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 reach🅠es maturity, or holding for a long period of time should it not have a maturity date.

Accounting standards require companies to classify any investments in debt or equity securities when they are pur🅠chased as available-for-sale, held-to-maturity, or held-for-trading securities.

AFS securities are reported at fair value; changes in value between accounting periods are included in the "accumulated other comprehensive income" component of the equity section of the balance sheet.

How an Available-for-Sale Security Works

AFS is an accounting term used to describe and classify financial assets. It refers to a debt or equity security not classif♛ied as a held-for-trading or held-to-maturity security (the ♒two other kinds of financial assets). AFS securities are nonstrategic and usually have a ready market price available.

The unrealized gains and losses derived from an AFS security are not reflected in net income (unlike those from trading investments). Instead, they appear in the 澳洲幸运5开奖号码历史查询:other comprehensive income (OCI) classification until they are sold. 

AFS Values Appear on the Balance Sheet

Net income is reported on the income statement. Therefore, 🐠unrealized gains and losses on AFS securities are not shown on the income statement.

Net income is accumulated over multiple accounting periods into 澳洲幸运5开奖号码历史查询:retained earnings on the balance sheet.𒁃 OCI, which includes unrealized gains and losses fro🐓m 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 澳洲幸运5开奖号码历史查询:below retained earnings in the equity section of the balance sheet.

Available-for-ඣSale vs. Held-for-Trading vs. Held-to-Maturity 🔯Securities

As mentioned above, there are three classifications of seౠcurities: available-for-sale, held-for-trading, and held-to-maturity securities.

HFTs and HTMs

Held-for-trading securitieꦅs are purchased and held primarily for sale in the short term. The purpose is to make a 𓃲profit 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.

AFS is the catch-all category that falls in the middle. It is inclusive of securities, both debt and eq💯uity, that the company plans to hold for a while (though not until maturity) but could also sell more quickly.

Difference in Reporting

From an accounting perspective, each of 𓂃these 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 r🍬ecorded at fair value. However, the unrealized gains or losses to the fair market value for trading securities are recorded in operating income and appear on the income statement. 

As noted, changes in the value of AFS securities are recorded as unrealized gains or losses in the OCI category. Some companies include OCI information below the income statemeꦡnt, while others provide a separate schedule detailing what is included in total comprehensive income🎀.

Recording an Available-for-Sale Security Transaction 🐼

If a company purchases AFS securities with cash for $100,000, it records a credit to cash and a debit to AFS 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 decreasꦺe in value is recorded as a credit of $50,000 to the AFS security and a de✃bit to OCI.

Likewise, if the investment goes up in value the next month, it is recorded as an increase in OCI. 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 a🌳nd losse𓄧s are considered unrealized until the securities are sold.

The Bottom Line

Whe♌n 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 ava🌸ilable-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.