Other Comprehensive IncomeExplained & Defined
Other comprehensive income is a business accounting term that refers to the revenues, gains, expenses, and losses which have not been realized yet.
Instead, other comprehensive income is typically reported on the balance sheet under shareholders’ equity.
A particularly common example of other comprehensive income is investments in bonds it intends to sell and which have not reached maturity or been sold and therefore have not yet been realized.
As a result, the final gains or losses from these investments cannot be exactly determined, and instead of including a potentially inaccurate value in net income, the bonds’ current value is recognized in other comprehensive income.
Other Comprehensive Income Explained
Other comprehensive income includes all of the unrealized income, which cannot be included under a company’s net income on its income statement due to GAAP and FRSB requirements.
This is to reduce the volatility of net income by including only realized income that is set in value.
Other comprehensive income is accounted for on a company’s balance sheet under the account “Accumulated other comprehensive income.”
This account is mandatory for publicly held companies and operates similarly to retained earnings except in that it only includes values that are not reported in net income.
Many types of gains and losses may be reported under other comprehensive income, commonly including revenues, expenses, gains, and losses related to investments such as bonds or stocks held for sale, foreign currency exchanges, and pension plans.
By their nature, the unrealized income included under other comprehensive income may change in value by the time it is realized.
Gains and losses have only been realized when the associated transaction has been completed, such as when a bond reaches maturity or an investment has been sold.
Once realized, an item cannot be included under other comprehensive income and will need to be removed from this account on the balance sheet and moved to the income statement to be reported under net income.
Though not included under net income, other comprehensive income is no less important.
Investors and company leaders can gain a far more expansive view of an organization’s financial status from other comprehensive income, which includes all of the gains and losses that it may soon realize, than they would through net income alone.
The limitation to this is, however, that these values are not certain, and non-professional readers may struggle to understand the line items included under this account and how likely they are to be realized at their current value.
Examples of Other Comprehensive Income
Other comprehensive income includes all unrealized gains and losses and, as a result, covers a wide breadth of potential investments.
However, the following are some of the most common factors relevant to other comprehensive income.
A common factor in other comprehensive income includes bond portfolios that have not yet been redeemed or sold.
The value of bonds changes regularly, and as a result, until they are sold, their final value cannot be determined.
Until these investments have been sold, any changes in their value will be recognized as other comprehensive income.
Exchanges of Currency
For firms that operate overseas, perform currency hedging, or otherwise have significant sources of foreign revenue, other comprehensive income can have a particularly large impact.
Changes in currency exchange rates will cause the value of a company’s foreign balances to fluctuate, and these gains and losses will be recorded in other comprehensive income.
For investors and analysts, this information can play a crucial role in examining the health of a company with a significant amount of foreign revenues.
Pension plans often represent a significant component of other comprehensive income.
Gains or losses in the value of pension plans are recorded in other comprehensive income and are based on the extent of a company’s retirement plan obligations.
This may be an important factor in judging its future growth prospects.
Is Other Comprehensive Income Part of Retained Earnings?
Though retained earnings and other comprehensive income are often confused with each other likely because they are both recorded under shareholders’ equity, these are not the same thing. Retained earnings represent all of a company’s funds remaining after expenses and dividends are accounted for.
This is calculated by taking net income from the income statement.
In contrast, other comprehensive income includes all gains and losses that are not included in calculating net income.
Though other comprehensive income is a component of shareholders’ equity, it does not have an impact on retained earnings and is recorded separately.
The Importance of Other Comprehensive Income
For investors and analysts, other comprehensive income is a crucial metric for evaluating a company’s overall earnings and financial health.
Though an income statement is generally the largest indicator of a firm’s profitability, other comprehensive income can provide a significant amount of additional information from which to judge its financial position.
Though other comprehensive income does not display the day-to-day income and expenses that a company incurs, it does provide information on other important items.
This includes the current value of an organization’s investments, foreign currency holdings, and pension plans.
These unrealized gains and losses can have a significant impact on a company’s overall financial standing.
Considering the line items under “Accumulated other comprehensive income” can help to determine whether or not these unrealized gains or losses may have a significant future impact and how likely these are to impact a company’s profitability.
- Other comprehensive income is a business accounting term that refers to the revenue, gains, expenses, and losses which have not yet been realized.
- Under GAAP and IFRS, other comprehensive income cannot be reported under net income and is instead reported separately on the balance sheet under shareholders’ equity.
- Other comprehensive income can provide investors with valuable information on the upcoming gains and losses which a company may soon realize.
- Items commonly included in other comprehensive income include, among others, gains and losses from investments available for sale, gains or losses on exchanges of foreign currency, and costs associated with operating pension plans.
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Louisiana State University "Comprehensive Income and Its Relation to Firm Value and Transitory Earnings. " Page 1-87. August 30, 2022
Harvard Business School "HOW TO PREPARE AN INCOME STATEMENT" Page 1 . August 30, 2022