What is Other Comprehensive Income?
Other Comprehensive Income refers to that income, expenses, revenue or loss in the company which has not been realized at the time of preparation of the financial statements of the company during an accounting period and are thus excluded from the net income and shown after the net income on the income statement of the company.
It consists of only those revenues, expenses, gains, and losses that have not been realizedGains, And Losses That Have Not Been RealizedUnrealized Gains or Losses refer to the increase or decrease respectively in the paper value of the company's different assets, even when these assets are not yet sold. Once the assets are sold, the company realizes the gains or losses resulting from such disposal. yet and hence is not included in the net income on the Profit & Loss statement. It is recorded on the liabilities side of the balance sheet under the Shareholders Equities head.
Components of Other Comprehensive Income
source: Facebook SEC Filings
It generally includes the following components:
- Unrealized gains or losses on investments that have been categorized as available for sale.
- Unrealized gain or loss on bonds;
- Foreign currency exchange gains or losses adjustments
- Gains or losses on derivatives that have been undertaken as cash flow hedgesCash Flow HedgesA cash flow hedge is an investment method to control and mitigate the sudden changes in cash inflow or outflow to the asset, liability, or the forecasted transactions. It can arise due to interest rate changes, asset price changes, or foreign exchange rates fluctuations.
- A pension plan or post-retirement benefit plan related adjustments.
How is Other Comprehensive Income Recognized?
As per the accounting standards, this income is recorded under shareholder’s equity on the liability side of the balance sheet.
source: Facebook SEC Filings
- A company may purchase equipment, machinery, or property during the process of conducting business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.. While accounting for the same, the company is required to determine the carrying amountCarrying AmountThe carrying amount or book value of asset is the cost of tangible, intangible assets or liability recorded in the financial statements, net of accumulated depreciation or any impairments or repayments. Accordingly, the carrying amount may differ from the market value of assets. of the asset, which essentially means that the accumulated depreciation and the accumulated impairment loss has to be deducted from the acquisition cost of the asset. The revalued cost hence attained, is the fair value of the asset as on the specific date. The unrealized gain or loss on revaluation is included. For example, if the carrying amount of the asset increases due to the revaluation, the increase will be recorded as other comprehensive income on the liabilities side in the Equity under the Revaluation surplus category.
- As mentioned earlier, only unrealized items can be categorized as other comprehensive income. However, the asset may be realized at a later date. It means that the company may decide to sell the asset in the subsequent years. In that scenario, the realized gainThe Realized GainWhen an asset is sold for a higher price than when it was purchased, it is referred to as a realized gain. Because the seller gains from the transaction, this gain is taxed, however an unrealized gain is not taxable because it is valued at fair market value. or loss associated with the asset gets removed from this category and is recorded in the income statement.
- It is also essential to state that the components of other comprehensive income may be reported either net of related tax effects or before related tax effects with a single aggregate income tax expense.
Examples of Other Comprehensive Income
The XYZ Ltd. purchased equipment for Rs.35,65,000 on 10th July 2017. The company decided to undertake the revaluation process for the equipment on 30th September 2017. Revaluation is a process by which the company brings the fixed market value of the fixed asset into the books of accounts. The revaluation of the equipment took place at Rs.40,85,000.
Record: The difference of Rs.5,20,000 will be shown as a component of the other comprehensive income in the Balance sheet under Equity in Revaluation surplus.
On 31st October 2018, the company decided to again revalue the asset. The revalued amount was Rs.25,10,000. The decrease in the amount of Rs.10,55,000 will be recorded as:
Record: The amount of Rs.5,20,000, which was recorded in the balance sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., will be reduced from the revaluation surplus, and Rs.5,35,000 will be shown in the income statement.
Company ABC Ltd. has recorded the following –
You need to look at not only the realized gains and losses listed in the income statement but also make a note of the unrealized income and losses that are mentioned as other comprehensive income. Some of the other factors that highlight its relevance are as follows:
#1 – Accounting for the Pension Plans
A pension plan or post-retirement benefit plan related adjustments are an essential part of the other comprehensive income. An individual can study the impact of the pension plan and the corporate retirement plan impact. An employer would plan for pension payment to the employees that retire at a later date. If the assets required for the plan are not adequate, the pension plan liability of the firm will increase. The company needs to plan accordingly.
#2 – Understand the Unrealized Gains and Losses from Bonds and Shares
An analyst can understand the unrealized gains and losses on bonds as well as shares while going through the components of the other comprehensive income. If a share has been purchased at $50 and the fair market value is $70, then the unrealized gain is $20. An analyst can understand the fair value of the investments of a company by reading about the other comprehensive income components. You must also learn about the unrealized gains or losses on the investments categorized as available for sale by the firmAvailable For Sale By The FirmAvailable for sale Securities are the company's debt or equity securities investments that are expected to be sold in the short run and will are not be held to maturity. These are reported on the balance sheet at fair value, and any unrealized gains or losses on these securities are reported in other comprehensive income as a part of shareholders' equity rather than in the income statement..
#3 – Accounting for Foreign Currency Exchange Gains or Losses Adjustments
A company may undertake to hedge against the fluctuations in the currencies while transacting business activities. The analyst will understand the impact of fluctuations in the currency rate and foreign currency exchange gains or losses adjustments made in the process.
As an investor, you need to critically examine the financial statements of the companyFinancial Statements Of The CompanyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. to gauge the fundamentals, financial stability, and credibility of a firm. Understanding the other comprehensive income that consists of the unrealized gains and losses will facilitate you to analyze the company better and make effective investment decisions.
This article has been a guide to Other Comprehensive Income Statement and its components. Here we also discuss examples of other comprehensive income and how it is recognized on the balance sheet. You can learn more about accounting from the following articles –