Available-for-Sale Security

Posted on by user

Available-for-Sale Security

What is an available-for-sale (AFS) security?

An available-for-sale security is a debt or equity investment that a company purchases with the intent to sell before it reaches maturity (or to hold for an indefinite period if the security has no maturity). Accounting standards require firms to classify investments at purchase as one of three types: held-to-maturity (HTM), held-for-trading (HFT), or available-for-sale (AFS).

AFS securities are reported at fair value on the balance sheet. Unrealized gains and losses from changes in fair value are not recorded in net income; they are recorded in other comprehensive income (OCI) and accumulated in equity as accumulated other comprehensive income (AOCI) until the securities are sold.

Key points

  • AFS securities can be debt or equity instruments intended for sale before maturity.
  • They are reported at fair value on the balance sheet.
  • Unrealized gains and losses are recorded in OCI (and accumulated in AOCI), not in net income, until realized.
  • When sold, realized gains or losses are reclassified from OCI to net income.

How AFS accounting works

  • Classification: AFS is the middle category between short-term trading securities (HFT) and long-term, held-until-maturity securities (HTM).
  • Measurement: AFS investments are carried at fair value each reporting date.
  • OCI treatment: Changes in fair value create unrealized gains or losses that flow to OCI. These amounts remain in equity (AOCI) until realized through sale or until an other-than-temporary impairment is recognized.
  • Income statement: Only realized gains or losses (or recognized impairments) affect net income.

Note: For trading securities, unrealized gains and losses affect operating income immediately. For HTM, debt securities are typically carried at amortized cost (subject to impairment).

Balance sheet placement

  • AFS securities appear as investments at fair value on the asset side of the balance sheet.
  • Unrealized gains and losses are accumulated in AOCI, which is presented within shareholders’ equity just below retained earnings.
  • The classification as current or long-term depends on expected holding period: if intended to be sold within 12 months, classify as current; otherwise, classify as long‑term.

Recording AFS transactions (example)

  1. Purchase:
  2. Dr AFS investment $100,000
  3. Cr Cash $100,000
  4. Fair value decline to $50,000 (unrealized loss of $50,000):
  5. Dr OCI (Unrealized Loss) $50,000
  6. Cr AFS investment $50,000
  7. If fair value later increases, reverse the accounting:
  8. Dr AFS investment $X
  9. Cr OCI (Unrealized Gain) $X
  10. On sale:
  11. Remove investment at fair value and reclassify accumulated OCI related to that security; realized gain or loss is reported in net income.

(Companies may use a valuation allowance or direct adjustment depending on policy; the effect is that unrealized changes flow through OCI until realized.)

AFS vs. HFT vs. HTM (brief)

  • Held-for-trading (HFT): Bought for short-term profit; measured at fair value; unrealized gains/losses flow to net income.
  • Held-to-maturity (HTM): Debt securities intended to be kept to maturity; recorded at amortized cost (subject to impairment).
  • Available-for-sale (AFS): Intermediate category; measured at fair value with unrealized gains/losses recorded in OCI.

Other considerations

  • Regulatory capital: Changes in AFS values can affect regulatory capital calculations for financial institutions, since unrealized losses in AOCI may reduce reported equity.
  • Impairment: If an AFS security suffers a credit loss or other other-than-temporary impairment, the loss may need to be recognized in earnings rather than OCI, per applicable accounting guidance.

Bottom line

Available-for-sale securities are investments reported at fair value whose unrealized gains and losses bypass the income statement and accumulate in other comprehensive income until realization. Proper classification (AFS vs. HFT vs. HTM) determines measurement and where gains and losses are recognized, affecting both financial reporting and regulatory metrics.