Other Comprehensive Income (3855 & 1530)

September 13, 2018 0 By c.boersma

Equity – formula

Reminder from Net Income

\Delta E = NI + OCI

Other Comprehensive Income is part of the assets, but disclosed as part of equity and not included in Net Income.  This can be seen on Liabilities (20.20) section as a component of Equity.

Held-to-maturity Investments

\mbox{Net Income} =\Delta AV +\mbox{dividends}

The accounting for this category is essentially the same as that used for bonds prior to the new standards as subsequent measurement is on an amortized cost basis.

Available-for-sale

\begin{aligned}\mbox{Net Income}&=\Delta AV+\mbox{dividends}\\ \mbox{Other Comprehensive Income}&=\Delta MV-\Delta AV\\ \Delta E = NI+OCI&=\Delta MV+\mbox{dividends}\end{aligned}

  • MV = Market Value
  • AV = Amortized Value.

Assets designated as available-for-sale will be carried on the balance sheet at fair value.  The regular investment income for these assets (dividends and bond coupons) as well as changes in the amortized cost, and realized gains and losses are booked to net income.

Change in the difference between the fair value and amortized cost will be recorded as Other Comprehensive Income

Held-for-Trading / Fair Value Option

\mbox{Net Income}=\Delta MV +\mbox{dividends}

Assets classified as held-for-trading or fair value option will be marked to fair value, with gains and losses recognized immediately in net income.  These changes may result in greater volatility of assets and investment gains and losses of these assets then under the current accounting standard.

CICA 3855 allows any financial assets or liabilities be designated as held-for-trading, but this optional designation may be restricted by Guideline D-10…. the fair value option can be used if it can be proven that doing so eliminates or significantly reduces an accounting mismatch resulting from measuring assets and liabilities or the associated gains and losses on different basis.

Actuarial Liabilities

Anytime there is a change to future/past investment income you need to re-asses the actuarial liabilities.  Changes in interest rate do not impact held-to-maturity (on the balance sheet).  Changes in interest rates impact liabilities: available-for-sale via Other Comprehensive Income; and held-for-trading via Net Income (Investment Income).

Since changes to available-for-sales assets do not affect net income, but the changes related to liabilities do.  Changes to interest rate for available-for-sales assets result in changes to net income (from liabilities) and other comprehensive income (from assets).

Held-for-trading – bypass the other comprehensive income component and go directly to net income.  As a result changes do net income come from reductions to both assets and liabilities – net result would depend on the mix of assets and liabilities (hopefully assets are larger than liabilities).

Market Rate Increase

Increasing  interest rates – decrease the  current market value.  In addition they increase  the discount factors – diminishing the cost of future paid losses: ultimately lowering  the present value of the unpaid claims (and unearned premiums): actuarial liabilities.

Held-for-Trading debt

Held-for-Trading debt securities Assets Liabilities  = Totals
+ Invested Assets
– Actuarial Liabilities
Net Income
Other Comprehensive Income
N/A for Held-for-Trading
N/A = 0
Equity (Assets – Liabilities)

Available-for-Sale 

Available-for-Sale debt securities Assets Liabilities  = Totals
+ Invested Assets
– Actuarial Liabilities
Net Income
Other Comprehensive Income
N/A for Held-for-Trading
Equity (Assets – Liabilities)