Available-for-Sale Securities: Definition vs. Held-for-Trading
A debt or equity instrument bought to sell before it matures or is retained for a long time if it has no maturity date is known as available-for-sale security (AFS). Companies must categorize any investments in debt or equity securities as held-to-maturity, held-for-trading, or available-for-sale at the time of acquisition by accounting rules. Securities readily available for purchase are valued fairly, and any fluctuations in value are recorded in the equity part of the balance sheet under the heading “accumulated other comprehensive income.”
How Availability-Based How Security Works
Financial assets are categorized and described using the available-for-sale (AFS) accounting term. This type of financial asset is neither categorized as a held-for-trading nor a held-to-maturity security. It can be either debt or equity. Since they are not strategically important, AFS securities often have a ready-market price.
Unlike profits and losses from trading assets, the gains and losses from an AFS security appear in the other comprehensive income (OCI) classification until sold. On the income statement, net income is shown. The income statement does not show unrealized profits or losses on AFS securities.
Retained earnings are the total net income across some accounting periods that appear on the balance sheet. On the other hand, OCI is included in “accumulated other comprehensive income” on the balance sheet after the accounting period and comprises unrealized gains and losses on AFS securities. The balance sheet’s equity section shows accumulated other comprehensive income just below retained profits.
Securities that are Held-for-Trading, Available-for-Sale, and Held-to-Maturity
The three categories of securities indicated above are available-for-sale, held-for-trading, and held-to-maturity securities. Securities that are retained for trading are bought and mostly kept for immediate selling.
Rather than making a long-term investment, the goal is to benefit from the rapid deal. Held-to-maturity securities are at the other extreme of the range. A company intends to keep these debt instruments or stocks until maturity. A CD with a predetermined maturity date would be one example.
The catch-all category in the center is called Available for Sale, or AFS. It includes debt and equity instruments that the business intends to hold for the foreseeable future but may ultimately sell. Each of these groups is handled differently in accounting, which impacts whether profits or losses appear on the income statement or balance sheet. Accounting for trading securities is comparable to accounting for AFS securities.
The investments are represented at fair value because of their short-term nature. On the other hand, unrealized profits or losses on trading securities are reported in operational income and show up on the income statement.
Variations in the worth of assets readily available for purchase are documented in other comprehensive income (OCI) as an unrealized gain or loss. While some businesses offer a separate schedule outlining what is included in total comprehensive income, others place OCI information beneath the income statement.
Capturing a Security That Is Available for Sale
When a business pays $100,000 in cash for available-for-sale securities, it records a $100,000 debit to available-for-sale securities and a $100,000 credit to cash. Should the stock’s value drop to $50,000 by the subsequent reporting period, the investment needs to be “written down” to account for the security’s fair market value modification.
This decline in value is reported as a $50,000 credit to the security that is available for sale and a $50,000 negative to other comprehensive income.
Similarly, an increase in the value of the investment the next month is reported as a rise in other comprehensive income. It is unnecessary to sell the investment for OCI to recognize the value change. Until the securities are sold, these profits and losses are seen as “unrealized” for this reason.
Existing Assets: Are They Available for Sale?
Since the definition of a current asset includes securities held for less than a year, securities that are available for sale may be categorized as current assets. Long-term assets must be categorized if they are intended to be retained beyond a year.
What Distinguishes Held-to-Maturity from Available-for-Sale?
A corporation can record its investment securities using the held-to-maturity (HTM) or available-for-sale (AFS) procedures. Securities held in HTM are retained until they mature. AFS sells securities it holds before they mature. Costless impairment is reported for the former, and fair value is recorded for the latter.
Describe an HTM strategy.
Held-to-maturity strategies, or HTM strategies, are ways for businesses to categorize their financial assets. A corporation will retain its HTM securities until they mature. A portfolio diversification strategy, protection against negative interest rates, or a modest return on low-risk assets can all be achieved using an HTM approach.
Accounting requirements require that investment securities, whether debt or equity, be categorized as either held-to-maturity, held-for-trading, or available-for-sale when a firm buys them. A security sold before its maturity date is considered available for sale. It is necessary to report any unrealized profits or losses on the security as cumulative comprehensive income until sold.
Conclusion
- Debt or equity securities bought to sell before they mature are known as available-for-sale securities or AFSs.
- Securities that are offered for sale are reported at fair value.
Unrealized profits and losses are reflected in the equity component of the balance sheet’s cumulative other comprehensive income category. - Purchased debt or equity securities must be categorized as available for sale, held until maturity, or kept for trade.
