Final answer:
The difference in market value of available-for-sale securities is accounted for in other comprehensive income, affecting the equity section of the balance sheet but not the income statement.
Step-by-step explanation:
If the combined market value of available-for-sale securities at the end of the year is less than the market value of the same portfolio at the beginning of the year, the difference is recognized in other comprehensive income. This adjustment to the market value is not reported on the income statement for available-for-sale securities. Instead, the unrealized loss, which is the difference between the cost and current market value, is reported as a reduction in the equity section of the balance sheet through accumulated other comprehensive income. This contrasts with trading securities where unrealized gains and losses are reflected in the income statement.
During a recession, as described by LibreTexts™, assets may lose value unexpectedly. For example, if a bank experiences a significant number of defaults, its loan assets would decrease in value, as had happened to many banks during the recession that began in 2007. This decline in asset values impacts the financial stability of institutions and subsequently affects their balance sheets.