What is Available-For-Sale Security?
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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 accumulated other comprehensive income in the equity section of the balance sheet.
Definition
Available-for-Sale (AFS) securities are debt or equity securities purchased by a company with the intention of selling them in the future. These securities can be sold before maturity or held for a long term if they have no maturity date. According to accounting standards, companies must classify these securities as held-to-maturity, trading, or available-for-sale at the time of purchase. AFS securities are reported at fair value, with changes in value recorded in the accumulated other comprehensive income section of the shareholders' equity on the balance sheet.
Origin
The concept of available-for-sale securities emerged from the evolution of accounting standards, particularly in the late 20th century. As financial markets became more complex and globalized, the International Accounting Standards Committee (IASC) and the Financial Accounting Standards Board (FASB) began emphasizing fair value measurement of financial instruments. The introduction of IAS 39 and FAS 115 in the 1990s marked the formal establishment of the AFS classification.
Categories and Features
AFS securities are primarily divided into debt securities and equity securities. Debt securities include corporate bonds, government bonds, etc., typically with fixed maturity dates and interest payments. Equity securities include stocks, which do not have fixed maturity dates. A notable feature of AFS securities is that fluctuations in their fair value affect a company's other comprehensive income rather than directly impacting net income, allowing companies more flexibility in handling market volatility in financial reporting.
Case Studies
Case Study 1: A company purchased a batch of government bonds in 2020, classified as AFS securities. Due to changes in market interest rates, the fair value of these bonds increased in 2021. The company recorded this appreciation in other comprehensive income on the balance sheet, rather than directly in the current period's profit. Case Study 2: A large corporation acquired shares of a tech company in 2019 as AFS securities. As the tech industry rapidly grew, the value of these shares significantly increased in 2020. The company recorded the appreciation in other comprehensive income, reflecting it in shareholders' equity.
Common Issues
Common issues investors face with AFS securities include how to accurately assess their fair value and how to handle the impact of their value fluctuations on financial statements. A common misconception is that changes in the value of these securities directly affect a company's net income, whereas they typically only impact other comprehensive income.
