What Is an Available-for-Sale Security?

An available-for-sale security (AFS) is a debt or equity security purchased with the intent of selling before it reaches maturity or holding it for a long period should it not have a maturity date. Accounting standards necessitate that companies classify any investments in debt or equity securities when they are purchased as held-to-maturity, held-for-trading, or available-for-sale. Available-for-sale securities are reported at fair value; changes in value between accounting periods are included in accumulated other comprehensive income in the equity section of the balance sheet.

How an Available-for-Sale Security Works

Available-for-sale (AFS) is an accounting term used to describe and classify financial assets. It is a debt or equity security not classified as a held-for-trading or held-to-maturity security—the two other kinds of financial assets. AFS securities are nonstrategic and can usually have a ready market price available.

The gains and losses derived from an AFS security are not reflected in net income (unlike those from trading investments), but show up in the other comprehensive income (OCI) classification until they are sold. Net income is reported on the income statement. Therefore, unrealized gains and losses on AFS securities are not reflected on the income statement.

Net income is accumulated over multiple accounting periods into retained earnings on the balance sheet. In contrast, OCI, which includes unrealized gains and losses from AFS securities, is rolled into “accumulated other comprehensive income” on the balance sheet at the end of the accounting period. Accumulated other comprehensive income is reported just below retained earnings in the equity section of the balance sheet.

Available-for-Sale vs. Held-for-Trading vs. Held-to-Maturity Securities

As mentioned above, there are three classifications of securities—available-for-sale, held-for-trading, and held-to-maturity securities. Held-for-trading securities are purchased and held primarily for sale in the short term. The purpose is to make a profit from the quick trade rather than the long-term investment. On the other end of the spectrum are held-to-maturity securities. These are debt instruments or equities that a firm plans on holding until its maturity date. An example would be a certificate of deposit (CD) with a set maturity date. Available for sale, or AFS, is the catch-all category that falls in the middle. It is inclusive of securities, both debt and equity, that the company plans on holding for a while but could also be sold.

From an accounting perspective, each of these categories is treated differently and affects whether gains or losses appear on the balance sheet or income statement. The accounting for AFS securities is similar to the accounting for trading securities. Due to the short-term nature of the investments, they are recorded at fair value. However, for trading securities, the unrealized gains or losses to the fair market value are recorded in operating income and appear on the income statement. 

Changes in the value of available-for-sale securities are recorded as an unrealized gain or loss in other comprehensive income (OCI). Some companies include OCI information below the income statement, while others provide a separate schedule detailing what is included in total comprehensive income.

Recording an Available-for-Sale Security 

If a company purchases available-for-sale securities with cash for $100,000, it records a credit to cash and a debit to available-for-sale securities for $100,000. If the value of the securities declines to $50,000 by the next reporting period, the investment must be “written down” to reflect the change in the fair market value of the security. This decrease in value is recorded as a credit of $50,000 to the available-for-sale security and a debit to other comprehensive income.

Likewise, if the investment goes up in value the next month, it is recorded as an increase in other comprehensive income. The security does not need to be sold for the change in value to be recognized in OCI. It is for this reason these gains and losses are considered “unrealized” until the securities are sold.

What Is Anti Money Laundering (AML)?

Anti money laundering (AML) refers to the web of laws, regulations, and procedures aimed at uncovering efforts to disguise illicit funds as legitimate income. Money laundering seeks to conceal crimes ranging from small-time tax evasion and drug trafficking to public corruption and the financing of groups designated as terrorist organizations.

AML legislation was a response to the growth of the financial industry, the lifting of international capital controls and the growing ease of conducting complex chains of financial transactions.

A high-level United Nations panel has estimated annual money laundering flows at $1.6 trillion, accounting for 2.7% of global GDP in 2020.

Understanding Anti Money Laundering (AML)

AML regulations in the U.S. have expanded from the 1970 Bank Secrecy Act’s requirement that banks report cash deposits of more than $10,000 to a complex regulatory framework requiring financial institutions to conduct due diligence on customers and to seek out and report suspicious transactions. The European Union and other jurisdictions have adopted similar measures.

Know Your Customer

For banks, compliance starts with verifying the identity of new clients, a process sometimes called Know Your Customer (KYC). In addition to establishing the customer’s identity, banks are required to understand the nature of a client’s activity and verify deposited funds are from a legitimate source.

The KYC process also requires banks and brokers to screen new customers against lists of crime suspects, individuals and companies under economic sanctions, and “politically exposed persons”—foreign public officials, their family members and close associates.

Money laundering can be divided into three steps:

• Deposit of illicit funds into the financial system
• Transactions designed to conceal the illicit origin of the funds, known as “layering”
• Use of laundered funds to acquire real estate, financial instruments or commercial investments

The KYC process aims to stop such schemes at the first deposit window.

