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A general ledger account called accumulated other comprehensive income (AOCI) is used to track changes in the fair value of specific assets and liabilities that are not included in net income.
The term "AOCI" refers to the aggregate amount of other comprehensive income (OCI) items and is found in the equity section of the balance sheet. According to generally accepted accounting principles (GAAP) and international financial reporting standards, OCI items are revenues, expenses, gains, and losses that are not included in net income (IFRS).
- Unrealized gains and losses on available-for-sale securities: These are changes in the fair value of investments that are not held for trading or held to maturity. They are reported in AOCI until the securities are sold, at which point the gains or losses are realized and transferred to net income.
- Unrealized gains and losses on derivative instruments: These are changes in the fair value of derivatives that are designated as cash flow hedges or net investment hedges. They are reported in AOCI until the hedged item affects net income, at which point the gains or losses are reclassified to net income.
- Foreign currency translation adjustments: These are changes in the value of foreign subsidiaries' assets and liabilities due to fluctuations in exchange rates. They are reported in AOCI until the subsidiary is sold or liquidated, at which point the adjustments are realized and transferred to net income.
- Pension plan adjustments: These are changes in the value of pension plan assets and liabilities due to actuarial gains and losses, prior service costs, and amortization of net transition obligations. They are reported in AOCI until they are amortized to net income over time.
The following is an example of how AOCI is presented on the balance sheet:
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Users of financial statements should pay close attention to the AOCI account since it contains data on how OCI items may affect net income in the future. For instance, a substantial unrealized gain on a firm's assets that are available for sale could mean that the company will report a greater net income when it sells those securities. On the other hand, if a corporation has a significant foreign currency translation adjustment, it can be a sign that it will experience a foreign exchange loss when selling its overseas subsidiary.
