The aggregate of other comprehensive income (OCI) includes the unrealized gains and losses presented in the equity section of the balance sheet which are offset below retained earnings. Other comprehensive income can include gains and losses on certain types of investments, pension plans and hedging transactions. It is excluded from the net result because the gains and losses have not yet been realized. Investors examining a company’s balance sheet can use the OCI account as a barometer of future threats or shortfalls in net income.
Key points to remember
- The aggregate of other comprehensive income (OCI) includes unrealized gains and losses which are presented 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 to fair value, but a sale transaction has not yet occurred so that the gain or loss is realized.
- In some cases, the cumulative sum of other comprehensive income is displayed on the balance sheet to alert users of the financial statements to the potential for gain or loss realized on the income statement en route.
Other comprehensive income relative to realized income
An investment must have a buy transaction and a sell transaction to realize a gain or loss. If, for example, an investor purchases common shares of IBM at $ 20 per share and then sells the shares at $ 50, the owner realizes a gain per share of $ 30. Realized gains and losses are presented in the income statement.
An unrealized gain or loss means that no sales transaction has taken place. Other comprehensive income presents unrealized gains and losses on certain investments based on the fair value of the security at the balance sheet date. If, for example, the security was purchased for $ 20 per share and the fair market value is now $ 35 per share, the unrealized gain is $ 15 per share.
Companies can designate available-for-sale investments, held to maturity or securities trading. Unrealized gains and losses are reported in other comprehensive income for some of these securities, so that the reader of the financial statements is aware of the potential gain or loss realized on the income statement in the process.
Types of accumulated other comprehensive income
Unrealized gains and losses related to a company’s pension plan are generally presented in accumulated other comprehensive income (OCI). Companies have several types of bonds to fund a pension plan. A defined benefit plan, for example, requires the employer to plan specific payments to retirees in the coming years. If the assets invested in the plan are not sufficient, the liabilities of the company’s pension plan increase. A company’s liability for pension plans increases when the investment portfolio recognizes losses. Pension plan expenses and unrealized losses can be reported in other comprehensive income. Once the gain or loss has been realized, the amount is reclassified from other comprehensive income to net income. Other comprehensive income also includes unrealized gains or losses related to investments. For example, a large unrealized loss on bonds held today could cause problems if the bonds near their maturity.
In addition to gains and losses on investments and pension plans, other comprehensive income includes hedging that a business performs to limit losses. This includes currency hedges which aim to reduce the risk of currency fluctuations. A multinational enterprise dealing with different currencies may require that a company protect itself against currency fluctuations, and the unrealized gains and losses on these assets are recorded in other comprehensive income.