Comprehensive income
Revenues, expenses, gains, and losses are used to compute earnings.
Earnings are ⇒ the extent to which revenues and gains during the period exceed expenses and losses during the same period.
Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Thus comprehensive income would reflect all changes in the equity of an entity during a period, except investments by owners and distributions to owners.
Comprehensive income differs from measures of net income because it encompasses certain changes in equity recognized in the equity section of the B/S under accumulated other comprehensive income (AOCI) but not in I/S.
Comprehensive income is the net income plus other comprehensive income.
Thus comprehensive income consists not only of revenues, expenses, gains, and losses, but also various intermediate components or measures that result from combining the basic components such as gross margin, contribution margin, operating income, and income from continuing operations. Plus other comprehensive income (OCI).
Comprehensive income includes all changes in equity of a business entity except those changes resulting from investments by owner and distributions to owners. Comprehensive income includes two major categories, net income and other comprehensive income; Comprehensive income is not the same as earnings because comprehensive income is a much broader, “all-inclusive” concept of income than earnings.
Earnings and comprehensive income have the same broad components; revenues, expenses, gains, and losses, but are not the same because certain classes of gains and losses are included in comprehensive income but are excluded from earnings. Thus comprehensive income is a much broader, “all-inclusive” concept of income than earnings.
Over the life of an entity comprehensive income equals the net of its cash receipts and cash outlays, excluding cash invested by owners (subtracted) or distributed to owners (added back).
The purpose of reporting comprehensive income is to report a measure of overall enterprise performance by displaying all changes in equity of an enterprise that result from recognized transactions (I/S) and other economic events (B/S) of the period other than transactions with owners in their capacity as owners.
Comprehensive income must be displayed in a financial statement given the same prominence as the other statements, but no specific format is required.
Alternative display options of Comprehensive income
Comprehensive income can be displayed in the financial statements in all of the following formats:
- At the bottom of I/S, continue from net income to arrive at a comprehensive income figure (equals net income plus other comprehensive income), A continuation of net income presented at the bottom of the income statement is a Preferred format by FASB.
- In a separate statement that starts with net income, it is also preferred format by FASB.
- In the statement of changes in stockholders’ equity;
Thus : No particular format is required to display components of Comprehensive income
Components of other comprehensive income
Certain income items are deliberately excluded from the calculation of net income and instead are included in comprehensive income.
Requiring these items to be included in net income would be misleading. They typically represent valuation adjustments, not independent economic events.
Other comprehensive income (OCI) is the subtotal of all these items of comprehensive income that are not included in net income. It includes :
- Changes in the fair values of available-for-sale securities (holding or called unrealized gains or losses on available for sale securities, except those that are hedged items in a fair value hedge).
- Translation adjustments arising from translating an entity’s financial statements from its functional currency into the reporting currency related to investments in foreign companies. And called foreign currency translation adjustments.
- The excess of an additional pension liability over any unrecognized prior service cost.
Components of other comprehensive income may be displayed net of related tax effects or before related tax effects with one amount shown for the aggregate income tax effect (with detail shown in notes).
If an enterprise that report a full set of financial statements has items of OCI; it must display comprehensive income and its components in the F/S having the same prominence as the other statements included in the full set. No particular format is required, but net income must be displayed as a component of comprehensive income in that statement.
Separate EPS numbers are not required for other comprehensive income or comprehensive income.
Reclassification adjustments shall be made in order to avoid double counting of items included in other comprehensive income and also in net income.