Available for Sale Investment
An available-for-sale (AFS) investment is a type of investment security that is held by a company with the intent of selling it in the future but without any specific timeline for disposal. AFS investments can include stocks, bonds, or other financial assets that are not classified as trading securities or held-to-maturity securities.
In accounting, AFS investments are initially recorded at cost and are subsequently adjusted to their fair market value at each reporting period. Unrealized gains or losses resulting from changes in the fair market value of AFS investments are recorded in other comprehensive income (OCI) rather than being recognized on the income statement. These unrealized gains or losses will remain in OCI until the investment is sold or otherwise disposed of, at which point the accumulated gains or losses will be reclassified from OCI to the income statement as realized gains or losses.
AFS investments are classified as either short-term or long-term assets on the balance sheet, depending on the company’s intention and ability to sell the investment within one year.
Example of an Available for Sale Investment
Suppose Company A invests in 1,000 shares of Company B’s stock as an available-for-sale investment. Company A purchased the shares for $10 each, for a total cost of $10,000. At the end of the current reporting period, the fair market value of Company B’s stock has increased to $12 per share, making the total market value of the investment $12,000.
In this example, Company A would initially record the AFS investment of $10,000 on its balance sheet. At the end of the reporting period, Company A would adjust the AFS investment to the fair market value of $12,000. The unrealized gain of $2,000 ($12,000 – $10,000) would be recorded in other comprehensive income (OCI) and not impact the income statement.
If Company A decides to sell the investment in the following year when the market value of Company B’s stock is $13 per share, Company A would realize a gain of $3,000 ($13,000 – $10,000). At this point, the accumulated unrealized gain of $2,000 previously recorded in OCI would be reclassified to the income statement along with the additional $1,000 gain, resulting in a total realized gain of $3,000 on the income statement.