Available-for-sale securities

Available-for-sale (AFS) is one of the classifications companies use to account for debt security investments. A debt security is classified as AFS by default when it fits neither of the other two categories: it is not held for active short-term trading, and management does not have both the positive intent and the ability to hold it to maturity.

The classification drives the accounting. AFS securities are carried on the balance sheet at fair value, but unrealized gains and losses from changes in that fair value bypass the income statement. Instead they are reported in other comprehensive income (OCI) and accumulate in equity as part of accumulated other comprehensive income (AOCI). Interest income is still recognized in net income each period, and when an AFS security is sold, the accumulated unrealized gain or loss is reclassified out of AOCI and into net income as a realized gain or loss.

This treatment contrasts with the other two categories. Trading securities are also carried at fair value, but their unrealized gains and losses hit net income immediately. Held-to-maturity securities are carried at amortized cost, so routine market fluctuations are not recorded at all. The AFS category therefore smooths earnings: the balance sheet reflects current value, while the income statement is shielded from market swings until sale.

The CMA Part 1 exam tests the three-category framework for debt investments directly. Be ready to classify a security, state where unrealized gains and losses are reported for each category, and account for the reclassification adjustment when an AFS security is sold.