Available For Sale (securities)

Description

Understanding Available for Sale Securities

There are numerous types of securities in the world of finance and investing and various ways to deal with them. One of the terms often paid attention to is “Available for Sale securities.” To a layman, the word might at first seem incomprehensible; when broken down, however, it is not hard to understand.

What Are Available for Sale Securities?

Available-for-Sale securities represent an investment or financial asset purchased by a company but not intended to be held over the long term. Nor are these intended as trading in the near term either. They are kept somewhere in between. There is no design of selling these at once for the company, but maybe in the future date. Whenever people buy those securities, they think that at some time or the other, over time, either through price changes or interest payments, they would make some money.

Types of Investments Considered

Stocks and bonds are investments that can be sold. Owning a stock implies owning a share in a company. Owning a bond entails lending money to a company or the government which pays you interest on the borrowed money. When these are purchased as Available for Sale, the business must determine their value at least periodically.

How Are AFS Securities Valued?

Perhaps, you are wondering how these investments are written down. Companies have to recheck the market price of their Available for Sale securities to ascertain their true worth. They have to write down any changes in value whether upward or downward. But this is the main part. If the value goes up, they do not show the gain as income immediately. They did, however, put it in a different part of their financial statements. “Other comprehensive income” is what this part is referred to as. Therein gains and losses sit in a waiting room until the security is sold.

When the Securities Are Sold

When the business sells the security, the gain or loss moves from the holding section to the income from actual investment. This ensures that the income statement represents real gains or losses and not only changes in market price which could be favorable or unfavorable again the next day.

Example of AFS Valuation

Let’s consider a simple instance. Suppose a company has put 1,000 rupees to get a bond. The price of that bond in the market would be 1,100 rupees after some months. It does not contain added one hundred rupees in income yet; that is placed within other income which is untaxed. If the company sells the bond for 1,100 rupees at a later date, the profit will get reflected in the income statement.

Why This Accounting Method Matters

Thus some financial reports hopefully will be more steady and faithful. They will keep you from showing profits on sales that have not been made yet. That helps investors and anyone reading the financial reports to get a better picture of how healthy the business really is.

Comparison with Other Types of Securities

Another thing to remember is that Available for Sale securities should not be confused with other kinds such as Trading securities and Held to Maturity securities. Trading securities are securities bought by people in order to sell them quickly in the market, and the income statement immediately reflects changes in their value. Held to Maturity securities refer to bonds that a company holds and will keep until they receive complete payment.

Why Companies Choose AFS Securities

You have plenty to pick from in the Available for Sale section. Yet they are not sold right away when the time is not right. Thus, to have a balance, many businesses that want to grow but also be safe often go with Available for Sale securities.

Relevance to Investors and the Public

Such an idea would carry with itself usefulness for common people since it is something which is usually reported by banks and large businesses If you want to buy shares in any company, it will help you understand them better if you are aware of how they manage their investments. It will indicate whether or not they are being clever with their expenditures and the planning of their investments.

Conclusion

In short, Available for Sale securities refer to those stocks or bonds that a company has purchased in order to sell at a later stage. They are revalued from time to time, but any gains or losses are not taken into real income until they are sold. This makes it easier for businesses to depict really how their finances are. This term would help financial decision makers, be they investors or students.