What is Accumulated Other Comprehensive Income?
Accumulated Other Comprehensive Income (OCI) refers to unrealized gains and losses reported in the equity section of the balance sheet, net of retained earnings. OCI can include gains and losses from certain types of investments, pension plans, and hedging transactions. Since these gains or losses are unrealized, they are not included in net income. When investors review a company’s balance sheet, they can look at the OCI account as an indicator of potential future gains or losses impacting net income.
Key Points
- Accumulated Other Comprehensive Income (OCI) includes unrealized gains and losses reported in the equity section of the balance sheet.
- Unrealized gains or losses occur when the fair value of investments, pension plans, or hedging transactions rises or falls, but no sale transactions have been made to realize those gains or losses.
- In certain circumstances, other comprehensive income displayed on the balance sheet informs financial statement users of potential realized gains or losses that may appear on the income statement in the future.
Difference Between Other Comprehensive Income and Realized Income
- Gains or losses from investments are realized only when there are buy and sell transactions. For instance, if an investor buys IBM common stock at $20 per share and sells it at $50 per share, the owner realizes a gain of $30 per share, which is reported as realized gains or losses on the income statement.
- Unrealized gains or losses occur when no sale transactions have taken place. OCI reports the unrealized gains and losses of certain investments based on their fair value as of the balance sheet date. For example, if a stock is purchased at $20 per share and its current open market value is $35 per share, the unrealized gain is $15 per share.
- Companies can designate investments as available-for-sale, held-to-maturity, or trading securities. The unrealized gains and losses from some of these securities are reported in OCI so that financial statement users are aware of potential future gains or losses that may be realized on the income statement.
Types of Accumulated Other Comprehensive Income
Unrealized gains or losses related to an enterprise's pension plans are often represented as accumulated other comprehensive income. Enterprises have various obligations to fund pension plans. For instance, defined benefit plans require the employer to pay specific amounts to retirees over future years. If the investment plan assets are insufficient, the company's pension plan liabilities increase. When the investment portfolio experiences a loss, the company’s pension plan liability also increases. Pension plan expenses and unrealized losses can be reported as accumulated other comprehensive income and reclassified to net income once the gains or losses are realized. Accumulated other comprehensive income also includes unrealized gains or losses related to investments. For example, a significant unrealized loss in currently held bonds might pose a problem as those bonds approach maturity.
Besides investment and pension plan gains or losses, accumulated other comprehensive income also includes hedging transactions that companies undertake to limit losses, including foreign exchange hedging intended to reduce currency fluctuation risks. Multinational companies dealing with multiple currencies might need to hedge against exchange rate fluctuations, and the unrealized gains and losses of these hedge positions are also included in accumulated other comprehensive income.
