For assets classified as Available-for-Sale securities, what happens to unrealized gains or losses in the income statement when market value increases?

• A. They are recognized in the income statement
• B. They are recognized in retained earnings only
• C. They are not recognized in the income statement
• D. They are recognized as cash

Answer: (C)

For Available-for-Sale securities, changes in fair value are recorded in Other Comprehensive Income rather than the income statement. When the market value rises, the unrealized gain increases the asset’s fair value on the balance sheet and is reflected in OCI, a separate equity component. This keeps current earnings unaffected by unrealized market fluctuations. The gain would only affect net income when the security is sold and the gain is realized, at which point it’s reclassified from OCI to earnings. There is no cash impact from the unrealized change, and retained earnings aren’t the place where these unrealized gains live.