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 maturity or 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 comprehensive income until the securities are sold.
How an Available-for-Sale Security Works
Available-for-sale 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 income comprehensive category until they are sold.
Unrealized gains and losses for available-for-sale securities are included in other comprehensive income.
Available-for-Sale vs. Held-for-Trading and 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 firms plan on holding until maturity. Available for sale, or AFS, is the catch-all category that falls in the middle. It is inclusive of securities, both debt and equity, the company plans on holding for a long period of time but could also be sold.
- Available-for-sale securities (AFS) are debt or equity securities purchased with the intent of selling before they reach maturity, or holding them for a long period if there is no maturity date.
- Available-for-sale securities are reported at fair value and changes in value are included in comprehensive income.
- Investments in debt or equity securities purchased must be classified as held to maturity, held for trading, or available for sale.
From an accounting perspective, each of these categories is treated differently as recorded on the balance sheet and income statement. In most cases, the accounting for available-for-sale securities is the same as the accounting for trading securities. Due to the short-term nature of the investments, they are recorded at fair value. For trading securities, the changes to the fair market value are recorded against operating income.
Changes in the value of available-for-sale securities are recorded as an unrealized gain or loss in other comprehensive income (OCI). Some firms include OCI with the income statement, while others provide a separate schedule detailing what is included in total comprehensive income.
Example of an Available-for-Sale Security
If a company purchases available-for-sale securities with cash for $100,000, it results in 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, and this change is recorded as a decline in other comprehensive income. Likewise, if the investment goes up in value, 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.