Understanding Investment Securities Available for Sale

An investment security is a financial instrument that holds value and can be bought or sold by an investor. One type of investment security is an available-for-sale security. This blog post will explore what available-for-sale securities are, how they work, and their differences from other types of investment securities.

What Is an Available-for-Sale Security?

An available-for-sale security is a security that is procured with the intention of selling it before its maturity date or holding it for a long period if there is no maturity date. These securities can include both debt and equity instruments. The main characteristic of available-for-sale securities is that they are not classified as trading securities or held-to-maturity securities.

How an Available-for-Sale Security Works

When an investor purchases an available-for-sale security, it is initially recorded at its cost. However, the value of the security may change over time due to market fluctuations. The unrealized gains and losses on available-for-sale securities are not included in the investor's earnings. Instead, they are reported in a separate component of the financial statements called other comprehensive income.

Available-for-Sale vs. Held-for-Trading vs. Held-to-Maturity Securities

There are different classifications for investment securities, and it's important to understand the distinctions between them. Available-for-sale securities are different from held-for-trading securities and held-to-maturity securities.

Key Takeaways:

• Available-for-sale securities are procured with the intention of selling them before maturity or holding them for a long period.
• Unrealized gains and losses on available-for-sale securities are not included in earnings but reported in other comprehensive income.
• Available-for-sale securities are not classified as trading securities or held-to-maturity securities.

Recording an Available-for-Sale Security

When an investor purchases an available-for-sale security, it is recorded at its cost. The cost includes the purchase price and any transaction costs. Subsequently, the value of the security is adjusted to its fair value at the end of each reporting period. The fair value is determined based on market prices or other valuation techniques.

Is Available-for-Sale a Current Asset?

Available-for-sale securities are classified as noncurrent assets because they are not intended to be sold or converted into cash within one year. Noncurrent assets are typically reported on the balance sheet after current assets.

What Is the Difference Between Held-to-Maturity and Available-for-Sale?

The main difference between held-to-maturity securities and available-for-sale securities is their intended holding period. Held-to-maturity securities are purchased with the intention of holding them until maturity, while available-for-sale securities are intended to be sold before maturity or held for a long period.

What Is an HTM Strategy?

HTM stands for held-to-maturity. An HTM strategy refers to the practice of investing in securities with the intention of holding them until maturity. This strategy is typically used by investors who have a long-term investment horizon and are not interested in actively trading securities.

The Bottom Line

Available-for-sale securities offer investors the flexibility to either sell them before maturity or hold them for a longer period. These securities are recorded at their cost and their value is adjusted to fair value at each reporting period. Understanding the differences between available-for-sale securities and other types of investment securities is important for investors to make informed investment decisions.