When are unrealized gains and losses for AFS securities reversed?

• A. When they are sold
• B. At year-end regardless of status
• C. During each quarterly review
• D. They are never reversed

Answer: (A)

Unrealized gains and losses for Available-for-Sale (AFS) securities are recognized in other comprehensive income and do not impact net income until the securities are sold. When AFS securities are sold, the accumulated unrealized gains or losses that were recorded in other comprehensive income are reversed and recognized in earnings at that point. This reflects the move from a non-cash position to a realized cash transaction, aligning the accounting treatment with the actual economic impact resulting from the sale of the securities. Thus, the correct time for these unrealized gains and losses to be reversed is indeed upon the sale of the securities.