Available-For-Sale Security
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 Securities (AFS) are debt or equity securities purchased with the intent to sell before maturity or to hold for a long term if there is no maturity date. According to accounting standards, companies must classify any investment in debt or equity 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 shareholders' equity on the balance sheet.
Origin: The concept of available-for-sale securities originated from the evolution of accounting standards, particularly to better reflect the true value and risk of a company's investments. In the late 20th century, as financial markets became more complex and globalized, accounting standards gradually introduced requirements for the classification and fair value measurement of financial instruments.
Categories and Characteristics: AFS securities are mainly divided into two categories: debt securities and equity securities.
- Debt Securities: These include corporate bonds, government bonds, etc., which usually have a fixed maturity date and interest payments.
- Equity Securities: These include company stocks, which do not have a fixed maturity date, and holders can profit through dividends and capital appreciation.
Specific Cases:
- Case 1: A company purchases a batch of government bonds, planning to sell them when market conditions are favorable. These bonds are classified as AFS securities. During the accounting period, the market value of these bonds increases, and the company records the appreciation in the other comprehensive income section of the balance sheet.
- Case 2: A company buys some stocks of a listed company as a long-term investment. These stocks are classified as AFS securities. During the accounting period, the market value of these stocks decreases, and the company records the depreciation in the other comprehensive income section of the balance sheet.
Common Questions:
- Question 1: How do changes in the fair value of AFS securities affect financial statements?
Answer: Changes in fair value are recorded in the other comprehensive income section of the balance sheet and do not directly affect the current period's profit or loss. - Question 2: What is the difference between AFS securities and trading securities?
Answer: Changes in the fair value of trading securities are directly recorded in the current period's profit or loss, whereas changes in the fair value of AFS securities are recorded in other comprehensive income.
