What is an available-for-sale equity security?
Assuming that the company owns less than 20% of outstanding shares and does not have significant influence, then a company can use the fair value option to value an investment. The equity investment can be classified as trading or available-for-sale.
“Available-for-sale” (“AFS”) generally means that the company plans to hold the equity security for a period greater than 1 year. If less than 1 year, then the equity investment would be classified as “trading”.
For an AFS equity security, unrealized gains and losses are recorded to OCI, which is part of stockholders’ equity in the balance sheet. The unrealized gains or losses are recorded to OCI because the change in fair value is considered “temporary”.
Gains and losses can be realized on an AFS security if the equity security is sold or the company believes the change in fair value is “other than temporary”.
The AFS security will be recorded as a current or non-current asset. Any cash inflows or outflows related to AFS securities will be recorded in the “investing section” of the cash flow statement.
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