Comprehensive Income: Statement, Purpose, and Definition

Income excluded from the income statement is reported under “accumulated other comprehensive income” of the shareholders’ equity section. Another suggestion is that the OCI should be restricted, should adopt a narrow approach. On this basis only bridging and mismatch gains and losses should be included in OCI and be reclassified from equity to SOPL.

Reporting Comprehensive Income

In March 2018 the Board published its Conceptual Framework for Financial Reporting. It suggests that the SOPL should provide the primary source of information about the entity’s financial performance for the reporting period. However, the Board may also provide exceptional circumstances where income or expenses arising from the change in the carrying amount of an asset or liability should be included in OCI. This will usually occur to allow the SOPL to provide more relevant information or provide a more faithful representation of an entity’s performance. Whilst this may be an improvement on the absence of general principles, it might be argued that it does not provide the clarity and certainty users crave. Comprehensive income is important because the amounts help to reflect a company’s true income during a specific time period.

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A revaluation surplus on a financial asset classified as FVTOCI is a good example of a bridging gain. The asset is accounted for at fair value on the statement of financial position but effectively at cost in SOPL. As such, by recognising the revaluation surplus in OCI, the OCI is acting as a bridge between the statement of financial position and the SOPL. On disposal, reclassification ensures that the amount recognised in SOPL will be consistent with the amounts that would be recognised in SOPL if the financial asset had been measured at amortised cost. The term comprehensive income consists of 1) a corporation’s net income (which is detailed on the corporation’s income statement), and 2) a few additional items which make up what is known as other comprehensive income.

What Does Comprehensive Income Include?

• Other comprehensive income (OCI) is an important component of comprehensive income, but they are not interchangeable.
• Understanding comprehensive income is essential for investors, analysts, and other stakeholders who seek a deeper insight into a company’s overall financial health.
• The original logic for OCI was that it kept income-relevant items that possessed low reliability from contaminating the earnings number (profit for the year).
• It is simply incorrect, to state that only realised gains are included in the statement of profit or loss (SOPL) and that only unrealised gains and losses are included in the OCI.
• The net income is transferred down to the CI statement and adjusted for the non-owner transactions we listed above to compute the total CI for the period.
• This inclusion provides a clearer picture of the long-term obligations and financial commitments a company has towards its employees.

Explore the key components and financial impact of comprehensive income, and understand its distinction from net income in financial reporting. In this blog post, our team at Lewis.cpa will explore what comprehensive income is, what it includes, and why it’s important for businesses to track and report. Net income is the actual profit or gain that a company makes in a particular period.

Since the company hasn’t sold these items and earned additional revenue from them, we can’t record additional income on the balance sheet and must keep the value listed at the purchase price. A smaller business with relatively simple operations may not have engaged in any of the transactions that normally appear on a statement of comprehensive income. But the statement shows Richard the stock’s value to comprehensive income meaning his company if they did decide to sell the shares. Comprehensive income provides a complete view of a company’s income, some of which may not be fully captured on the income statement. A third proposition is for the OCI to adopt a broad approach, by also including transitory gains and losses. The Board would decide in each IFRS standard whether a transitory remeasurement should be subsequently recycled.

IFRS emphasizes the importance of presenting a complete picture of financial performance, which aligns with its broader principles-based approach. This method allows for greater flexibility and judgment in financial reporting, accommodating the diverse economic environments in which multinational companies operate. Comprehensive income is the variation in the value of a company’s net assets from non-owner sources during a specific period. Unrealized income can be unrealized gains or losses on, for example, hedge/derivative financial instruments and foreign currency transaction gains or losses. In today’s complex business environment, understanding and reporting comprehensive income is essential for companies looking to provide a complete and transparent picture of their financial performance. By including both realized and unrealized gains and losses, comprehensive income offers valuable insights into a company’s overall financial health and helps stakeholders make more informed decisions.

Only by recognising the effective gain or loss in OCI and allowing it to be reclassified from equity to SOPL can users to see the results of the hedging relationship. This lack of a consistent basis for determining how items should be presented has led to an inconsistent use of OCI in IFRS standards. It may be difficult to deal with OCI on a conceptual level since the International Accounting Standards Board (the Board) is finding it difficult to find a sound conceptual basis. At present it is down to individual accounting standards to direct when gains and losses are to be reported in OCI However, there is urgent need for some guidance around this issue. Creditors can see how much skin investors have in the company and investors can see the potential of the company assets and future earnings and profits if these assets were actually sold and the gains were realized. The net income is transferred down to the CI statement and adjusted for the non-owner transactions we listed above to compute the total CI for the period.

Other comprehensive income is also not the same as “comprehensive income”, though they do sound very similar. Comprehensive income adds together the standard net income with other comprehensive income. Richard’s Running Shoes is a chain in four states that sells a range of athletic clothing and shoes to its customers.

Other comprehensive income is accumulated and then reported under shareholder’s equity on the balance sheet. Net income is what you have left of gross revenue after subtracting expenses and costs of your goods sold, whereas comprehensive income combines net income with various unrealized gains not reported as earned income. However, there is a general lack of agreement about which items should be presented in profit or loss and in OCI. The interaction between profit or loss and OCI is unclear, especially the notion of reclassification and when or which OCI items should be reclassified. A common misunderstanding is that the distinction is based upon realised versus unrealised gains. It is simply incorrect, to state that only realised gains are included in the statement of profit or loss (SOPL) and that only unrealised gains and losses are included in the OCI.

The statement of comprehensive income gives company management and investors a fuller, more accurate idea of income. It can be argued that reclassification should simply be prohibited. This would free the statement of profit or loss and other comprehensive income from the need to formally to classify gains and losses between SOPL and OCI. This would reduce complexity and gains and losses could only ever be recognised once.