Other Comprehensive Income Statement

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  • #241213

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    Mogtaba Mohammed
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    Can you please explain to me (Reclassification adjustment for gains included in net income) ?

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  • #241216

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    Lynn Roden
    HOCK international

    Hello Mogtaba Mohammed,

    In the example in your book of  “Statements of Income and Comprehensive Income,” the company had some held-to-maturity debt securities that it sold before their maturity date. HTM debt securities are accounted for at amortized cost and are not adjusted to their fair value at each reporting date.

    The first thing the company needed to do was reclassify those debt securities from the HTM classification on their balance sheet to the Available-for-Sale debt securities classification. AFS securities are adjusted to their fair value at each reporting date, and the unrealized gain or loss is reported in Accumulated Other Comprehensive Income on the balance sheet.

    Because unrealized gains on AFS debt securities are reported in Accumulated Other Comprehensive Income on the balance sheet, the company needed to credit AOCI for the unrealized gain on the HTM securities when the securities were reclassified to AFS debt securities preparatory to selling them. Then, when the company sold those securities as AFS securities, it needed to reclassify the unrealized gain out of AOCI and over to the income statement as a realized gain.

    That is the reason you see 283 as an “unrealized gain on debt securities reclassified from HTM to AFS preparatory to selling,” followed by a negative 283 as a “reclassification adjustment” to move the gain to net income because it became a realized gain on AFS securities when they were sold. And realized gains are reported in the income statement.

    Lynn

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