Relationship between accumulated other comp income and other comp income

[Digweed]

Can someone confirm the following:

Other comp income: difference between amortized cost and fair value for the year, used to calculate the the total comp income

Accumulated other comp income: difference between the amortized cost and fair value since inception (??), used to calculate equity

Thanks

[hemsky]

Hi yes, I think that's fair to say --

OCI is unrealized gains/losses

AOCI is the sum of OCIs from previous years like how Retained Earnings is the sum of Net Income from previous years.

[Digweed]

Thanks Hemsky. A follow up:

Can you have unrealized gain for a held to maturity asset?

Also investment income for bonds=
a) Held to maturity: coupon
b) Available for sale: coupon
c) Held for trading: coupon + change in fair value?

[PV Power]

I agree with you. Let's do an example with a bond available-for-sale,
Time 0 1 2 3
Amortized Cost 97 98 99 100
Fair Value 97 103 101 100
Net income 1 1 1
Retained earning 1 2 3
OCI 5 -3 -2
Acc. OCI 5 2 0

Now, if the bond is sold at t=2, then the Acc. OCI would be set to 0 and the OCI would be -5 for the year 2, because the gain is recognized in the net income (which would be 3 for year 2). At least, it's how I see it...

[hemsky]

Okay, I'm getting confused now...

Maybe OCI is just changes in fair value for AFS/held for trading, so that there's no OCI for held to maturity

So for OCI, I'm not sure if we really need to compare to amortized costs, or just simply take the change in fair value?

ex. AFS bond

Time 0 1 2 3
Fair Value 97 103 101 100 (market value of bond)
Net income 1 1 1 (coupon payments)
Retained earning 1 2 3
OCI 6 -2 -1 (change in fair value)
AOCI 6 4 3

If sell bond at t=2,
realized gain is 101-97=4
so net income = 1 coupon + 4 realized gain = 5
AOCI should reset to 0 which means OCI is -6
?

[Digweed]

Agreed that there is no OCI for Held to maturity. There is also no OCI for held for trading though.

I think looking at the difference between amortized/market or change in fair value should yield the same answer since the amortized cost is constant.

The one thing that I see different from you guys is the way the OCI is calculated on year of sale.

Hemsky's example: (if selling at year 2):
then net income = 1 + 4 =5 (Agreed)
OCI = - (101-97) = -4
Previous AOCI: 6
AOCI as a result of change in fair value: 6 - 2 = 4
AOCI as a result of selling: 4 - 4 = 0.

[PV Power]

Sorry, I didn't tell you my example was for a zero-coupon.
Hemsky is right if you assume the amortized cost as fixed for the term of the bond and $1 coupon.
However, the amortized cost is usually not fixed. The amortized cost gradually approach the face value of the bond (which I assume to be $100 at t=3). For AFS, the change in amortized cost (as well as coupon if any) are booked to net income. What I wanted to show by my example is that the OCI is not the change in FV in the year, it's the change of (FV - amortized cost), because the change in amortized cost is reflected in the net income.

[hemsky]

Hi yes my mistake -- I went back to re-read the Education Note on CICA 3855/1530 and it clearly states that for AFS, OCI is the difference between fair value and the amortized cost, and changes in amortized cost are booked in net income. Thanks for clearing that up!