how an available for sale security works
afs is an accounting term used to describe and classify financial assets it refers to a debt or equity security not classified as a held for trading or held to maturity security the two other kinds of financial assets afs securities are nonstrategic and usually have a ready market price available the unrealized gains and losses derived from an afs security are not reflected in net income unlike those from trading investments instead they appear in the other comprehensive income oci classification until they are sold net income is reported on the income statement therefore unrealized gains and losses on afs securities are not shown on the income statement net income is accumulated over multiple accounting periods into retained earnings on the balance sheet oci which includes unrealized gains and losses from afs securities is rolled into accumulated other comprehensive income on the balance sheet at the end of the accounting period accumulated other comprehensive income is reported just below retained earnings in the equity section of the balance sheet changes in value of afs securities can impact the value of regulatory capital that large banks are required to hold according to accounting regulations 1available for sale vs held for trading vs held to maturity securitiesas mentioned above there are three classifications of securities available for sale held for trading and held to maturity securities held for trading securities are purchased and held primarily for sale in the short term the purpose is to make a profit from the quick trade rather than the long term investment on the other end of the spectrum are held to maturity securities these are debt instruments or equities that a firm plans on holding until their maturity dates an example would be a certificate of deposit cd with a set maturity date afs is the catch all category that falls in the middle it is inclusive of securities both debt and equity that the company plans to hold for a while though not until maturity but could also sell more quickly from an accounting perspective each of these categories is treated differently and affects whether gains or losses appear on the balance sheet or income statement the accounting for afs securities is similar to the accounting for trading securities due to the short term nature of the investments they are recorded at fair value however the unrealized gains or losses to the fair market value for trading securities are recorded in operating income and appear on the income statement as noted changes in the value of afs securities are recorded as unrealized gains or losses in the oci category some companies include oci information below the income statement while others provide a separate schedule detailing what is included in total comprehensive income recording an available for sale security transactionif a company purchases afs securities with cash for 100 000 it records a credit to cash and a debit to afs securities for 100 000 if the value of the securities declines to 50 000 by the next reporting period the investment must be written down to reflect the change in the fair market value of the security this decrease in value is recorded as a credit of 50 000 to the afs security and a debit to oci likewise if the investment goes up in value the next month it is recorded as an increase in oci the security does not need to be sold for the change in value to be recognized in oci it is for this reason these gains and losses are considered unrealized until the securities are sold 