Definition
Available For Sale Securities (AFS) are financial assets that a company has purchased with the intent of selling before they mature. They are recorded on the balance sheet as non-current assets at fair market value. The gains and losses from changes in their value are reported in the equity section of the balance sheet, under other comprehensive income.
Key Takeaways
- Available For Sale Securities (AFS) are debt or equity securities purchased with the intent of selling them before they mature, if they are not classified as held for trading or held to maturity. They represent one of the three general classifications of investment securities proscribed by Generally Accepted Accounting Principles (GAAP).
- The gains or losses from AFS securities are not reported through earnings but instead through other comprehensive income until the financial instrument is sold or there is a decline in value, and the loss is considered other than temporary, thus affecting the balance sheet. This is different from trading securities, where unrealised gains and losses affect the income statement.
- AFS securities’ fair value can fluctuate over time. Due to these fair value changes, organisations must adjust the value of these securities at the end of each reporting period and report these adjustments as part of accumulated other comprehensive income within the equity section of the balance sheet.
Importance
Available For Sale Securities (AFS) is a significant finance term as it refers to debt or equity securities bought with the intent to sell before they reach maturity or not scheduled to be held to maturity.
From an organization’s point of view, these securities provide a certain degree of short-term liquidity, hence offer flexibility in investment strategies.
They are also influential in the financial statements analysis of a company as the changes in their market value can impact the company’s net income and thus, the overall profitability.
Moreover, understanding the nature of AFS helps investors and stakeholders evaluate the company’s investment strategies and risk tolerance.
Explanation
Available For Sale (AFS) securities serve an important role in the realm of finance. As a type of investment, AFS securities are bonds, equities or other financial assets that neither fall under hedges nor are they intended for active trading.
This categorization acts as an equilibrium between the two extremes of financial portfolio management—hedges and trading securities—thus providing companies with an option to leverage investment diversification, portfolio management, and increased returns on idle cash. Moreover, the AFS portfolio allows organizations an avenue to pour their surplus working capital into a broad range of investments while still keeping the option open to liquidate if the funds are required elsewhere.
They act as a conduit for firms to realize short-term gains without influencing their regular business operations. Final decision to sell or retain these securities is generally decided on their market value, offering great flexibility to maximize profitability while maintaining liquidity.
Therefore, AFS securities are pivotal in the financial strategy of diverse investment portfolios.
Examples of Available For Sale Securities
Available-for-sale securities (AFS) are any type of security that is not classified as a trading security or held-to-maturity security. They are purchased by firms to generate profits from temporary differences in price. Here are three real-world examples of Available For Sale Securities:
Corporate Bonds: A multinational company, like Apple, may buy corporate bonds issued by another company with the intent of selling them if and when the price increases. They do not intend to hold these bonds till maturity and neither do they plan to trade them actively. These bonds would therefore be considered as available-for-sale securities.
Foreign Investments: A multinational bank such as Citigroup might invest in equity shares of a foreign company intending to sell them in the future when their price appreciates. This is another example of an available-for-sale security.
Government Securities: A retail company, like Walmart, might purchase U.S Treasury bills to store excess cash. The company does not intend to hold these till maturity and these may be sold when the company needs cash. These Treasury bills are, therefore, examples of available-for-sale securities.
FAQ for Available For Sale Securities
What are Available For Sale Securities?
Available For Sale Securities are a type of assets which are not classified as held for trading or held until maturity. Companies purchase these securities with an intention to sell before maturity and they are marked to market in accounting.
How are Available For Sale Securities different from other securities?
Unlike Held For Trading securities, which are intended to be sold in the short term, and Held To Maturity securities, which are held until they mature, Available For Sale Securities can be sold at any point, providing the company with liquidity.
How are Available For Sale Securities accounted for?
Under the Generally Accepted Accounting Principles (GAAP), unrealized gains or losses from Available For Sale Securities are reported in the other comprehensive income section of equity until they are sold and realized. At point of sale, the gains or losses are transferred to the net income account.
What are some examples of Available For Sale Securities?
They can include stocks, bonds or any other types of financial assets that a company has bought with an intent of selling before its maturity. The actual classification depends on the intent of the company at the time of purchase.
Related Entrepreneurship Terms
- Unrealized Gains or Losses
- Fair Value Measurement
- Financial Assets
- Equity Securities
- Balance Sheet
Sources for More Information
- Investopedia: A comprehensive resource offering definitions and explanations on a wide range of finance terms, including Available For Sale Securities.
- Corporate Finance Institute: This site offers educational resources and guides to finance-related topics.
- Accounting Tools: A website delivering concise, useful explanations on various financial and accounting topics.
- Financial Accounting Standards Board (FASB): The official site for the board that establishes financial accounting and reporting standards in the United States. It provides in-depth resources on financial terminology.
