Available for Sale Securities
Available-for-sale (AFS) securities are financial instruments that a company invests in with the intention of holding them for an indefinite period rather than for trading or immediate resale. These securities can be debt or equity instruments and are not classified as trading securities or held-to-maturity securities.
In accounting, AFS securities are initially recorded at cost on the balance sheet, but their value is subsequently adjusted to fair market value at the end of each reporting period. The unrealized gains or losses resulting from changes in the fair market value of AFS securities are reported as a component of other comprehensive income (OCI), which is recorded in the equity section of the balance sheet.
When AFS securities are sold, the realized gains or losses are reported on the income statement, and the corresponding unrealized gains or losses that were previously recorded in OCI are reclassified to the income statement as well. AFS securities allow companies to invest in various financial instruments while maintaining flexibility in their investment strategies, as they are not committed to holding these securities until maturity or for a specific period.
Example of Available for Sale Securities
Let’s consider a hypothetical example.
Company ABC invests $10,000 in available-for-sale (AFS) securities, consisting of various stocks and bonds. The company does not intend to actively trade these securities but will hold them for an indefinite period.
At the end of the first quarter, the fair market value of these AFS securities increases to $11,000. The unrealized gain of $1,000 ($11,000 – $10,000) will be reported as part of other comprehensive income (OCI) on the company’s balance sheet, under the equity section.
During the second quarter, the company decides to sell one of the stocks in the AFS securities portfolio for $3,500, which had an initial cost of $3,000. The realized gain of $500 ($3,500 – $3,000) will be reported on the income statement. Additionally, the corresponding portion of the unrealized gain previously reported in OCI will be reclassified to the income statement as well.
The remaining AFS securities will continue to be adjusted to their fair market value at the end of each reporting period, with unrealized gains or losses reported in OCI until the securities are sold or otherwise disposed of.