Accumulated Other Comprehensive Income Details

Accumulated other comprehensive income (AOCI) comprises items under the other comprehensive income category, including gains or losses from active investments, foreign currencies conversion, the costs of running pension plans, as well as hedging transactions. All of these items’ profits or gains are unrealized, meaning they don’t amount to real gains or losses to the company just yet, but certainly will. What this means is that the transactions related to the gains or losses haven’t occurred. Once any transaction happens, the profit or loss becomes realized and reported on the income statement.

Other comprehensive income doesn’t affect the net income of a company’s balance sheet during the current period. However, the company still needs to include AOCI on the balance sheet located just below retained earnings. Once profit or loss is associated with the item, the item is moved from the AOCI account into the net income account.

Types of investments under the other comprehensive income category may vary based on their designation. For instance, investment securities may be listed as available for sale, trading securities, or held to maturity. Security becomes available for purchase if the company intends to sell it before it reaches maturity or is holding it if it doesn’t have a maturity date. Held for trading security is an investment held for a short time (less than a year) before sold. If held to maturity, security is kept until they mature (e.g., bonds).

Example of Accumulated Other Comprehensive Income

One of the simplest examples of accumulated other comprehensive income is common stocks. Let’s say that you purchase a set of shares from a public company priced at $5 per share. In the future, if the price of the company’s share climbs to around $15 per share, then you would have an unrealized gain of $10 per share. Furthermore, if you manage to sell the share back at the same price, your gain is realized and enters your pocket.

The same is true for losses. If, unfortunately, the share price goes down to around $2.5 per share, then it becomes your unrealized loss. By selling the stock at the same price, your loss becomes realized. The price of an open investment is known as fair value. The fair value of an investment is the basis for the value of accumulated other comprehensive income listed on the balance sheet, which represents unrealized gains and losses.

Types of Accumulated Other Comprehensive Income

As mentioned before, the types of accumulated other comprehensive income may vary. One example is hedging transactions a company undertakes to limit risks. Foreign currency conversion is quite common for multinational companies to consolidate income listed on the financial statements. To protect themselves against the fluctuations of the currency market, these companies need forex hedges. Doing this will ensure that any potential gains and losses are within their comfort zones.

Another example is a pension plan. Some pension plans require the employer to contribute a specific amount to the qualified employees’ goals. The employer-sponsored defined-benefit plan, for example, has a determined formula that takes the employer’s and, in some cases, the employee’s contribution regularly. The employer/company’s contribution defers—not paid until the employee retires. The deferred contribution becomes an unrealized loss if the assets invested in the plan are not sufficient.

History of Accumulated Other Comprehensive Income

For public companies, the act of listing the AOCI account on the balance sheet is mandatory. Meanwhile, other comprehensive income is thought to be an essential financial indicator of a company. In 1997, the Financial Accounting Standards Board (FASB) enforced the rule for companies to give a comprehensive accounting that includes all income, realized or not. That said, this rule doesn’t apply to privately-owned companies. Privately-owned companies don’t have an obligation to submit financial statements to third parties.