A regional bank holds $20 million of corporate bonds it plans to flip within the quarter and $80 million of identical bonds it might sell if rates move. The first portfolio runs every price tick through net income. The second parks the same volatility in OCI until the day of sale. Classification, not the security, controls where the gain or loss lands.
The accounting tracks the economic reason you hold the security.
Trading. Short-horizon inventory. A broker-dealer flips bonds inside a quarter, price volatility IS the business model, so fair value through net income mirrors the economics.
Available-for-sale (AFS). Middle-term hold for debt only. An insurer buys a 10-year bond to earn a spread but might sell if rates move. You want today's fair value on the balance sheet without every rate tick whipsawing net income. The compromise: unrealized gains and losses park in OCI, accumulate in AOCI, and recycle into net income on sale.
Equity securities (ASC 321). Stocks, equity funds, ETFs, partnership interests below the equity-method threshold. Continuous mark-to-market liquidity makes them economically closer to trading inventory, so since ASU 2016-01 they run...
Common mistakes
- Putting equity-security gains in OCI. A choice that says "the $12,000 unrealized gain on the stock portfolio increased AOCI by $12,000" tests pre-2018 GAAP. Under ASC 321, equity gains with RDFV flow through NI. Trap: a non-zero AOCI line that absorbs an equity gain.
- Recycling Trading-security gains on disposal. Trading securities mark to FV through NI every quarter. On sale, the entry is a cash-for-security swap at carrying amount, there is no AOCI to recycle. Trap: a JE that debits AOCI and credits a realized gain. That pattern fits AFS debt, not Trading.
- Putting AFS credit losses in OCI. ASC 326 routes the credit-loss component through NI via an allowance; only the non-credit (rate-driven) piece stays in OCI. Trap: a choice placing the entire $40,000 FV decline in OCI when the stem describes credit deterioration. That is the pre-2020 OTTI trap.
Bottom line
- Trading debt = fair value through net income (FV-NI); every tick hits the income statement.
- AFS debt = fair value through OCI (FV-OCI); unrealized gains and losses park in AOCI and recycle into net income on disposal via a reclassification adjustment.
- AFS unrealized gains and losses are presented net of tax; the deferred tax balance offsets the gross OCI line and never runs through current tax expense.
- Equity securities with readily determinable fair value under ASC 321 = FV-NI by default; no OCI option since ASU 2016-01, and no separate impairment model.
Exam shortcut
Read the stem for the measurement-and-flow signature before you read the choices. "Through net income" → Trading, ASC 321 equity, or FV option. "Through OCI" → AFS debt only. "Recycled on sale" → AFS only. Equity gains in OCI = pre-2018 GAAP, wrong. AFS credit decline staying entirely in OCI = pre-2020 OTTI trap.
The full lesson (about 4,389 words, 29 min read) adds 8 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.E1
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