What must be true for unrealized losses on AFS securities to be recognized in income?

Unrealized losses on available-for-sale (AFS) securities are recognized in income when there is an expected credit loss. This reflects the accounting standard's emphasis on the reality of potential losses rather than merely temporary declines in market value. An expected credit loss indicates a departure from the assumption that the investment will recover its value. Therefore, once management determines that the expected cash flows related to the AFS security have decreased due to credit-related factors, it is appropriate for such unrealized losses to be recognized in income.

This requirement ensures that financial statements reflect a more accurate and conservative view of the entity's financial position, aligned with the principles of recognizing loss as they become apparent, especially in cases where the issuer may not meet its obligations.

The other scenarios, such as market conditions being bullish, management's decision to sell, and uncertainties in future cash flows, do not inherently trigger the need to recognize unrealized losses in income per the established accounting standards. These factors may influence the management's outlook on the security's value but are not definitive in the requirement to recognize losses in the income statement.