I like the OCI statement

“Learn the rules like a pro, so you can break them like an artist.” Pablo Picasso

There are five main financial statements in financial accounting:

  1. Balance sheet
  2. Income statement
  3. Statement of cash flows
  4. Statement of stockholder’s equity
  5. Statement of comprehensive income

The first three have a special emphasis in the intermediate accounting textbook that we use. The latter two, not so much.

For the last one, when it is mentioned, I make a point to tell students that I call it the OCI statement… the other comprehensive income statement.

This isn’t quite correct though, and I admit to my students that this is NOT the official name of the statement. I reiterate what the official name is, and that there is no statement called the OCI statement.

The “OCI statement” is analogous to the income statement

I have found great benefit to separating the OCI portion of CI and treating it as a discreet statement. It permits me to compare OCI with the income statement. In most ways it does behave like one:

  • OCI accounts are temporary accounts, just the same way that income statement accounts are temporary
  • OCI amounts close to Accumulated other comprehensive income (AOCI) just the same way that the income statement amounts close to retained earnings

Once somebody understands how the income statement closes to retained earnings at the end of the period, it becomes a lot easier to understand how OCI amounts close to AOCI in just the same way. This permits me to build on what students already know. I’d rather do that, since there is a very good chance they’ll remember it.

… but there is one difference

Based on my reading of the intermediate accounting textbook we use, so far I have discerned one difference in the way the statements behave. Once an income statement is closed for a period, we never post reversals, corrections, or adjustments from that period into a new income statement. These are always posted to retained earnings. This pattern does not hold for AFS debt securities:

  • Fair value adjustments (unrealized holding gains or losses) are posted to OCI (same pattern)
  • OCI closes to AOCI at the end of the period – it opens a new period with a zero balance (still the same pattern)
  • When the security is sold in a new period, previous fair value adjustments are reversed, not from AOCI where they are located after being closed from OCI at the end of the period, but from the current period’s OCI. This is where the pattern breaks, because if it followed the same pattern, the reversal would happen from AOCI. We would not be touching OCI for an amount related to a prior period.

I am wading into an area where I have zero professional experience – I have not worked with OCI or AOCI in a professional setting. So maybe there is some benefit to posting the reversal to the current period’s OCI of which I am not aware.

Even if there is no benefit, someone might reply that it doesn’t matter since the effect is the same after closing the period. However, if it truly doesn’t matter, then perhaps it would be better to retain the pattern. This would make it even more analogous to the income statement, making it easier for accounting students to learn and remember.

This exception doesn’t change the way I teach it. For me, teaching OCI as a discreet statement permits me to teach it as largely analogous to the income statement. It makes it easier to teach and, I hope, easier to learn. As much as I can, I piggy-back off of prior knowledge, since doing so will reduce the cognitive load required from students.

I’m sure it’s debatable whether I’m really a pro (or an artist) about such things. But I like to think that I know the rules well enough to know that it’s OK to bend them a little bit at times like this, to help with learning.

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