What is Available For Sale Securities?
Available for Sale Securities are those debt or equity securities investments by the company that are expected to sell in the short run and therefore will not be held to maturity. These are reported on the balance sheet at fair value. However, any unrealized gain and losses arising out in such securities are not recognized in the Income Statement but are reported in other comprehensive income as a part of shareholders’ equity. Any dividend received on such securities, interest income and actual gains and losses when the securities are sold are recognized in the Income Statement.
Available for Sale Securities Example
source: Starbucks SEC Filings
Available for Sale Investments for Starbucks included Agency Obligations, Commercial Paper, Corporate Debt Securities, Foreign government obligations, US treasury securities, Mortgage, and other ABS, and Certificate of deposits.
The total fair value of such securities was $151.7 million in 2017.
Available For Sale Securities Journal Entries
ABC Bank buys $100000 equity Securities of Divine Limited on 01.01.2016, which is classified as AFS in its books of accounts. ABC Bank realized at the end of the accounting year that the value of Available for Sale investment has declined to $95000 by the end of the period. At the end of the second-year value of investment increased to $110000, and ABC Bank sold the same.
#1 – Purchase of Securities
Journal Entry to record the purchase of $100000 of equity securities of Divine Limited is mentioned as follows:
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#2 – Decline of Value
Journal Entry to record the decline in the value of equity securities at the end of the year is mentioned as follows:
#2 – Increase in Value
Journal Entry to record the increase in the value of equity securities at the end of the second year, as well as the sale of an investment, is mentioned as follows:
Thus we can see when an Available for Sale investment is classified under the AFS category; any unrealized gain or loss is reported in the Other Comprehensive Income as shown above in the case of ABC Bank. Once the same is realized on the sale of such securities is reported in the Income Statement.
Available for Sale Securities in Banks and Financial Institutions
They are broadly classified by Bank and Financial Institutions under the Banking Book or the Trading book.
- Banking Book refers to assets on a Bank’s balance sheet that is expected to be held to maturity. Banks and Financial Institutions are not required to mark these assets on a mark to market (MTM) basis, and such assets are usually held at historical cost in the books of accounts of the company. The popular category includes assets under Held to Maturity (HTM) category.
- Trading Book refers to assets held by a Bank which are available for sale and are traded regularly. These assets are acquired with the intent not to be held till maturity but to profit with them over the near term. Banks and Financial Institutions are required to mark these assets on a mark to market (MTM) daily, and such assets are recorded at fair value, which is also known as Mark to market accounting. The popular category includes assets held under the Held for Trading (HFT) category and Available for Sale (AFS) category.
Differences Between Available for Sale Securities vs. Trading Securities vs. Held to Maturity Securities
| Basis for comparison | Available for Sale (AFS) | Held for Trading (HFT) | Held to Maturity (HTM) | |||
| Meaning | It includes debt and equity securities, which are not expected to be held to maturity or traded in the near term. Simply stating, it includes all securities which are not part of HFT and HTM. | It includes debt and equity securities, which are acquired with the intent to profit over the near term. | It includes debt securities, which are acquired with the intent to be held until maturity. | |||
| Measurement | Recorded in the books of accounts at Fair Value; | Recorded in the books of accounts at Fair Value; | Recorded in the books of accounts at Amortized cost; (Amortized cost is equal to the original price minus any principal payment plus any amortized discount or minus any amortized premium, minus any impairment loss. | |||
| Treatment of Unrealized gain/losses | Any unrealized gain or loss is reported under Other Comprehensive Income. | Any unrealized gain or loss is reported under Income Statement. | Such securities are reported as current assets (if maturity is less than or equal to one year) or long-term assets (if maturity is more than one year). | |||
| Trading Book/Banking Book | Classified under Trading Book of the Bank/FI | Classified under Trading Book of the Bank/FI | Classified under Banking Book of the Bank/FI |
Conclusion
Available for Sale Securities is an important category of an investment portfolio that is held in the books of accounts of Banks/FI. The intent of the management decides the classification of Available for Sale investment. By classifying these under the AFS Securities category when fair value is down, the unrealized loss can be reported in Other Comprehensive Income without impacting the Income Statement.
Available For Sale Securities Video
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