What happens if the unrealized loss for an AFS investment goes from temporary to other than temporary?
However, if the AFS investment has no change in value but management believes the loss is now other than temporary (i.e. permanent), then the unrealized loss should be reclassed to a realized loss. This means that the unrealized loss is removed from OCI and recorded as a realize loss in the income statement.
The journal entries below illustrate how a $10,000 temporary loss in Year 1 would be reclassified to an “other than temporary” loss in Year 2.
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What does “other than temporary” mean for an available-for-sale investment?
When the investment is classified as available-for-sale, then any unrealized losses are recorded to OCI because management believes the fair value will increase in the long term. Therefore, the loss is considered temporary. However, if management decides that the loss is “other than temporary”, that means that the decline in fair value is permanent, and […]