What are available-for-sale securities?
Available-for-sale (AFS) securities are debt or equity securities a company purchases with the intent of selling them before they reach maturity or holding them if they don’t have a maturity date (the lifespan of a security, when the investors get their principal back). Equity securities typically do not have a maturity date and provide. They have returned in the form of dividends and capital gains. Debt securities have predefined returns in the form of interest.
Accounting standards require companies to classify their securities as held-to-maturity, held-for-trading, or available-for-sale. Available-for-sale securities are reported at fair value (an estimate of the potential market price of the securities) on the balance sheet. AFS securities are considered short-term investments and therefore recorded at fair value. Changes are recorded in the equity section of the balance sheet.
How do available-for-sale securities work?
According to the generally accepted accounting principles (GAAP), available-for-sale securities are neither held for trading nor to maturity. They are non-strategic securities that have a readily available market price.
The profit and loss from AFS investments are not reported in the net income. They are recorded in the category of other comprehensive income (OCI) until they are sold. Accumulated other comprehensive income is reported in the equity section of the balance sheet.