Your Ask Joey ™ Answer

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.

Back To All Questions

You might also be interested in...

  • Discontinued Operations on the FAR CPA Exam

    Overview of Discontinued Operations In financial reporting, discontinued operations refer to a component of a company’s core business or product line that have been divested or shut down. Discontinued operations will be reported (net of tax) separately from continuing operations on the income statement. The reason that discontinued operations are reported separately is so that...

  • Equity Method Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on the equity method, please click the link below to download the Excel workbook: Equity Method Lecture Example

  • How Hard is the CPA Exam?

    So you’re thinking about taking the CPA exam? Whether you have a dream of becoming a tax advisor, feel as though you need public accounting experience, or just want to solidify your business acumen, the CPA license is one of the most prestigious and well respected licenses in the business world. The exam itself is...