CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingEasy
A company is preparing its financial statements and needs to classify its investments. Which of the following investments would be classified as an 'available-for-sale' security under U.S. GAAP?
- ADebt and equity securities that are not classified as trading or held-to-maturity.
- BEquity investments where the company has significant influence over the investee.
- CEquity investments held for short-term profit from price changes.
- DDebt securities that the company has the positive intent and ability to hold to maturity.
Show answer & explanationAnswer & explanation
Correct answer: A. Debt and equity securities that are not classified as trading or held-to-maturity.
Available-for-sale (AFS) securities are a residual category. They include debt and equity securities that are not classified as trading securities (held for short-term profit) nor as held-to-maturity securities (debt securities with intent and ability to hold to maturity).
Why the other options are wrong
- B. These would typically be accounted for using the equity method, not classified as AFS.
- C. These are classified as trading securities.
- D. These are classified as held-to-maturity securities.
Available-for-Sale (AFS) Securities
Debt and equity securities that are not classified as trading securities or held-to-maturity securities. Unrealized gains and losses are reported in other comprehensive income (OCI).
- Residual category for investments
- Unrealized gains/losses go to OCI
- Can be debt or equity securities
Memory trick: Investments: Trading for quick cash, Held-to-Maturity for steady bonds, and AFS for everything else that's not Equity Method.