Available For Sale Securities

What is Available For Sale Securities?

Companies make the investment in financial assets which includes financial securities such as stocks and bonds, derivative instruments, loans, and receivables etc. Available for Sale Securities often abbreviated AFS are debt and equity securities that are not expected to be held to maturity or traded in the near term.

• Available for Sale securities are not actively managed and traded for a profit like securities Held for the trading category.
• Available for Sale Financial Assets 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 Financial Assets are reported on the balance sheet at the end of each accounting period at their fair market value which means that at the end of the period, AFS securities are evaluated and adjusted for any changes in the market price of such investment.
• Any unrealized gain or loss on account of change in the value of the Available for Sale investment is reported on the balance sheet as part of Other Comprehensive Income.

Starbucks Available for Sale Securities Example

Below is the example of Starbucks Available for Sale Securities.

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

Let’s understand the same with the help of an Available for Sale securities journal entries example

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 at 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 – Available For Sale Securities Journal Entry –  Purchase of Securities

Available for Sale Securities Journal Entry to record the purchase of $100000 of equity securities of Divine Limited is mentioned as follows:

#2 – Available For Sale Securities Journal Entry –  Decline of Value

Available for Sale Securities Journal Entry to record the decline in the value of equity securities at the end of the year is mentioned as follows:

#2 – Available For Sale Securities Journal Entry –  Increase in Value

Available for Sale Securities 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 investment, is mentioned as follows:

Thus we can see when an Available for Sale investment is classified under AFS category, any unrealized gain or loss is reported in the Other Comprehensive Income as shown above in the case of ABC Bank and 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

Available for Sale investment 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 Institution 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 Institution are required to mark these assets on a mark to market (MTM) on a daily basis 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

Differences Between Available for Sale Securities vs Trading Securities vs Held to Maturity Securities are as follows:

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 basically 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 asset (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 Investment portfolio which 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 Available for Sale Financial Assets 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.

Recommended Articles

This has been a guide to what is Available for Sale securities. Here we discuss its examples along with available for sale securities journal entries. Also, we look at how it is reported by Banks and Financial Institutions. Finally, we discuss its key differences between Available for Sale Securities vs Trading Securities vs Held to Maturity. You may also learn more from the following accounting articles –

• Long-Term Debt in Balance Sheet
• Tangible vs Intangible Assets
• Marketable Securities on the Balance Sheet
• Asset-Backed Securities