AFS: impact on NI, OCI and Equity
When I was reading the material, I understand the impact on invested asset values, discount rate for actuarial liabilities and actuarial liabilities. But I don't understand the impact on NI, OCI and Equity. For example, with the scenario of market rate decrease, why NI decreases in liabilities and OCI increases in assets? I'd rather to understand how it derives rather than boring memorization.
Thank you!
Comments
There is another thread in the the CIA.Accting category that may shed some light:
https://www.battleactsmain.ca/vanillaforum/discussion/37/why-does-oci-htm-0-always
Very briefly, AFS is treated differently in that unrealized gains/losses in asset values are recorded in a different account, namely the OCI account. This is just an accounting convention. Bonds of type AFS, which are generally kept longer than HFT bonds, may experience volatility in their value due to changes in market rates. Putting these unrealized gains/losses in OCI, instead of NI, keeps this volatility outside of NI. It's just tidier. Anyway, in your example, if market rates go down, asset values go up, so OCI goes up. (It is only the AFS assets that affect the OCI account in this context.)
It's different for changes in liability values for AFS, however. These changes are included in NI, which is why NI goes down when market rates go up (because that causes liabilities to go up.)
Note that for HTM bonds, unrealized gains are excluded from NI, whereas for HFT bonds, unrealized gains are included in NI. But they are meant to be sold in the short-term, so any volatility they experience would be short-lived. (i.e. we don't care about it!)