Available-for-sale investment definition
/What is an Available-for-Sale Investment?
An available-for-sale investment is a non-derivative asset classification that does not fit into a variety of other classifications. In essence, this investment class can include stocks and bonds, as well as other financial assets that do not meet the requirements for the held-to-maturity or trading securities classifications.
Characteristics of an Available-for-Sale Investment
The key characteristics of an available-for-sale investment are as follows:
Intent to hold. The investor does not intend to hold available-for-sale securities until maturity (as is the case with held-to-maturity investments) or sell them in the near term (as is the case with trading securities).
Types of securities. Securities in the available-for-sale classification can include debt securities (e.g., bonds) and equity securities (e.g., common or preferred stock) that are not classified as trading securities or held-to-maturity securities.
Fair value measurement. Available-for-sale investments are reported on the balance sheet at fair value.
Unrealized gains and losses. Changes in the fair value of available-for-sale investments are recorded as unrealized gains or losses in other comprehensive income rather than in the income statement. This treatment avoids impacting net income until the investment is sold or impaired.
Impact of realized gains or losses. When an available-for-sale investment is sold, the cumulative unrealized gains or losses recorded in Other Comprehensive Income are reclassified to the income statement as realized gains or losses.
Dividend and interest income. For debt securities, interest income is recognized in the income statement using the effective interest method. For equity securities, dividend income is recognized in the income statement when declared by the issuer.
Liquidity. Available-for-sale investments are generally considered more liquid than held-to-maturity investments, because they can be sold before maturity, though this depends on market conditions.
Accounting for an Available-for-Sale Investment
An available-for-sale investment is carried on an entity's books at fair value. If there is a change in fair value from period to period, the gain or loss is recorded in equity.
Presentation of an Available-for-Sale Investment
An available-for-sale investment is not classified as held-to-maturity, nor it is a loan, a receivable, or a financial asset at fair value through profit or loss.