Customer Due Diligence

Customer due diligence is integral to the KYC process, for example by ensuring the information a potential customer provides is accurate and legitimate. But it is also a constant process extending to customers old and new, and their transactions.

Customer due diligence requires ongoing assessment of the risk of money laundering posed by each client and the use of that risk-based approach to conduct closer due diligence for those identified as higher non-compliance risks. That includes identifying customers as they are added to sanctions and other AML lists.

According to the U.S. Treasury’s Financial Crimes Enforcement Network, the four core requirements of customer due diligence in the U.S. are:

• Identifying and verifying the customer’s identity
• Identifying and verifying the identity of beneficial owners with a stake of 25% or more in a company opening an account
• Understanding the nature and purpose of customer relationships to develop customer risk profiles
• Conducting ongoing monitoring to identify and report suspicious transactions and update customer information 

Customer due diligence seeks to detect money laundering strategies including layering and structuring, also known as “smurfing”—the breaking up of large money laundering transactions into smaller ones to evade reporting limits and avoid scrutiny.

One rule in place to foil layering is the AML holding period, which requires deposits to remain in an account for a minimum of five trading days before they can be transferred elsewhere.

Financial institutions are required to develop and implement a written AML compliance policy, which much be approved in writing by a member of senior management and overseen by a designated AML compliance officer. These programs must specify “risk-based procedures for conducting ongoing customer due diligence” and conduct “ongoing monitoring to identify and report suspicious transactions.”

History of Anti Money Laundering

Efforts to police illicit gains have a history stretching back centuries, while the term “money laundering” is only about 100 years old and in wide use for less than 50.

The first major piece of U.S. AML legislation was the 1970 Bank Secrecy Act, passed in part to thwart organized crime. In addition to requiring banks to report cash deposits of more than $10,000, the legislation also required banks to identify individuals conducting transactions and to maintain records of transactions. The U.S. Supreme Court upheld the Bank Secrecy Act’s constitutionality in 1974, the same year “money laundering” entered wide use amid the Watergate scandal.

Additional legislation passed in the 1980s amid increased efforts to fight drug trafficking, in the 1990s to expand financial monitoring and in the 2000s to cut off funding for terrorist organizations.

Anti-money laundering assumed greater global prominence in 1989, when a group of countries and international organizations formed the Financial Action Task Force (FATF). Its mission is to devise international standards to prevent money laundering and promote their adoption. In October 2001, following the 9/11 terrorist attacks, FATF expanded its mandate to include combating terrorist financing.

Another important organization in the fight against money laundering is the International Monetary Fund (IMF). Like the FATF, the IMF has pressed its member countries to comply with international standards to thwart terrorist financing.

The United Nations included AML provisions in its 1998 Vienna Convention addressing drug trafficking, the 2001 Palermo Convention against international organized crime and the 2005 Merida Convention against corruption.

The Anti-Money Laundering Act of 2020, passed in early 2021, was the most sweeping overhaul of U.S. AML regulations since the Patriot Act of 2001. The 2021 legislation included the Corporate Transparency Act, which made it harder to use shell companies to evade anti-money laundering and economic sanctions measures.

The legislation also subjected cryptocurrency exchanges as well as arts and antiquities dealers to the same customer due diligence requirements as financial institutions.

What Is Annuity Due?

An annuity due is an annuity whose payment is due immediately at the beginning of each period. A common example of an annuity due payment is rent, as landlords often require payment upon the start of a new month as opposed to collecting it after the renter has enjoyed the benefits of the apartment for an entire month.

How Annuity Due Works

An annuity due requires payments made at the beginning, as opposed to the end, of each annuity period. Annuity due payments received by an individual legally represent an asset. Meanwhile, the individual paying the annuity due has a legal debt liability requiring periodic payments.

Because a series of annuity due payments reflect a number of future cash inflows or outflows, the payer or recipient of the funds may wish to calculate the entire value of the annuity while factoring in the time value of money. One can accomplish this by using present value calculations.

A present value table for an annuity due has the projected interest rate across the top of the table and the number of periods as the left-most column. The intersecting cell between the appropriate interest rate and the number of periods represents the present value multiplier. Finding the product between one annuity due payment and the present value multiplier yields the present value of the cash flow.

A whole life annuity due is a financial product sold by insurance companies that require annuity payments at the beginning of each monthly, quarterly, or annual period, as opposed to at the end of the period. This is a type of annuity that will provide the holder with payments during the distribution period for as long as they live. After the annuitant passes on, the insurance company retains any funds remaining.

