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What is the reason behind Unrealized gain or loss on trading securities being reported on the income statement while AFS securities are included in OCI?

The reason unrealized trading gains or losses are recorded in the income statement while AFS (available-for-sale) security gains and losses are reported in OCI is due to intent. In other words, “why did Management purchase the security in the first place?” 

When the security is classified as trading, it means that management only intends to hold it for a short period of time (typically less than a year). So if the security has an unrealized loss and Management is intending to sell it soon, we want to reflect that unrealized loss in the income statement since it will likely become a realized loss shortly.

For AFS securities, Management would typically plan to hold the security for a longer period of time. This doesn’t necessarily mean they would hold the security until maturity (if it is a debt security), but at least longer than one year. Since that is the case, any unrealized activity doesn’t need to yet be reflected in the income statement since the security is not expected to be sold in the short-term.


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