Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

BASIC UNDERSTANDING OF AVAILABLE-FOR-SALE (AFS)

Available-for-sale securities are debt or equity investments that are held for an indefinite period of time without any intention to resell for profit. They are not trading assets as in the case of short-term assets held for speculation nor are they acquired with an intention to hold until maturity. In the case of equity securities, there is no concept of holding until maturity and hence whatever investments in equity are acquired without any intention to resell for profit, the same is classified as “available-for-sale” securities. Thus available-for-sale securities are a hybrid. While available-for-sale securities are recorded at fair value or market value, the unrealized gains/losses on them are excluded from current earnings (P&L) and are instead recorded as an adjustment to bonds on the balance sheet.

The available-for-sale category includes all bond securities except those classified as fair value through profit or loss and under “held-until-maturity.” Available-for-sale financial assets are carried at fair value subsequent to initial recognition. Usually the fair value can be readily determined for most financial assets through an active market or by a reasonable estimation process. The exception to this rule is bond securities that are not actively traded and hence do not have a quoted market price for arriving at a reliable fair value. Such instruments, however, are measured at cost instead of fair value.

For available-for-sale ...