Available for Sale Investments (AFS)

Available for sale investments are investments that do not qualify for classification as held for trading (fair value through profit and loss) or held-to-maturity investments.

Balance sheet valuation and changes in fair value

Available for sale investments are carried on balance sheet at their fair value and any change in fair value between two reporting dates is taken to the shareholders' equity as a separate component which is normal called 'changes in fair value of available for sale investments'.

If the fair value of an investment increases, the carrying amount of the investments is debited and the 'changes in fair value of AFS investments' (equity) is credited. If the fair value of the investments decreases, the carrying amount of the investments is decreased and the changes in fair value of AFS investments (equity) is debited.

Under IFRS, any change in fair value is broken down into two components: change in fair value due to currency fluctuation and change in fair value due to change in investment value. The change in fair value due to fluctuation in currency value is taken to the income statement while the change in fair value due to change in value of investments is taken to the shareholders' equity.

Periodic income from AFS investments

Dividends or interest income earned on available for sale securities is recognized on the income statement in the period in which they are earned.

Example

On 1 January 2012, UI Ltd. has invested $20 million in bonds of GW Ltd. The bonds had a par value of $1,000 and they were purchased at par. The bonds have a maturity of 10 years and the management of UI Ltd does not intend to hold the bond till their maturity. The fair value of the bond as at 31 December 2012 is $980 per bond. The bonds earned an interest of $2 million during the year.

Solution

UI Ltd. would recognize the purchase of bonds as follows:

Available for sale investments$20 million
Cash$20 million

UI Ltd. has purchased 20,000 bonds as at 1 January 2012, so change in fair value over the period is $0.4 million = 20,000*(1,000-980). UI Ltd. would recognize this change as follows:

Change in fair value of AFS$0.4 million
Available for sale investments$0.4 million

The interest income earned in the period is credited to the income statement of the period:

Cash/interest receivable$2 million
Interest income$2 million

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork