What is the Statement of Comprehensive Income?
Statement of Comprehensive Income refers to the statement which contains the details of the revenue, income, expenses, or loss of the company that is not realized when a company prepares the financial statements of the accounting period and the same is presented after net income on the company’s income statement.
We note from above that Colgate Reported a Net Income of $2,596 million in 2016. however, its total Comprehensive Income including noncontrolling interests was $2,344 million in 2016.
How to Interpret the Statement of Comprehensive Income (with Examples)?
To understand this, we need to first pay heed to the opposite of comprehensive income. The opposite of comprehensive income is narrowed-down income or income from its main operation.
Below is the snapshot of the Consolidated Income Statement of Colgate.
source: Colgate SEC Filings
We note that Colgate’s Net income including noncontrolling interests is $2,586 million. As we see from above that the Income Statement contains the revenues and expenditures related to the main operations of the business.
What about those items (gains/losses) that are excluded from the Income Statement? Where do they get adjusted?
Let us understand this concept with the help of a basic statement of comprehensive income example.
Given below is the balance sheet of Company XYZ.
Total Assets = Total Liabilities = $1300
#1 – Inventory Writedown from $300 to $200
- If the value of the inventory decreases from $300 to $200, then the Total Assets amount in the balance sheet will decrease to $1200.
- How does the Total Liabilities figure gets adjusted? Answer: Through the Income Statement -> Retained Earnings
- The inventory write-down of $100 ($300 – $200) will flow from the Income Statement.
In this example, we have assumed taxes to be zero. The above case is for gains and losses flow through the income statement.
Lets now take a different case where such gains and losses do not flow through the Income Statement.
#2 – If the Marketable Securities (Available for Sale) decreases to $100
- If the value of the Available for Sale Marketable Securities reduces from $200 to $100, then the Total Assets amount in the balance sheet will decrease to $1200
- However, the Total Liabilities are still at $1300. Accounting rules don’t allow us to adjust this unrealized loss on Available for Sale securities from the Income Statement. Instead, they are adjusted directly in the Shareholder’s Equity Section through “accumulated other comprehensive income”.
Two takeaways from the above statement of comprehensive income examples –
- Gains and Losses on items that are not allowed to flow from the income statement are included in the Statement of Comprehensive Income.
- Other Comprehensive Income for the period gets added to the Accumulated Other Comprehensive Income in the Shareholder’s Equity Section.
Format for Statement of Comprehensive Income
Comprehensive income connotes the detailed income statement where we will also include income from other sources along with the income from the main function of the business.
source: Colgate SEC Filings
As seen from above statement, we have to consider two primary components –
- Net income or loss from the income statement of the company &
- Other Comprehensive Income (net of taxes)
Here’s a simple list of items included in “Statement of Comprehensive Income”
#1 – Translation Adjustments
Foreign currency translation gains or losses do not flow through the income statement and therefore, they are included. As we see from below, the cumulative foreign currency translation adjustment for Colgate is – $97 million (pre-tax) and – $125 million (net of taxes)
# 2 – Pension & Other Benefits
Following Pension related gains or losses are included –
- Pension or post-retirement benefit plan gains or losses
- Pension or post-retirement benefit plan prior service costs or credits
- Pension or post-retirement benefit plan transition assets or obligations that are not recognized as a component of the net periodic benefit or cost
We note in Colgate that the Retirement Plan and other retiree benefits adjustments are – $168 million (pre-tax) and – 109 million (post-tax).
#3 – Available for Sale Securities
Available for sale securities are securities that are available for sale (literally!) and have a readily available market price. At the end of each financial year, companies need to value available for sale securities. Any gains/losses due to the change in valuation are not included in the Income Statement but are reflected in the Statement of Comprehensive Income.
Colgate’s Gains (losses) on available for sale securities is – $1 million (post-tax).
#4 – Cash Flow Hedges
Like the list above, unrealized gains and losses from cash flow hedges flow through the Statement of comprehensive income. Colgate Gains (losses) on cash flow hedges included in other comprehensive income is $7 million (pre-tax) and $5 million (post-tax).
Consolidated Statement of Comprehensive Income format
Here’s a snapshot of how you need to format your consolidated statement of comprehensive income.
| Particulars | Year 1 | Year 2 |
| Net Income | ****** | ****** |
| Other Comprehensive Income/Loss: | ||
| Change in Foreign Currency Translation Adjustment | ||
| Available for Sale Investments | ||
| Cash Flow Hedge | ||
| Other Comprehensive Income/Loss (if any) | ||
| Comprehensive Income | ****** | ****** |
Why Report Statement of Comprehensive Income every Quarter?
Now you may ask why it is mandatory for the publicly traded companies to prepare a consolidated statement of comprehensive every quarter?
Here’s the explanation.
- First of all, these reports are important because they are compared with the last quarter’s report and also with last year’s same quarter so that SEC can understand if any discrepancy lies in the statement or not.
- Second, the ultimate aim of these reports is to help the investors to know better so that they can make more informed decisions about which company they should invest in and which company they should avoid investing in completely.
Things you need to know as an investor
Even after look at the consolidated comprehensive income statement, there are few things you should consider as an investor. Here are they –
- First of all, no single document can tell you the whole thing about a company. To be sure, you need to get your hands on an annual report of the company (to shareholders), the annual report (under 10K) and the consolidated income & comprehensive income statement (under 10Q). Also, checkout SEC Filings Types
- If you appreciate the complexities and technicalities of finance, you will enjoy the detailed approach thoroughly by looking at all of the documents. But, if you are just starting out as an investor, it’s better to learn from someone or hire someone who can help you out with these statements.
- It is recommended that instead of relying only on statements, you should also go for ratio analysis to get a firm grip on how the firm is actually performing. You can start with cash conversion cycle, turnover ratios, DSCR, Interest Coverage Ratios, ROIC, etc.
In the final analysis
A statement of comprehensive income is the overall income statement that consolidates standard income statement, which gives details about the repetitive operations of the company, and other comprehensive income, which gives details about the non-operational transactions such as sale of assets, patents, etc. But don’t depend solely on it. Look for other statements and also to get an inner view of the firm, go through their last 10 years of statements and try to see a trend coming forward. This will help you in understanding the risk-return ratio even before investing in the organization.
