What Is Accumulated Other Comprehensive Income?
Let me explain what accumulated other comprehensive income, or OCI, really is. It's all the unrealized gains and losses that show up in the equity part of the balance sheet, netted right below retained earnings.
This OCI can come from gains and losses on specific investments, pension plans, and hedging deals. We keep it out of net income because those gains or losses aren't realized yet—they haven't actually happened in a way that affects cash flow.
If you're an investor looking at a company's balance sheet, you can use the accumulated OCI as a gauge for possible threats or bonuses coming to net income soon.
Key Takeaways
- Accumulated other comprehensive income (OCI) includes unrealized gains and losses that are reported in the equity section of the balance sheet.
- An unrealized gain or loss occurs when an investment, pension plan, or hedging transaction has appreciated or depreciated in fair value, but a sale transaction has not yet occurred for the gain or loss to be realized.
- Accumulated other comprehensive income is displayed on the balance sheet in some instances to alert financial statement users to a potential for a realized gain or loss on the income statement down the road.
Other Comprehensive Income vs. Realized Income
To understand this, you need to know the difference between other comprehensive income and realized income. For an investment to have a realized gain or loss, there has to be both a buy and a sell transaction. Say you buy IBM stock at $20 a share and sell it later at $50—you've got a realized gain of $30 per share, and that goes straight to the income statement.
But an unrealized gain or loss means no sell has happened yet. OCI reports those unrealized changes based on the fair value of the security at the balance sheet date. If you bought stock at $20 and it's now worth $35 at fair market value, that's an unrealized gain of $15 per share.
Companies classify investments as available for sale, held to maturity, or trading securities. For some of these, unrealized gains and losses go into OCI, so you as a reader know there might be a realized gain or loss hitting the income statement later.
Types of Accumulated Other Comprehensive Income
One common type in accumulated OCI is unrealized gains and losses from a company's pension plan. Companies have obligations to fund these plans, like in a defined benefit setup where they promise specific payments to retirees down the line. If the plan's investments aren't enough, the liability grows. When the portfolio takes losses, that increases the pension liability, and those expenses or unrealized losses show up in OCI. Once realized, they move from OCI to net income.
OCI also covers unrealized gains or losses on investments. For instance, a big unrealized loss on bonds could mean trouble if those bonds are close to maturing.
On top of that, OCI includes hedging transactions to limit losses, like foreign currency hedges to cut down on fluctuation risks. If a multinational company deals with multiple currencies, they might hedge, and the unrealized gains or losses from those go into OCI.
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