Accumulated other comprehensive income definition
/What is Accumulated Other Comprehensive Income?
Accumulated other comprehensive income is a general ledger account that is classified within the equity section of the balance sheet. It is used to accumulate unrealized gains and unrealized losses on those line items in the income statement that are classified within the other comprehensive income category. A transaction is unrealized when it has not yet been settled. Thus, if you invest in a bond, you would record any gain or loss at its fair value in other comprehensive income until the bond is sold, at which time the gain or loss would be realized.
Once a gain or loss is realized, it is shifted out of the accumulated other comprehensive income account, and instead appears within the line items that summarize into net income. Thus, the realization of a gain or loss effectively shifts the related amount from the accumulated other comprehensive income account to the retained earnings account. This means that an investor can use accumulated other comprehensive income information to better understand the nature of gains and losses that will eventually appear in net income.
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Contents of Accumulated Other Comprehensive Income
Other comprehensive income is comprised of the following items:
Foreign Currency Items
Foreign currency translation adjustments
Gains and losses on intra-company foreign currency transactions where settlement is not planned in the foreseeable future
Hedging Items
Gains and losses on derivative instruments that are cash flow hedges
Gains and losses on foreign currency translation adjustments that are net investment hedges in a foreign entity
Investment Items
Unrealized holding gains and losses on available-for-sale debt securities
Unrealized holding gains and losses resulting from the transfer of a debt security from the held-to-maturity classification to the available-for-sale classification
Amounts recognized in other comprehensive income for debt securities classified as available-for-sale and held-to-maturity, if the impairment is not recognized in earnings
Subsequent changes in the fair value of available-for-sale debt securities that had previously been written down as impaired
Postretirement Benefit Items
Gains and losses from pension or postretirement benefits that have not been recognized as a component of net periodic benefit cost
Prior service costs or credits associated with pension or postretirement benefits
Transition assets or obligations linked to pension or postretirement benefits that have not been recognized as a component of net periodic benefit cost
Other
Changes in fair value that are attributable to the credit risk of specific liabilities for which the fair value option has been selected
Example of Accumulated Other Comprehensive Income
An example of the presentation of accumulated other comprehensive income within the equity section of the balance sheet is:
| Shareholders' equity | |
| Common stock, $0.01 par value, 100,000 shares authorized, 52,000 shares issued | $500,000 |
| Additional paid-in capital | 200,000 |
| Retained earnings | 1,100,000 |
| Accumulated other comprehensive income: | |
| Net unrealized loss on available-for-sale securities | (50,000) |
| Unrealized loss from foreign currency translation | (15,000) |
| Total shareholders' equity | $1,735,000 |
When to Use Accumulated Other Comprehensive Income
While the use of accumulated other comprehensive income is required, a privately-held business that does not issue its financial statements to outside parties may elect to avoid its use. If so, and the entity later chooses to have its financial statements audited, the effects of other comprehensive income should be retroactively made in the audited financial statements.
Nonprofit entities do not use the other comprehensive income concept, so the accumulated other comprehensive income account does not appear in their general ledgers or financial statements.