Available-for-Sale Securities: Definition, Accounting, and Financial Reporting

Available-for-Sale (AFS) Securities represent an important category of debt investments that are neither actively traded for short-term profits nor held strictly to maturity. AFS securities provide companies with flexibility in their investment strategies while requiring specific accounting and reporting treatment.

This article explains the definition, accounting treatment, valuation rules, and disclosure requirements for Available-for-Sale Securities under U.S. GAAP (ASC 320) and IFRS (IFRS 9), with clear examples and journal entries.

1. What Are Available-for-Sale Securities?

Available-for-Sale (AFS) Securities are debt securities that a company:

✦ Does not classify as trading (for short-term profit)

✦ nor intends to hold until maturity

AFS securities are held with the intent to sell when advantageous but without a fixed short-term trading plan.

Typical examples include:

✦ Bonds issued by governments or corporations

✦ Mortgage-backed securities

✦ Asset-backed securities

✦ Important: Under current U.S. GAAP, only debt securities can be classified as AFS. Equity securities are measured through net income under ASC 321.

2. Initial Recognition and Measurement

When initially purchased, AFS securities are recorded at cost, which includes:

✦ Purchase price

✦ Transaction costs (e.g., broker fees)

Journal Entry at Purchase:

Debit: Available-for-Sale Securities – Purchase Cost

Credit: Cash – Purchase Cost

3. Subsequent Measurement

After acquisition:

✦ AFS securities are reported at fair value on the balance sheet

✦ Unrealized gains and losses (changes in fair value) are recorded in Other Comprehensive Income (OCI), not in net income

Fair value adjustments do not affect profit or loss until the security is sold or impaired.

Example – Fair Value Adjustment:

A company holds an AFS bond purchased for $100,000. At year-end, the fair value increases to $105,000.

Unrealized gain = $5,000

Journal Entry:

Debit: Available-for-Sale Securities – $5,000

Credit: Unrealized Gain – OCI – $5,000

The gain is not recognized in net income until sale or impairment.

4. Sale of AFS Securities

When an AFS security is sold:

✦ Realize previously recorded unrealized gains/losses

✦ Remove security from books at carrying value

✦ Recognize gain or loss in net income

Example – Sale of AFS Security:

Continuing the previous example:

• Carrying value = $105,000

• Sale proceeds = $106,000

✦ Realized gain = $1,000 (sale price above carrying value)

✦ Reclassify $5,000 unrealized gain from OCI to net income

Journal Entries:

1. Reclassify prior OCI gain:

Debit: Unrealized Gain – OCI – $5,000

Credit: Realized Gain on Sale – $5,000

2. Record sale:

Debit: Cash – $106,000

Credit: Available-for-Sale Securities – $105,000

Credit: Realized Gain on Sale – $1,000

5. Impairment of AFS Securities

If an AFS debt security experiences credit losses (i.e., impairment is probable):

✦ Recognize a credit loss in net income

✦ Recognize any non-credit losses (due to market conditions) in OCI

Impairment evaluation uses the Current Expected Credit Loss (CECL) model under U.S. GAAP.

Example:

• Fair value drop due to issuer's financial deterioration

• Expected future cash flows decrease

Journal Entry for Credit Loss:

Debit: Credit Loss Expense – Amount

Credit: Allowance for Credit Losses – Amount

6. IFRS Treatment for Similar Investments

Under IFRS 9, companies may classify debt securities at:

✦ Fair Value Through Other Comprehensive Income (FVOCI) — similar to AFS treatment

✦ Fair Value Through Profit or Loss (FVTPL)

Under FVOCI:

✦ Unrealized gains and losses recorded in OCI

✦ Realized gains and losses recycled to net income upon sale

✦ Impairment losses recognized in net income

7. Financial Statement Presentation

✦ Balance Sheet: AFS securities are reported at fair value under non-current assets (or current if near-term sale is expected)

✦ Equity Section: Unrealized gains/losses reported in Accumulated Other Comprehensive Income (AOCI)

✦ Income Statement: Realized gains and impairment losses flow through net income when triggered

Companies must disclose:

✦ Amortized cost, fair value, and unrealized gains/losses

✦ Methods for estimating fair value

✦ Credit loss allowance, if applicable

✦ Maturity profiles of debt investments

8. Summary of Key Accounting Features

Aspect	U.S. GAAP (ASC 320)	IFRS (IFRS 9)
Initial Measurement	Cost	Cost
Subsequent Measurement	Fair value through OCI	Fair value through OCI (for FVOCI assets)
Unrealized Gains/Losses	OCI	OCI
Realized Gains/Losses	Reclassified to Net Income	Reclassified to Net Income
Impairment	Credit losses in Net Income (CECL Model)	Credit losses in Net Income