Annuity Due vs. Ordinary Annuity

An annuity due payment is a recurring issuance of money upon the beginning of a period. Alternatively, an ordinary annuity payment is a recurring issuance of money at the end of a period. Contracts and business agreements outline this payment, and it is based on when the benefit is received. When paying for an expense, the beneficiary pays an annuity due payment before receiving the benefit, while the beneficiary makes ordinary due payments after the benefit has occurred.

The timing of an annuity payment is critical based on opportunity costs. The collector of the payment may invest an annuity due payment collected at the beginning of the month to generate interest or capital gains. This is why an annuity due is more beneficial for the recipient as they have the potential to use funds faster. Alternatively, individuals paying an annuity due lose out on the opportunity to use the funds for an entire period. Those paying annuities thus tend to prefer ordinary annuities.

Examples of Annuity Due

An annuity due may arise due to any recurring obligation. Many monthly bills, such as rent, car payments, and cellphone payments, are annuities due because the beneficiary must pay at the beginning of the billing period. Insurance expenses are typically annuities due as the insurer requires payment at the start of each coverage period. Annuity due situations also typically arise relating to saving for retirement or putting money aside for a specific purpose.

How to Calculate the Value of an Annuity Due

The present and future values of an annuity due can be calculated using slight modifications to the present value and future value of an ordinary annuity.

Present Value of an Annuity Due

The present value of an annuity due tells us the current value of a series of expected annuity payments. In other words, it shows what the future total to be paid is worth now.

Calculating the present value of an annuity due is similar to calculating the present value of an ordinary annuity. However, there are subtle differences to account for when annuity payments are due. For an annuity due, payments are made at the beginning of the interval, and for an ordinary annuity, payments are made at the end of a period. The formula for the present value of an annuity due is:

With:

• C = Cash flows per period
• i = interest rate
• n = number of payments

Let’s look at an example of the present value of an annuity due. Suppose you are a beneficiary designated to immediately receive $1000 each year for 10 years, earning an annual interest rate of 3%. You want to know how much the stream of payments is worth to you today. Based on the present value formula, the present value is $8,786.11.

Future Value of an Annuity Due

The future value of an annuity due shows us the end value of a series of expected payments or the value at a future date.

Just as there are differences in how the present value is calculated for an ordinary annuity and an annuity due, there are also differences in how the future value of money is calculated for an ordinary annuity and an annuity due. The future value of an annuity due is calculated as:

Using the same example, we calculate that the future value of the stream of income payments to be $11,807.80.

Annuity Due FAQs

Which Is Better, Ordinary Annuity or Annuity Due?

Whether an ordinary annuity or an annuity due is better depends on whether you are the payee or payer. As a payee, an annuity due is often preferred because you receive payment up front for a specific term, allowing you to use the funds immediately and enjoy a higher present value than that of an ordinary annuity. As a payer, an ordinary annuity might be favorable as you make your payment at the end of the term, rather than the beginning. You are able to use those funds for the entire period before paying.

Often, you are not afforded the option to choose. For example, insurance premiums are an example of an annuity due, with premium payments due at the beginning of the covered period. A car payment is an example of an ordinary annuity, with payments due at the end of the covered period.

What Is an Immediate Annuity?

An immediate annuity is an account, funded with a lump sum deposit, that generates an immediate stream of income payments. The income can be for a stated amount (e.g., $1,000/month), a stated period (e.g., 10 years), or a lifetime.

How Do You Calculate the Future Value of an Annuity Due?

The future value of an annuity due is calculated using the formula:

where

• C = cash flows per period
• i = interest rate
• n = number of payments

What Does Annuity Mean?

An annuity is an insurance product designed to generate payments immediately or in the future to the annuity owner or a designated payee. The account holder either makes a lump sum payment or a series of payments into the annuity and can either receive an immediate stream of income or defer receiving payments until some time in the future, usually after an accumulation period where the account earns interest tax-deferred.

What Happens When an Annuity Expires?

Once an annuity expires, the contract terminates and no future payments are made. The contractual obligation is fulfilled, with no further duties owed from either party.

The Bottom Line

An annuity due is an annuity with payment due or made at the beginning of the payment interval. In contrast, an ordinary annuity generates payments at the end of the period. As a result, the method for calculating the present and future values differ. A common example of an annuity due is rent payments made to a landlord, and a common example of an ordinary annuity includes mortgage payments made to a lender. Depending on whether you are the payer or payee, the annuity due might be a better option.

What Is Antitrust?

Antitrust laws are regulations that encourage competition by limiting the market power of any particular firm. This often involves ensuring that mergers and acquisitions don’t overly concentrate market power or form monopolies, as well as breaking up firms that have become monopolies.

