What is Accumulated Other Comprehensive Income
Accumulated other comprehensive income are expenses, gains and losses reported in the equity section of the balance sheet that are netted below net income. Other comprehensive income includes unrealized gains and losses on certain types of investments, as well as gains or losses on pension funds and foreign currency transactions.
BREAKING DOWN Accumulated Other Comprehensive Income
OCI is excluded from net income, because the transactions are unusual and are not generated through a company's normal business operations. In addition to investment and pension plan gains and losses, OCI includes hedging transactions a company performs to limit losses. By segregating OCI transactions from operating income, a financial statement reader can compare income between years and have more clarity about the sources of income.
The Differences Between Realized and Unrealized Gains and Losses
An investment must have a buy and a sell transaction to realize a gain or a loss. If, for example, an investor buys IBM common stock at $20 per share and sells the shares at $50, the owner has a $30 realized gain per share, which is reported in the income statement.
An unrealized gain or loss means that no sale transaction has occurred. OCI reports unrealized gains and losses for certain investments based on the fair value of the security. If IBM is purchased at $20 per share and the fair market value is $35 per share, for example, 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 realized gain or loss in the income statement down the road.
Factoring in Pension Plans
Companies have several types of obligations for funding a pension plan. Some of the income and loss activity for pension plans is reported in OCI. 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.
Examples of Other Risks
Investors reviewing a company's balance sheet can use the OCI account as a barometer for upcoming threats or windfalls to net income. For example, a large unrealized loss from bond holdings today could spell trouble if the bonds are nearing maturity. 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.