The term AFS, or available for sale security, is a debt security or an equity security that were bought with the intention of either selling it before reaching maturity or keeping it for an extended period of time if it does not have a date of maturity.
Available for sale is a special accounting term that is used to classify, analyze, and describe the financial assets. It is an equity or debt security that is not classified as the other two types of financial assets – a held to maturity security or a held for trading. AFS securities are considered to be nonstrategic and usually have an available and ready market price.
There are special accounting standards that require companies to classify any new investments in equity and debt securities when purchasing them as available for sale, held for trading, and held to maturity. Available for sale securities are being reported at fair price; changes in that price between the accounting periods are included in the equity section of the balance sheet.
Losses and gains from AFS security are never stated in net profit but are reflected in the classification of other comprehensive income until they are sold, and this is opposed to securities from trade investments. Net income has to be recognized in the profit statement; consequently, unrealized losses and profits on available for sale securities cannot be recognized on that statement.
Net profit accrues over several reporting periods in undistributed profits on the balance sheet. However, on the balance sheet, other comprehensive income that consists of unrealized losses and gains from available for sale securities is included in accumulated other comprehensive income when the reporting period ends.
In the equity section of the balance sheet, accumulated other comprehensive income is indicated under the undistributed profits. The accumulated other comprehensive income is reflected slightly below retained incomes in the balance sheet’s equity section.