-Sale Securities: Definition, vs. Held-for-Trading (1)")
How an Available-for-Sale Security Works
Available-for-sale (AFS) is an accounting term used to describe and classify financial assets. It is a debt or equity security not classified as a held-for-trading or held-to-maturity security—the two other kinds of financial assets. AFS securities are nonstrategic and can usually have a ready market price available.
The gains and losses derived from an AFS security are not reflected in net income (unlike those from trading investments) but show up in the other comprehensive income (OCI) classification until they are sold.Net income is reported on the income statement. Therefore, unrealized gains and losses on AFS securities are not reflected on the income statement.
Net income is accumulated over multiple accounting periods into retained earnings on the balance sheet. In contrast, OCI, which includes unrealized gains and losses from AFS securities, is rolled into "accumulated other comprehensive income" on the balance sheet at the end of the accounting period. Accumulated other comprehensive income is reported just below retained earnings in the equity section of the balance sheet.
Available-for-Sale vs. Held-for-Trading vs. Held-to-Maturity Securities
As mentioned above, there are three classifications of securities—available-for-sale, held-for-trading, and held-to-maturity securities. Held-for-trading securities are purchased and held primarily for sale in the short term.
The purpose is to make a profit from the quick trade rather than the long-term investment.On the other end of the spectrum are held-to-maturity securities. These are debt instruments or equities that a firm plans on holding until their maturity dates. An example would be a certificate of deposit (CD) with a set maturity date.
Available for sale, or AFS, is the catch-all category that falls in the middle. It is inclusive of securities, both debt and equity, that the company plans on holding for a while but could also be sold.
From an accounting perspective, each of these categories is treated differently and affects whether gains or losses appear on the balance sheet or income statement. The accounting for AFS securities is similar to the accounting for trading securities.
Due to the short-term nature of the investments, they are recorded at fair value. However, for trading securities, the unrealized gains or losses to the fair market value are recorded in operating income and appear on the income statement.
Changes in the value of available-for-sale securities are recorded as an unrealized gain or loss in other comprehensive income (OCI). Some companies include OCI information below the income statement, while others provide a separate schedule detailing what is included in total comprehensive income.
Recording an Available-for-Sale Security
If a company purchases available-for-sale securities with cash for $100,000, it records a credit to cash and a debit to available-for-sale securities for $100,000. If the value of the securities declines to $50,000 by the next reporting period, the investment must be "written down" to reflect the change in the fair market value of the security.
This decrease in value is recorded as a credit of $50,000 to the available-for-sale security and a debit to other comprehensive income.
Likewise, if the investment goes up in value the next month, it is recorded as an increase in other comprehensive income. The security does not need to be sold for the change in value to be recognized in OCI. It is for this reason these gains and losses are considered "unrealized" until the securities are sold.
Is Available-for-Sale a Current Asset?
Available-for-sale securities can be classified as current assets if they are held for less than one year, which is the definition of a current asset. If they are to be held for more than a year, then they have to be classified as a long-term asset.
What Is the Difference Between Held-to-Maturity and Available-for-Sale?
Both held-to-maturity (HTM) and available-for-sale (AFS) are methods of recording investment securities held by a company. HTM securities are held until they mature. AFS securities are sold before they mature. The former is recorded at cost minus impairment, the latter is recorded at fair value.
What Is an HTM Strategy?
An HTM strategy is a held-to-maturity strategy, which is a method of classifying certain investment securities held by a company. When a company has HTM securities, it will hold these till maturity. The goal of an HTM strategy can be to protect against adverse interest rates, create portfolio diversification, or earn a small return on low-risk securities.
The Bottom Line
When a company purchases an investment security, whether that be equity or debt, it must be classified in one of three ways per accounting standards: held-to-maturity, held-for-trading, or available-for-sale. An available-for-sale security is one that is sold before it reaches maturity. Any unrealized gains or losses on the security must be recorded as accumulated comprehensive income until it is sold.
