If applicable, adjustments must be made to avoid double counting of comprehensive income items that are presented as part of net income in one period, and as part of other comprehensive income in that period or earlier periods. ASC 220 refers to such adjustments as reclassification adjustments.
EXAMPLE: In year 1, an entity records an unrealized gain on securities available for sale which is shown as part of stockholders’ equity and other compre-hensive income.
In year 2, the company sells the security which results in a realized gain on the income statement.
Conclusion. In year 2, the gain must be deducted from other comprehensive income to avoid including the gain in comprehensive income twice—once as a realized gain on the sale, and once as an unrealized holding gain.
Rules for Reclassification Adjustments
An entity shall present separately for each component of other comprehensive income:
• Current-period reclassifications out of accumulated other comprehensive income
• Other amounts of current-period other comprehensive income
The reclassification adjustment for foreign currency translation adjustments is limited to translation gains and losses realized upon sale or upon complete or substantially complete liquidation of an investment in a foreign entity.
An entity shall separately provide information about the effects on net income of significant amounts reclassified out of each component of accumulated other compre-hensive income, if those amounts are required under GAAP to be classified to net income in the same reporting period. An entity shall provide this information together, in one location, in either of the following ways:
• On the face of the statement where net income is presented
• As a separate disclosure in the notes to the financial statements
If an entity chooses to present information about the effects of significant amounts reclassified out of accumulated other comprehensive income on net income, on the face of the statement, the entity shall present parenthetically, by component of other comprehensive income, the effect of significant reclassification amounts on the respec-tive line items of net income.
An entity also shall present parenthetically the aggregate tax effect of all significant reclassifications on the line item for income tax benefit or expense in the statement where net income is presented. If an entity is unable to identify the line item of net income affected by any significant amount reclassified out of accumulated other com-prehensive income in a reporting period, the entity must follow the guidance for presentation in the notes.
If an entity chooses to present information about significant amounts reclassified out of accumulated other comprehensive income in the notes to the financial state-ments, it shall present the significant amounts by each component of accumulated other comprehensive income, and provide a subtotal of each component of comprehensive income.
The subtotals for each component shall agree with the other presentations. Both before-tax and net-of-tax presentations are permitted provided the entity complies with the other requirements.
For each significant reclassification amount, the entity shall identify, for those amounts that are required under other GAAP to be reclassified to net income, each line item affected by the reclassification on the statement where net income is presented.
For any significant reclassification for which other GAAP does not require that reclas-sification to net income, the entity shall cross-reference to the note where additional details about the effect of the reclassifications are disclosed.
Required Disclosures
An entity is required to disclose the effect of reclassifications on the line items in the statement in which net income is presented on either a before-tax or a net-of-tax basis consistent with the entity’s method of presentation for the line items in that statement.
In either case, the total for this disclosure should agree with the total amount of reclassifications for each component of other comprehensive income that complies with the presentation requirements.
EXAMPLE: The following example extracted from ASC 220 illustrates the application of the reclassification adjustment when presented on the face of the income statement.
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MODULE 2 - CHAPTER 5 - Comprehensive Income (ASC 220)
Facts. On December 31, 20X1, Company X purchases 1,000 shares of equity securities at $10 per share (total purchase price is $10,000). The securities are classified as available for sale.
Fair value of these securities at December 31, 20X3 and 20X2 follows:
Year End Fair value/ Total fair Total cost Unrealized 30% tax Unrealized
share value gain effect net gain
12-31-X2 $12 $12,000 $10,000 $2,000 $(600) $1,400
12-31-X3 15 15,000 10,000 5,000 (1,500) 3,500
• Federal and state tax rate is 30 percent.
• On December 31, 20X3, the securities were sold for $15,000.
Conclusion. Because the security is categorized as available for sale, it is recorded at fair value with any unrealized gain or loss recorded as a component of other comprehen-sive income, net of the tax effect.
Entries as follows:
December 31, 20X1:
dr cr
Investment in equity security 10,000
Cash 10,000
To record purchase of 1,000 shares at $10 per share
December 31, 20X2 and 20X3 entries:
20X2 Entries 20X3 Entries
dr cr dr cr
Allowance for unrealized gain 2,000 3,000
Unrealized gain on securities (equity) 2,000 3,000
Unrealized gain on securities (30%) (equity) 600 900
Deferred income tax liability 600 900
To record unrealized holding gains on securities available for sale, net of related tax effect
20X3 Entries
dr cr
Cash 15,000
Investment in equity security 10,000
Gain on sale of securities 5,000
To record sale of investment on 12-31-X3
Unrealized gain on securities 3,500
Allowance for unrealized gain 5,000
Deferred income tax liability 1,500
To reverse the unrealized gain and related tax effect related to the sale of investments.
Presentation on Financial Statements:
Company X Statements of Income and Comprehensive Income For The Years Ended December 31, 20X3 and 20X2
20X3 20X2
Revenue $XX $XX
XX XX
Expenses
Income from operations XX XX
Other income:
Gain on sale of securities 5,000 0
XX XX
Income taxes
Net income (given) 400,000 300,000
Other comprehensive income (before taxes):
Unrealized gain on securities available for sale
(net of taxes $900 in 20X3 and $600 in 20X2) 2,100 1,400 Reclassification adjustment (net of tax
(3,500) 0
effect of $1,500)
(1,400) 1,400 Other comprehensive income
$398,600 $301,400 Comprehensive income
What happens to the reclassification adjustment if there are purchases and sales of securities within the same year?
EXAMPLE: Assume in 20X1, a security is purchased and sold as follows:
March 1, 20X1 purchased $10,000 13,000 November 1, 20X1 sold
Gain 3,000
(1,200) Tax effect 40%
$1,800 Net gain
Should an unrealized gain be shown up to the date of sale ($1,800) with a corresponding reversal as a reclassification adjustment of $(1,800)? Or should the entire unrealized gain up to the date of sale be excluded with only the $3,000 realized gain shown?
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MODULE 2 - CHAPTER 5 - Comprehensive Income (ASC 220)
Response: For ASC 320 purposes, there would be no unrealized gain recorded because the calculation is done at the balance sheet date. At that date, there were no securities owned. However, for ASC 220 presentation purposes, the unrealized gain must be reflected up to the date of the sale as follows:
Company X Statement of Income and Comprehensive Income For The Year Ended December 31, 20X1
Revenue $XX
Expenses XX
Income from operations XX
Other income:
Gain on sale of securities 3,000
Income before income taxes XX
Income taxes XX
Net income XX
Other comprehensive income:
Unrealized gain on securities available for sale (net of
taxes $1,200) 1,800
Reclassification adjustment (net of tax effect of
(1,800)
$1,200)
Other comprehensive income (0)
Comprehensive income $XX