This course is the fourth course in a five-course Financial Reporting Specialization. This course focuses on the recognition, measurement and subsequent accounting for equity, pensions, share-based compensation and cash flows utilizing the FASB Accounting Standards Codification and other resources.
Equity: Accumulated Other Comprehensive Income
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來自 University of Illinois at Urbana-Champaign 的課程
Accounting Analysis II: Accounting for Liabilities and Equity
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從本節課中
Module 3 Equity
In this module, the conversation changes from liabilities to equity. You will learn how to account for the issuance of common stock and basic transactions such as cash dividends, stock dividends, stock splits, and the purchase and reissuance of treasury stock. The module also includes a discussion of preferred stock and accumulated other comprehensive income.
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John HeppClinical Assistant Professor of Accountancy
Department of Accountancy
Welcome back. In this lesson,
we're going to talk about accumulated other comprehensive income.
Now, other comprehensive income is a very difficult topic for a lot of people.
You will find quite a few accountants who think
that the other comprehensive income shouldn't even exist.
It should just all be part of net income.
You aren't have others especially the users of the financial statements only,
who insist on retaining this concept of
other comprehensive income in the financial statements.
The FASB hasn't really defined other comprehensive income and
they've been reluctant to make any measure that could legitimize it.
The ISP, however, is working on
a new conceptual framework that may start to
explain when you would use other comprehensive income.
A general purpose of this is when you want to have the balance sheet perhaps at
fair value but the income statement add an amortized cost basis,
other comprehensive income becomes the reconciling item between the two.
Sometimes, it's recycled, which means that at some point in the future the amounts we
put into other comprehensive income coming out in
effect net income and sometimes they are not.
Sometimes, they go into accumulated other comprehensive income and they more or
less stay there until they're offset in the future.
Let's take a look at a couple of different instances of that.
So, here's some examples of items that go into accumulated other comprehensive income.
Required discussion on defined benefit plan accounting,
remeasurement gains and losses.
On the obligation and differences between
the expected and actual amount of
plan assets both went into accumulated other comprehensive income.
The expectation frankly in both of those is that they will never recycle out of there.
Now, the prior service cost on
the other hand when it was recognized in other comprehensive income,
there was an expectation that in future periods, if you recall,
we would amortize those amounts out of
accumulated other comprehensive income into income expense.
Those will be an example of recycling.
There's also changes in the fair value of
debt investments if they recognize at fair value through other comprehensive income.
Again, those amounts are not always expected to recycle.
Changes in the fair value of own debt due to
entity-specific factors when the fair value option is elected,
we talked about this in the first part of this course.
There's changes in the fair value of derivatives and cash flow hedges.
These are amounts that are expected to recycle
when the hedge transaction affects net income.
Currency translation adjustments when a foreign currency is
a functional currency and hedging gains and losses.
Now, those last ones generally do not recycle either.
A point thing to remember,
other comprehensive income is net of tax.
So, it's usually recognized with a deferred tax asset or liability,
the net amount is then closed into
accumulated other comprehensive income at the end of the accounting period.
And again, accumulated other comprehensive income is a component of equity.
The same as retained earnings,
the same as APIC,
your additional paid in capital,
the same as common stock,
the same as preferred stock t,
he same as warrants and options.
So, some of the amounts again are not going to reclassify out of OCI,
they'll just be offset in future periods,
but some amounts do reclassify out of OCI.
Some of them are due to the realization of previous amounts that are
recognized in OCI and these are referred to as reclassification entries.
So, if I've recognized a gain through fair value through other comprehensive income,
and I subsequently sell the instrument for example,
I may reclassify any amounts previously recognized in other comprehensive income,
into net income, through another entry to OCI.
Now, this is a complicated thing that a lot of people really have
a hard time getting their head around. Let's look through it.
Reclassification entries, again, they go through
OCI and are not a direct debit or credit to AOCI.
You do not directly debit equity for these amounts,
you treat AOCI as an account that will
be accessed by entries through other comprehensive income.
So, for example, Laramie Cattle Company has an investment in
a debt instrument that it accounts for as fair value through other comprehensive income.
It was purchased on October first for $100.
The fair value at the end of the year is $120,
and then they sell it on January 31st for $110,
tax rates 25 percent.
That's a fairly common type of entry.
So, here's our journal entries in year one.
So, we purchased it for a hundred dollars,
and the fair value at 12/31 is $120.
So, we're going to debit the investment in the fair value
OCI debt instrument for $20 to record the increase in the fair value of the instrument.
And we'll credit an OCI gain.
But we're going to credit it net of tax so we'll have
a deferred tax credit for five dollars which is equal to the 25 percent tax rate,
and an OCI gain of $15 net of tax.
And then we'll also close OCI at
the end of the year into accumulated other comprehensive income.
So, now we're going to debit that gain to close the account,
it's a temporary account, and credit accumulated other comprehensive income.
My accumulated other comprehensive income is a component of equity,
I've now recognized this an equity net of tax.
So, let's look at the entries in year two.
In year two, recall that we have recorded this investment now at $120,
we paid $100 for it.
We've sold it for $110.
So, I'm going to debit the account cash for 110,
and now I have to clear the rest of
the accounts in order to determine the gain or loss in the sale.
Well, one of them is going to be the fair value at OCI account and that's said, $120.
I've recorded this investment at $120,
I'm selling it at $110.
Now, what I did though is I wrote that investment up through OCI.
It's a fair value through OCI,
and I now have a balance and
accumulated other comprehensive income of $15 attributable to this investment.
I'm going to reclassify that gain by debiting OCI a loss,
and then I'm going to call the deferred tax amount for $5 as well.
Now, I'm left with a gain on the sale of $10.
Now, if you take a close look at this,
that gain is exactly my amortized cost gain because I bought it for $120,
I sold it for $110, I gain $10.
I achieved that result by recognizing the realized gain in year two by recycling,
reclassifying the entry out of other comprehensive income.
In year one, I recognized the $15 net gain in comprehensive income.
In year two, I had a loss in other comprehensive income of
$15 so net incomprehensive income in year two,
I have a gain of $10 in net income and a loss of
$15 in other comprehensive income so the net and comprehensive income,
the bottom line is a loss of five dollars in year two.
And this reflects fair value accounting in
comprehensive income and amortized cost accounting
in net income and that's a process that's been formerly known as recycling,
and formerly known as reclassification.
Now, I'm also then going to close that OCI loss into AOCI either
at the end of the quarter or
the end of the year and that will clear the amount out of AOCI.
I don't go directly to AOCI because if I did that,
it wouldn't show up in the statement of comprehensive income.
So, AOCI is kind of a complicated topic.
One thing to remember is that you're going to recognize
some amounts if an amount reclassifies,
you're going to recognize again it was potentially three times.
You're going to recognize that in OCI when it originally happens,
and when the amount is recognized in net income you will reclassify
the amount out of OCI and recognize it in net income.
The third time's the charm,
at which point you're done with it.
It's complicated accounting, it does achieve
the purpose of having the balance sheet at fair value,
comprehensive income at fair value, and net income,
and amortized cost which is a solution that is desired by many analysts and others.
It's complicated, there's not much we're going to be able to do about that.
AOCI and OCI seemed to be here to stay.
New standards continue to be issued that either expand the use of it,
for example the fair value of liabilities when you exercise the fair value option,
or continue the use of it,
the classification and measurement standard that was issued in 2016 and still continues
the notion that we have fair value through OCI so expect
this accounting to continue for the foreseeable future. Thank you.