Antitrust laws also prevent multiple firms from colluding or forming a cartel to limit competition through practices such as price fixing. Due to the complexity of deciding what practices will limit competition, antitrust law has become a distinct legal specialization.

Understanding Antitrust

Antitrust laws are the broad group of state and federal laws that are designed to make sure businesses are competing fairly. The “trust” in antitrust refers to a group of businesses that team up or form a monopoly to dictate pricing in a particular market.

Supporters say antitrust laws are necessary and that competition among sellers gives consumers lower prices, higher-quality products and services, more choices, and greater innovation. Most people agree with this concept and the benefits of an open marketplace, although there are some who claim that allowing businesses to compete as they see fit would ultimately give consumers the best prices.

The Antitrust Laws

The Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the key laws that set the groundwork for antitrust regulation. Predating the Sherman Act, the Interstate Commerce Act was also beneficial in establishing antitrust regulations, although it was less influential than some of the others.

Congress passed the Interstate Commerce Act in 1887 in response to growing public demand that railroads be regulated. Among other requirements, the law ordered railroads to charge a fair fee to travelers and post those fees publicly. It was the first example of antitrust law but was less influential than the Sherman Act, passed in 1890.

The Sherman Act outlawed contracts and conspiracies restraining trade and/or monopolizing industries in an attempt to stop competing individuals or businesses fixing prices, dividing markets, or attempting to rig bids. The Sherman Act laid out specific penalties and fines for violating the terms.

In 1914, Congress passed the Federal Trade Commission Act, banning unfair competition methods and deceptive acts or practices. The Clayton Act was also passed in 1914, addressing specific practices that the Sherman Act does not ban. For example, the Clayton Act prohibits appointing the same person to make business decisions for competing corporations.

Special Considerations

The Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) are tasked with enforcing federal antitrust laws. In some cases, these two authorities may also work with other regulatory agencies to ensure that certain mergers fit the public interest.

The FTC mainly focuses on segments of the economy where consumer spending is high, including healthcare, drugs, food, energy, technology, and anything related to digital communications. Factors that could spark an FTC investigation include premerger notification filings, certain consumer or business correspondence, congressional inquiries, or articles on consumer or economic subjects.

If the FTC thinks that a law has been violated, the agency will try to stop the questionable practices or find a resolution to the anticompetitive portion of, say, a proposed merger between two competitors. If no resolution is found, the FTC may put out an administrative complaint and/or pursue injunctive relief in federal court.

The FTC might also refer evidence of criminal antitrust violations to the DOJ. The DOJ has the power to impose criminal sanctions and holds sole antitrust jurisdiction in certain sectors, such as telecommunications, banks, railroads, and airlines.

Major Example of Antitrust Law

In January 2023, the DOJ and eight states filed an antitrust lawsuit against Alphabet’s Google, alleging that the search giant has illegal monopolization of the digital advertising business. “Today’s complaint alleges that Google has used anticompetitive, exclusionary, and unlawful conduct to eliminate or severely diminish any threat to its dominance over digital advertising technologies,” the government agency said.

The filing, which seeks to make Google divest parts of its advertising business, alleges that the company has used acquisitions as a strategy for “neutralizing or eliminating” rivals and forces advertisers to use its products by making competitors’ products difficult to use. The complaint claims that the company’s monopolistic practices curtail innovation, raise advertising fees, and prevent small businesses and publishers from growing.

Google’s advertising business has come under fire from critics who argue that the search giant controls both the supply and demand sides of the digital advertising market. The company provides tools that help websites offer ad space and that assist advertisers in placing online ads. The suit alleges that Google’s dominance in the market allows it to pocket 30 cents of each dollar that advertisers spend using its suite of advertising tools.

The lawsuit marks the second federal antitrust complaint against Google in three years. Under the former Trump administration, the DOJ filed a lawsuit in October 2020, accusing the tech giant of using its monopoly to reduce competition through exclusionary agreements. That case is expected to go to trial this fall.

Google responded to the suit, saying the DOJ was attempting to intervene in the free market. “Today’s lawsuit from the Department of Justice attempts to pick winners and losers in the highly competitive advertising technology sector,” Google Global Ads Vice President Dan Taylor said in a statement.

The Bottom Line

Antitrust laws regulate the concentration of economic power to prevent companies from price colluding or creating monopolies. Proponents of antitrust laws argue that they keep consumer prices lower and foster innovation through increased competition. Critics say antitrust regulations intervene in the free market and reduce efficiency.

Antitrust laws are enforced by the FTC and DOJ, with the agencies focusing on areas of the economy that receive significant consumer spending, such as technology, healthcare, pharmaceuticals, and communications. Typically, antitrust investigations arise from premerger notification filings, congressional inquiries, or consumer and business correspondence.