If a company elects not to bifurcate a hybrid financial instrument and records the entire instrument at fair value, which of the following is true?

1. No changes in value are recorded until the hybrid instrument is sold.
2. Changes in fair value of the hybrid instrument are recognized each year in other comprehensive income.
3. Changes in fair value of the hybrid instrument are recognized each year in earnings.
4. Changes in fair value of the hybrid instrument are recognized each year by recognizing a cumulative effect adjustment to the beginning balance of retained earnings for the period.