Comprehensive Income: Definition and Examples

A companys statement of profit and loss, also known as its income statement, has its drawbacks. For the most part, the statement accurately reflects a companys past profitability and earnings growth—one of the primary determinants of a firms stock performance—but it remains a subjective measure, open to manipulation. In particular, companies have a fair amount of latitude on the timing and impact of the quarterly and annual charges and other expenses reported on the statement.

How a firm generates revenues and turns them into earnings is an important factor, but there are other important considerations. The Financial Accounting Standards Board (FASB) has continued to emphasize a financial measure called other comprehensive income (OCI) as a valuable financial analysis tool. The FASBs stated goal, in general, is to issue guidance “to improve the comparability, consistency, and transparency of financial reporting.” To accomplish this, it has sought to “increase the prominence of items reported in other comprehensive income.”

Comprehensive Income

What does comprehensive income include?

Comprehensive income is made up of a companys overall sales revenue (net income) and figures for other comprehensive income which are combined to form comprehensive income.

Other comprehensive income is made up of unrealized gains or losses from the following:

What is comprehensive income?

Comprehensive income is a way to give company stakeholders more information about the overall financial outlook of their investment. This figure is depicted as a separate amount from net income to give more details about possible income from investments and the sale of financial assets like stocks. It does not include changes in equity based on investments made by owners or distributed to owners.

Where do companies record comprehensive income?

Companies record comprehensive income in several ways:

Statement of comprehensive income

Comprehensive income is usually reported on a statement of comprehensive income. It is reported separately from retained earnings, which includes the net income of a company. Instead, comprehensive income is reported as stakeholder equity.

The statement of comprehensive income includes two parts: the net income and other comprehensive income (or financial hedges). The statement gives a comprehensive income total, which combines the net income and other comprehensive income to create the total sum of comprehensive income.

Income statement

Tax statements

Another way to look at comprehensive income is as unrealized gains and losses. These are reported differently for tax purposes depending on how the gain or loss is realized. For example, other comprehensive income in a stock loss can be realized and moved to the category of a capital loss when a company liquidates and closes. This stock investment is now a loss for the company and instead of being considered part of other comprehensive income, it will move to a loss in revenue.

Comprehensive income is not reported as part of net income for tax purposes since it is a relative figure that can fluctuate based on market trends, economic events and stock performance. It can be changed into regular income and reported under net income when an asset is sold and the value is reported. A company files a statement with other comprehensive income if they meet certain criteria that classifies the income as comprehensive.

Comprehensive income, other comprehensive income and net income explained

Comprehensive income can be confused with other comprehensive income. Other comprehensive income, or comprehensive earnings, is part of the calculations accountants use to determine a companys comprehensive income. Other comprehensive income includes gains and losses not realized by the company, so it is not eligible to be counted as net income because net income refers to a companys total sales revenue.

Since the sum of comprehensive income is made up of both other comprehensive income and net income, its helpful to examine the differences between all three:

Comprehensive income

Here are the distinctions of comprehensive income:

Other comprehensive income

Here are specific details about other comprehensive income:

Net income

Why do companies record comprehensive income?

Companies record comprehensive income as a way to show the changes in their equity as a result of recognized transactions. They also report it to reflect other economic events in a given financial period besides those of an owner. Per accounting standards, businesses are required to report these transactions in a separate financial statement.

Examples of comprehensive income

Here are some examples of comprehensive income:

Example 1: Non-business

When someone wins prize money on a television show and walks away from the show with the additional assets, this money is considered separate from the taxable net income of their job or other revenue streams. However, this prize money is still considered part of their overall taxable comprehensive income.

Example 2: Business

When a business creates a statement for other comprehensive income, it may include a gain or loss from foreign currency transactions. These items affect the balance sheet, but the effects are not reported on a companys income statement. Instead, they are reported on the comprehensive income statement that reflects all gains and losses for the business. These statements are reported during each specified financial period.

FAQ

What is meant by comprehensive income?

Comprehensive income includes net income and unrealized income, such as unrealized gains or losses on hedge/derivative financial instruments and foreign currency transaction gains or losses. It provides a holistic view of a company’s income not fully captured on the income statement.

What are some examples of comprehensive income?

Examples of comprehensive income include gains or losses on:
  • Available-For-Sale Securities. This is a security that a company plans to hold for a long time. …
  • Financial Investments. …
  • Pension and Retirement Plans. …
  • Derivative Instruments. …
  • Debt Security.

What is comprehensive income formula?

Comprehensive Income Formula

Use the following comprehensive income formula: Gross Profit Margin (Revenue – COGS) – Operating Expenses. (+/-) Other Income items. (+/-) Discontinued Operations (add if savings, subtract if loss)

What is comprehensive income vs net income?

Net income is the financial gain or loss that a business has made in one single time period while comprehensive income is the change in equity in that same time period originating in non-owner sources.

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