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 sheetLiabilities Side Of The Balance SheetLiabilities in financial accounting refer to the amount of money a business owes to the lender. The lender can be anyone, including a bank, services provider, or supplier, while liabilities can be mortgages, loans, or IOUs. It is one of the two important parts of the balance sheet, followed by assets. But unlike assets, liabilities are debts or obligations that require the company to use its economic benefits to write off the owed amount in the future. under the Shareholders Equities head.
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Other Comprehensive Income Explained
The other comprehensive income statement is the profit or loss that the business entity generates but are not shown in the profit and loss statement. They are reported in a separate part of the financial statement known as statement of comprehensive income.
They usually include items like the unrealized gain or loss from available -for-sale securities. Such type of securities are held by the entity but are not actively traded and are reported until they are sold by the company. They also include the foreign currency translation adjustment in which the company translates the financial statements of its branches operating in different countries into the home currency and report the gains or losses.
Companies sometimes hedge their finances from inflation or changes in interest rates by using derivative contacts. Any gain or loss from such hedging are reported as other comprehensive income. Even plant or property revaluation resulting in gain or loss is reported and this kind of income. This income provides an overview of the financial condition of the entity and help investors and analysts take investment decisions based on risk assessment and uncertainties. It does not affect the earnings per share of the company because it is not a part of the net income.
Statement of Comprehensive Income Explained in Video
Given below are the main components of other comprehensive income.
source: Facebook SEC Filings
It generally includes the following other comprehensive income items:
- Unrealized gains or losses on investments that have been categorized as available for sale. They are the ones which the company has kept in its holding but do not actively trade. They will continue to be reported till they are sold off.
- Unrealized gain or loss on bonds and also reported in this section.
- Foreign currency exchange gains or losses adjustments are reported here. Companies may have their subsidiaries or branches in other countries that are earning in the currency of that country. In that case the company needs to convert the financial statement of those countries in the currency of the home country and report the gain or loss in the other comprehensive income section.
- 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. to hedge or protect the entity’s financial instruments against any fluctions in currency, interest rate or inflation.
- A pension plan or post-retirement benefit plan related adjustments are also reported in this section.
Thus, the above are the other comprehensive income items.
How Is Other Comprehensive Income Reported?
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 while 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.
Let us look at some other comprehensive income examples to understand the concept better.
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 when 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 –
Thus the above are some useful other comprehensive income examples.
We need to look at not only the realized gains and losses listed in the income statement but also note the unrealized income and losses mentioned as other comprehensive income accounting. Some of the other factors that highlight its relevance are as follows:
#1 – Accounting for the Pension Plans
A pension 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 and corporate retirement plans. For example, an employer would plan for pension payment to employees who retire later. 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 and shares while going through the components of the other comprehensive income. For example, if a share has been purchased at $50 and the fair market value is $70, the unrealized gain is $20. An analyst can understand the fair value of a company’s investments by reading about the other comprehensive income components. We 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 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.
Other Comprehensive Income Vs Comprehensive Income
Even though they may sound similar the two concepts given above has a distinct difference as detailed below:
- The former includes those type of income that do not form a part of the net income whereas the latter is a part of the net income.
- The former includes only the gain or loss from foreign currency translation or available-for-sale securities but the latter include these and additionally the items of net income.
- Comprehensive income is the overall company equity change whereas the other complete income accounting is not.
This article has guided to what is Other Comprehensive Income. We explain it with example, its various components and how it is reported. You can learn more about accounting from the following articles –