What is Accumulated Other Comprehensive Income (AOCI)?

What is Accumulated Other Comprehensive Income (AOCI)?

Accumulated other comprehensive income (AOCI) accumulates other comprehensive income (OCI), which records unrealized and realized gains and losses from certain transactions. Unrealized means paper gains and losses, which are usually not part of the net income calculation for a small business. Accumulated other comprehensive income is part of the shareholders’ equity section of the balance sheet, while other comprehensive income and net income are part of the income statement.

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.

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Breaking Down an AOCI Account

Several types of profits or losses are eligible to be listed in an Accumulated Other Comprehensive Income account. They include profits or losses related to foreign currency transactions, unrealized profits or losses that are yet to reach maturity, and costs related to operating a pension plan.

After a profit or loss is realized, it is moved from the AOCI account into the net income section of the company’s balance sheet. 

The use of AOCI accounts is mandatory, except in the case of privately-held companies and non-profit organizations. As long as financial statements don’t need to be submitted to outside parties, a company is not required to use AOCI accounts.

Regulations Surrounding AOCI Accounts

The Financial Accounting Standards Board (FASB) issued a new standard in 1997, requiring a comprehensive accounting of all income, including “other” or special types of income, specifically the profits and losses that are, in the present, not finalized. The ruling made AOCI accounts mandatory for all publicly-traded companies in the US.

Reporting Accumulated Other Comprehensive Income accounts thoroughly and accurately on a balance sheet is important because the gains and losses affect the balance sheet as a whole and the comprehensive income of a business.

The items, however, do not affect net income, retained earnings, or the income statement in terms of actual, finalized income until the transactions are completed and are moved to a different section of the balance sheet.