Accumulated other comprehensive income (OCI) includes unrealized gains and losses reported in the equity section of the balance sheet that are netted below-retained earnings. Other comprehensive income can consist of gains and losses on certain types of investments, pension plans, and hedging transactions. It is excluded from net income because the gains and losses have not yet been realized. Investors reviewing a company's balance sheet can use the OCI account as a barometer for upcoming threats or windfalls to net income.

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

An investment must have a buy transaction and a sell transaction to realize a gain or loss. If, for example, an investor buys IBM common stock at $20 per share and later sells the shares at $50, the owner has a realized gain per share of $30. Realized gains and losses are reported on the income statement.

An unrealized gain or loss means that no sell transaction has occurred. Other comprehensive income reports unrealized gains and losses for certain investments based on the fair value of the security as of the balance sheet date. If, for example, the stock was purchased at $20 per share, and the fair market value is now $35 per share, the unrealized gain is $15 per share.

Companies can designate investments as available for sale, held to maturity, or trading securities. Unrealized gains and losses are reported in OCI for some of these securities, so the financial statement reader is aware of 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 relating to a company's pension plan are commonly presented in accumulated other comprehensive income (OCI). Companies have several types of obligations for funding a pension plan. A defined benefit plan, for example, requires the employer to plan for specific payments to retirees in future years. If the assets invested in the plan are not sufficient, the company's pension plan liability increases. A firm's liability for pension plans increases when the investment portfolio recognizes losses. Retirement plan expenses and unrealized losses may be reported in OCI. Once the gain or loss is realized, the amount is reclassified from OCI to net income. OCI also includes unrealized gains or losses related to investments. For example, a large unrealized loss from bond holdings today could spell trouble if the bonds are nearing maturity.

In addition to investment and pension plan gains and losses, OCI includes hedging transactions a company performs to limit losses. This includes foreign currency exchange hedges that aim to reduce the risk of currency fluctuations. A multinational company that must deal with different currencies may require a company to hedge against currency fluctuations, and the unrealized gains and losses for those holdings are posted to OCI.