Available for Sale of Securities

Definition of Available for Sale of Securities

Available for sale of securities is a classification of securities held for sale in the short term and did not intend to keep it for the long term. The securities which are neither classified as held for trading nor held to maturity securities are called available for sale securities.

Explanation

There are three types of securities classification per generally accepted accounting practices: trading securities, securities held for maturity, and available for sale securities. The securities classified as trading or intended to be held until maturity are classified under the available securities. There is a different accounting process for it as they are short-term securities. These types of securities are debt or equity securities intended to sell within a short time and purchased to earn profits from the short-term funds available.

How Does Available for Sale for Securities Work?

Suppose the organization intends to purchase securities, whether equity or debt, and the purpose is to sell in a short period. In that case, these types of securities are classified as available for sale. These types of securities are classified under financial assets on the balance sheet. These types of securities are normally valued at the realizable value, unrealized gains or losses are not recognized in the income statement, and there is a different accounting process for available-for-sale securities. The only purpose is to benefit the financial position and earn profit as these securities easily provide liquidity.

Types

It is mainly classified into two categories:

1. Financial Instruments

Financial instruments are available for sale for securities issued or sold by companies that require short-term business financing and intend to re-purchase or buy back the securities. The securities may be issued as new equity shares or bonds. The company is obligated to give interest to the bondholders. For shareholders, the company needs to take such a decision or perform so that the value of shares should increase at the buyback time. These securities are classified as liabilities as they intend to repay the financiers.

2. Investment Securities

Investment securities are the type of securities that a company and intention purchase to sell in the short term, and the purpose is to earn profit. It can also be purchased to diversify the portfolio’s risk to reduce the risk. These securities are valued at a realizable price and classified as financial assets, i.e., short-term investments held for sale.

Accounting

As available for sale, securities are intended to be sold in the short term, and due to the nature of securities, the price fluctuates in nature; hence these types of securities are valued at the market price, i.e., the price available for sales on the reporting date. Accordingly, the profit or loss due to valuation will be transferred to other comprehensive income until the available securities are sold. Then, the net profit or loss is transferred to the income statement on sale. Accordingly, accumulated other comprehensive income is classified in the balance sheet below the retained earnings.

Example of Available for Sale for Securities

ABC Ltd. buys the securities amounting to $ 20,000, which it classifies as available for sale. On the balance sheet date, the value of securities standing in the market was $ 12,000. After the balance sheet date in the next reporting period, the securities’ value reached $ 21,000, and ABC Ltd. sold the securities at that price. Record the accounting treatment for the above securities.

Solution:

Year 1:

Date	Particulars	Debit ($)	Credit($)
Year 1	Loss on available for sale securities A/c                 Dr	8,000
	To investment available for sale A/c		8,000
	(being Loss on available for sale securities is to be shown in other comprehensive income ( $ 8,000) on the balance sheet. )

Now, if in the next accounting year the value becomes $ 9,000, then the accounting entry will be as follows

Year 2:

Date	Particulars	Debit ($)	Credit($)
Year 2	Investment Available for sales A/c                    Dr	9,000
	To gain on securities available for sales A/c		1,000
	To Loss on Securities available for sales A/c		8,000
	(Being change in the value of investment recorded)

First, the previous loss is to be settled from the current gain to reflect the true and correct position in the accounts.

On Sale:

Date	Particulars	Debit ($)	Credit($)
On sale	Cash or Bank A/c                 Dr	21,000
	To investment available for sale A/c		21,000
	(being entry to record sale of investment)

Net gain on sale, i.e., sale value –original cost ($21,000 – $20,000) $ 1000, must be transferred to a net income account.

Available for Sale for Securities in Banks

As the bank has to maintain the liquidity per different norms, varies from country to country, the banks invest in short-term securities to earn profit and maintain the liquidity, i.e., sell the securities at any time. The common examples of available for sale securities in banks are Commercial paper, corporate debt securities, demand deposits, certificates of deposit, demand loans given, etc. In banking accounting also, these type of securities is to be shown separately.

Available for Sale for Securities vs Trading Securities

The key differences are as follows:

• It is the type of security intended to be sold in the short term. In contrast, trading securities are the type of securities that are held to sell, not necessarily for immediate or short-term selling.
• Available for sale securities are valued at the realizable value, whereas trading securities are valued at face value.
• The unrealized gain on available for sale securities will be transferred to other comprehensive income until sold. Then, the net gain or loss is transferred to the income statement on sale. In contrast, the profit or loss on sale in trading securities is directly recorded into the income statement, i.e., the profit and loss account.

Advantages

Some of the advantages are as follows::

• These types of securities are easy to liquidate.
• The purpose of buying is to earn a profit from the funds available for a short period.
• Useful for managing the portfolio risk.
• Recorded at fair value on the balance sheet date to show the true picture and accumulated loss or gain.

Conclusion

It is the type of securities held to earn short-term profit from the funds available. These types of securities can be easily liquidated; hence banks also invest in available-for-sale securities as banks have to maintain the liquidity ratios. These securities are classified as financial assets on the balance sheet and will be recorded at fair value on each valuation date. The gain or loss on revaluation will be transferred to other comprehensive income until sold. That other comprehensive account is to be shown in the balance sheet liabilities below retained earnings after adjusting the other comprehensive income. The net gain or loss on sale on actual sales is to be transferred to the profit and loss account.

Recommended Articles

This is a guide to Available for Sale of Securities. Here we also discuss the definition and different types along with advantages. You may also have a look at the following articles to learn more –

1. Asset-Backed Securities
2. Marketable Securities in Balance Sheet
3. Dilutive Securities
4. Hybrid Securities