Available-for-sale

Definition

Available-for-sale refers to a category of financial assets that are not classified as either trading securities or held-to-maturity securities. These assets are intended to be held for an indefinite period but may be sold in response to changes in market conditions or other factors. The accounting treatment for available-for-sale securities includes recording them at fair value on the balance sheet, with unrealized gains and losses recognized in other comprehensive income.

5 Must Know Facts For Your Next Test

1. Available-for-sale securities are reported at fair value on the balance sheet, which means their market price can fluctuate over time.
2. Unlike trading securities, available-for-sale securities are not actively traded for short-term profits; they may be sold when it is advantageous.
3. Unrealized gains and losses from available-for-sale securities do not impact net income but are recorded in other comprehensive income until realized.
4. This category of securities allows companies to react to market changes without impacting their earnings until the securities are sold.
5. Available-for-sale securities can include various types of investments such as stocks, bonds, and mutual funds that are not intended for immediate resale.

Review Questions

• How does the accounting treatment of available-for-sale securities differ from that of trading securities?
  • Available-for-sale securities are recorded at fair value, similar to trading securities; however, the key difference lies in how unrealized gains and losses are treated. For trading securities, unrealized gains and losses are included in net income, impacting earnings directly. In contrast, for available-for-sale securities, these gains and losses are recorded in other comprehensive income until the securities are sold. This allows companies to manage their reported earnings more effectively.
• Discuss the implications of classifying an investment as available-for-sale rather than held-to-maturity.
  • Classifying an investment as available-for-sale means that it is intended to be held indefinitely but can be sold based on market conditions. This gives management flexibility to respond to changing economic situations without affecting immediate earnings. Conversely, held-to-maturity investments must be kept until maturity, resulting in different accounting treatment where they are valued at amortized cost rather than fair value. This can limit a company's ability to react quickly to market opportunities.
• Evaluate the impact of market fluctuations on available-for-sale securities and their effect on a company's financial statements over time.
  • Market fluctuations significantly impact available-for-sale securities since they are recorded at fair value on the balance sheet. As prices rise or fall, unrealized gains or losses affect other comprehensive income, leading to potential swings in equity without affecting net income. Over time, if these securities are sold, realized gains or losses will then be reflected in net income. This dual impact allows companies to show a more stable income while still being exposed to market changes through their equity position.

Related terms

Fair Value: The estimated price at which an asset could be bought or sold in a current transaction between willing parties.

Unrealized Gains and Losses: The increases or decreases in the value of an investment that has not yet been sold.

Other Comprehensive Income: Income that includes all non-owner changes in equity during a period, except for those resulting from investments by owners and distributions to owners.