Question

What are the components of AOCI？You should also be able to explain what each of them means for a complete answer. Why is the gain/loss on the sale of PPE not part of AOCI? It passes through the income statement. Explain. What is the IFRS treatment? Mention revaluation reserves here (as part of AOCI).

Answer 1

AOCI or Accumulated Other comprehensive Income

Accumulated other comprehensive income is a general ledger account that is classified within the equity section of the balance sheet. It is used to accumulate unrealized gains and unrealized losses on those line items in the income statement that are classified within the other comprehensive income category.

A transaction is called unrealized when it has not been settled. So if a Company invests in a bond, we shall record any gain or loss at its fair value in other comprehensive income until the bond is sold and gain or loss would be realized.

The unrealized gains and losses that may be aggregated into the accumulated other comprehensive income account include:

• Unrealized holding gains or losses on investments that are classified as available for sale - explained above
• Foreign currency translation gains or losses - when a company has a liability / receivable and the same is not settled and at the year end is valued at the exchange rate, which is unrealized
• Pension plan gains or losses - the pension fund has invested in some stock, the unrealized gain / loss at the year end is unrealized and recorded here

Gain or loss on the sales of PPE or Property Plant & Equipment is a classification on a Balance Sheet of a Company's Fixed Assets such as Land & Building, Factory Machinery , Furniture etc. and the investment in Fixed Assets is to enhance the Company's operations in long run and sale of PPE happens when the asset expires it's useful life or Company decides to replace any Machinery for modernization. So sales of assets is not a primary activity of the Company and thus gain /loss on sale of PPE is not part of AOCI.It appears as Disposal of Assets in the Income Statement as the difference between the disposal proceeds and the book value less accumulated depreciation as on date of sale.

IFRS 5 deals with Non current Assets held for sale and discontinued operations -

When a company makes the decision to sell an asset or to stop some part of its business, it is making a decision that affects the future cash flows, profitability and overall financial situation. IFRS 5 came into effect on 1 January 2005. It has to classify the Assets held for sale.

A non-current asset must be classified as held for sale if most of its carrying amount is expected to be recovered via future cash flows from the sale of the asset

Revaluation Reserve :

Companies use revaluation reserve lines on the balance sheet to account for value fluctuations in long-term assets.Revaluation reserves are most often used when an asset’s market value greatly fluctuates due to currency fluctuations.Revaluation reserves have an offsetting expense that is debited (increased) or credited (decreased) depending on the change from revaluation. When an Asset value decreases, a debit entry is made in expense Account, which will be in Income statement and credit is given to Revaluation Reserve, a part of Balance sheet .When the Assets value changes and the change in the annual depreciation charges does not necessarily be transferred to retained earnings, a part of AOCI.