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What is accumulated other comprehensive income?
Accumulated other comprehensive income (AOCI) rounds up all financial gains and losses that are either unrealised or do not result from an entity’s income-producing activities. This value is usually found in the equity section of the balance sheet, as opposed to other comprehensive income (OCI) and net income which are reflected in the income statement.
What is accumulated other comprehensive income?
Accumulated other comprehensive income (AOCI) rounds up all financial gains and losses that are either unrealised or do not result from an entity’s income-producing activities. This value is usually found in the equity section of the balance sheet, as opposed to other comprehensive income (OCI) and net income which are reflected in the income statement.
Simply put, AOCI is made up of the previous years’ OCI plus or minus the current reporting year’s OCI.
While OCI and AOCI form part of an entity’s equity, it is not considered as income since its values do not affect the income for the previous and current reporting year.
What is other comprehensive income?
OCI lists an entity’s financial gains and losses that are considered non-owner changes to the owner’s equity. These are not included in the net income because they have yet to be realised.
Unrealised income refers to gains or losses that are only on paper and do not affect an entity’s actual finances for a reporting period.
Items that are usually declared in a comprehensive income statement but not in the income statement include:
- Unrealised gains or losses from investments that are generally classified as available for sale (bonds, shares, properties for sale, etc.)
- Losses or gains from foreign currency translation adjustments
- Gains or losses from retirement benefit plans
- Income produced outside of the usual income producing activities such as windfalls
OCI is added or deducted from the previous AOCI as long as it remains unrealised. Once the gains or losses are realised—for example, when a sale transaction is complete—the amount is no longer considered as OCI.
How to compute for AOCI
As mentioned earlier, AOCI is simply the accumulation of OCI.
Simply take the previous year’s AOCI and consider it as the starting balance then take all the OCI for the current reporting year and add or subtract the after-tax values on gains or losses.
Sample computation
For example, Bill owns $100,000 worth of shares in Company A in his self-managed super fund (SMSF) during the previous year. The shares were originally purchased for $75,000 3 years prior but, during the current financial year, Company A took a direct hit to its business and its share price plummeted to half its value. Bill decided not to sell in hopes he could at least gain back his principal investment.
The above example shows that Bill has a $50,000 loss in OCI for the current year because he still owns the shares.
Bill also has an $90,000 piece of land he was unable to sell, especially after the property’s market value increased to $105,000.
This translates to the following values:
| Previous Year | Gain/(Loss) | Current Year | |
| Starting balance | — | — | $190,000 |
| Company A Shares | $100,000 | ($50,000) | $50,000 |
| Property | $90,000 | $15,000 | $105,000 |
| AOCI/Final balance | $190,000 | ($35,000) | $155,000 |
Bill’s final AOCI for the current reporting year is $155,000 after accounting for the gains and losses from his unsold assets which incurred unrealised gains and losses.
If Bill had sold his shares for $50,000 after incurring such a huge loss, his current year AOCI would be $205,000—the previous year’s end balance of $190,000 plus the $15,000 unrealised gain from the increase in property value.
Where did the gain or loss from the sale of Company A shares go? Well, since the $50,000 gain/loss was realised from the sale, it now forms part of Bill’s current year assessable income.
What makes accumulated other comprehensive income important?
AOCI are paper gains or losses that don’t directly affect actual income, so why is this value necessary when computing for equity?
The AOCI forms part of an entity’s retained earnings and shows whether an entity or investment is profitable or not. The AOCI can also serve as a red flag if an investment registers more unrealised losses than gains, especially if it is about to reach maturity.
Simply put, if an entity keeps on incurring unrealised losses to a point where it exceeds the gains, it may cease being profitable. This would happen if the losses are realised when a sale transaction concludes or an investment matures at a discount.
Sample situation: the effect of AOCI
Going back to the example above, when Bill reviews Company A’s financial statement, he finds out that the more recent loss was due to a typhoon that critically damaged a major manufacturing plant before the financial year closed. Company reports say it would take at least 6 months to get operations back in full swing again once reconstruction commences.
What this means for Bill is that there is a big chance Company A would divert most of its income to rebuilding instead of paying out dividends and that the company’s share value may stay low for a while. Bill could then decide whether his investment in Company A is still profitable for him, especially if he wanted dividend payouts.
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