Accumulated Other Comprehensive Income
Accumulated other extensive income (OCI) incorporates unrealized gains and losses reported in the equity section of the balance sheet that are netted below retained earnings. Other comprehensive income can comprise of gains and losses on certain types of investments, pension plans, and hedging transactions. It is excluded from net income in light of the fact that the gains and losses have not yet been realized. Investors checking on a company's balance sheet can utilize the OCI account as a barometer for impending dangers or bonuses to net income.
Other Comprehensive Income versus Realized Income
An investment must have a buy transaction and a sell transaction to understand a gain or loss. On the off chance that, for instance, an investor buys IBM common stock at $20 per share and later sells the shares at $50, the owner has a realized gain for every share of $30. Realized gains and losses are reported on the income statement.
An unrealized gain or loss means that no sell transaction has happened. Other complete income reports unrealized gains and losses for certain investments in view of the fair value of the security as of the balance sheet date. If, for instance, the stock was purchased at $20 per share, and the fair market value is presently $35 per share, the unrealized gain is $15 per share.
Companies can assign investments as [available for sale](/ready to move security), held to maturity, or trading securities. Unrealized gains and losses are reported in OCI for a portion of these securities, so the financial statement reader knows about the potential for a realized gain or loss on the income statement down the road.
Types of Accumulated Other Comprehensive Income
Unrealized gains and losses connecting with a company's pension plan are commonly introduced in accumulated other extensive income (OCI). Companies have several types of obligations for funding a pension plan. A defined benefit plan, for instance, requires the employer to plan for specific payments to retired people in later years. In the event that the assets invested in the plan are not adequate, the company's pension plan liability increments. A company's liability for pension plans increments when the investment portfolio perceives losses. Retirement plan expenses and unrealized losses might be reported in OCI. When the gain or loss is realized, the amount is renamed from OCI to net income. OCI additionally incorporates unrealized gains or losses connected with investments. For instance, a large unrealized loss from bond holdings today could mean something bad on the off chance that the bonds are approaching maturity.
Notwithstanding investment and pension plan gains and losses, OCI incorporates hedging transactions a company performs to limit losses. This incorporates foreign currency exchange hedges that aim to reduce the risk of currency changes. A multinational company that must deal with various currencies might require a company to hedge against currency vacillations, and the unrealized gains and losses for those holdings are posted to OCI.
Features
- Accumulated other extensive income (OCI) incorporates unrealized gains and losses that are reported in the equity section of the balance sheet.
- Accumulated other far reaching income is shown on the balance sheet in certain cases to alert financial statement users to a potential for a realized gain or loss on the income statement down the road.
- An unrealized gain or loss happens when an investment, pension plan, or hedging transaction has appreciated or depreciated in fair value, however a sale transaction has not yet happened for the gain or loss to be realized.
