When are losses on available-for-sale securities recognized in income?

Losses on available-for-sale securities are recognized in income upon sale of the security or transfer to a trading classification. This is because, under the accounting standards, available-for-sale securities are initially recorded at fair value, and any unrealized gains or losses are reported in other comprehensive income (OCI), not directly in earnings. However, when the security is either sold or reclassified, the cumulative gain or loss that has been accumulated in OCI is then recognized in net income. This ensures that the financial statements accurately reflect the performance based on realized transactions rather than unrealized fluctuations, which can lead to misleading conclusions about a company's financial health if not properly accounted for.

The other options misinterpret how and when losses are recognized for this type of security. Holding a security indefinitely does not trigger recognition as it remains part of OCI until realization. Similarly, merely having a market value increase does not lead to recognition of losses; losses are recognized only when they are realized through sale or reclassification, not when they are still unrealized. Lastly, changes in management's financial strategy do not have a direct impact on the timing of loss recognition; it's the status of the securities and their sale or reclassification that drive this recognition.