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.”
Other comprehensive income (OCI) is an important yet often misunderstood component of a company’s total earnings picture. As an investor or financial analyst, having a solid grasp of what OCI is, why it matters, and how to analyze it will give you a more comprehensive view of a company’s profitability and financial health.
In this complete guide, we’ll demystify other comprehensive income, walk through examples, discuss its relevance, and provide tips for analyzing OCI as part of your research process. By the end, you’ll have the knowledge to confidently evaluate this piece of the earnings puzzle.
What Exactly is Other Comprehensive Income?
Other comprehensive income consists of revenues, expenses, gains and losses that are excluded from net income on the income statement under generally accepted accounting principles (GAAP). OCI captures certain gains and losses that have not yet been realized.
For example let’s say a company has an investment portfolio of bonds that have not yet reached maturity. Any gains or losses from changes in the market value of those bonds cannot be recognized as “realized” gains or losses until the bonds are actually sold. So those unrealized interim gains or losses are captured as part of OCI.
Essentially, other comprehensive income acts as a temporary holding spot for certain revenues, expenses, gains and losses that have occurred but don’t directly flow through the income statement. It provides a fuller picture of earnings while avoiding unnecessary volatility in net income.
Key Examples of Items Included in OCI
Some of the most common items recorded in OCI include:
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Unrealized gains or losses on investments classified as available-for-sale: Investments that a company intends to hold for an undefined period of time are considered available-for-sale. The changes in fair market value of these investments are captured in OCI until the investments are sold.
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Foreign currency translation adjustments: Large multinational corporations that operate in different currencies will record exchange rate differences as part of OCI. These translation adjustments are unrealized gains or losses stemming from changes in exchange rates.
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Gains or losses from cash flow hedging derivatives: Derivatives used as hedges generate OCI too. The fair value adjustments get recorded in OCI until the underlying hedged transaction occurs.
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Pension plan adjustments: Changes in estimates or actuarial assumptions that affect a company’s defined benefit pension plan obligations generate OCI as well. This OCI gets recaptured over time as employees receive their vested pension benefits.
As you can see, the common thread is that these revenues, expenses, gains and losses have occurred but don’t directly flow through net income…yet. They ultimately will once realized. So for now, they sit in the temporary OCI holding spot on the balance sheet.
Why Does Other Comprehensive Income Matter?
At first glance, OCI may seem relatively inconsequential. After all, it contains unrealized, temporary adjustments. But ignoring OCI comes with real risks:
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You’ll miss part of the earnings picture: Net income is certainly important. But for a comprehensive view of profitability, you need to analyze net income alongside OCI. Think of OCI as the companion to net income. Together they provide the complete earnings framework.
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Lack of transparency: Without properly tracking or disclosing OCI, companies could conceal certain losses and create the illusion of higher profitability. OCI enhances transparency for investors.
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Income statement volatility: Recognizing some unrealized gains/losses directly on the income statement could cause unnecessary fluctuations that don’t reflect the company’s core operations. OCI avoids this.
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Foreshadows future impact: While unrealized, the OCI adjustments often indicate items that will eventually flow through net income once realized. OCI provides an early signal.
In short, other comprehensive income plays a pivotal role in the larger earnings framework and financial analysis process. It deserves attention.
Tips for Analyzing Other Comprehensive Income
Here are some tips to help you sharpen your analysis and interpretation of OCI as an investor or analyst:
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Study OCI over time – Analyze trends in the types of adjustments hitting OCI. Is there an unusual new source of OCI this period? Steady recurring items? This context helps you parse signal from noise.
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Understand the company’s activities – The nature of the business and the company’s assets, investments, and risk management strategies can all influence what flows into OCI. This understanding allows you to analyze the adjustments in context.
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Look for hidden risks – Significant OCI adjustments may reflect lurking risks. For example, a pension adjustment may flag an underfunded pension obligation that could become problematic later. OCI can act as an early warning sign.
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Consider future earnings impact – Make note of items sitting in OCI that could eventually flow through the income statement and impact earnings once realized. Model out that future impact if material.
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Compare to peers – Look at OCI relative to other comparable companies in the same industry. Unusual differences could signal risks or even accounting discrepancies. Peer comparisons provide helpful perspective.
How to Locate Other Comprehensive Income on Financial Statements
By now you understand what OCI is and why it’s important. But where exactly do you locate it within a company’s financial statements?
On the income statement, you’ll see a subtotal for “net income.” Right below this, you’ll find a section called “other comprehensive income.” Any applicable OCI adjustments will be listed here, itemized out.
These OCI items then accumulate on the balance sheet in an equity account called “accumulated other comprehensive income.” This accumulated balance from prior periods represents the running total of all previously recognized unrealized gains and losses that have yet to flow through net income.
So OCI adjustments start on the income statement, but you’ll also find the cumulative amounts on the balance sheet.
Real World Examples of Other Comprehensive Income
To make OCI even more tangible, let’s walk through two real-world examples from well-known companies’ financial statements:
Microsoft Other Comprehensive Income Example
In its fiscal year 2021, Microsoft reported $61.3 billion of net income on the income statement. Right below this net income line, Microsoft listed a $465 million foreign currency translation loss as part of other comprehensive income.
This unrealized currency translation loss was excluded from net income but captured in OCI. It stemmed from exchange rate fluctuations related to Microsoft’s international operations.
On Microsoft’s balance sheet, this OCI currency loss accumulated into the $5.1 billion balance of accumulated other comprehensive income. That balance also included unrealized gains and losses on derivatives held as cash flow hedges.
Bank of America Other Comprehensive Income Example
Bank of America reported $32.0 billion of net income in fiscal 2021. Its other comprehensive income section listed several items:
- $2.6 billion of unrealized net gains related to debt securities
- $1.4 billion unrealized net loss related to derivatives
- $1.7 billion improvement in pension liability adjustments
These unrealized interim adjustments were excluded from net income but captured in OCI. The cumulative effect increased Bank of America’s accumulated other comprehensive income balance to $10.4 billion on the balance sheet.
Key Takeaways on Analyzing Other Comprehensive Income
Here are some key takeaways as you tackle analyzing OCI:
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Other comprehensive income consists of unrealized revenue, expense, gain and loss adjustments excluded from the income statement under GAAP.
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OCI captures interim changes in value that haven’t yet flowed through net income. Common examples include gains/losses on available-for-sale investments, currency adjustments, pension plan changes, and cash flow hedge derivatives.
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While unrealized, OCI provides important transparency for investors on the complete earnings picture and often foreshadows future impact.
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Study OCI over time, dig into the details, and benchmark against peers. Identify future income statement impact and potential risks.
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Locate OCI on the income statement and accumulated other comprehensive income on the balance sheet.
Equipped with this comprehensive guide, you now have the knowledge to confidently evaluate how other comprehensive income fits into a company’s overall profitability framework. Adding OCI analysis to your research toolkit will lead to wiser investment decisions guided by the complete earnings picture.
Important Categories of OCI
Understanding the drivers of a companys daily operations is going to be the most important consideration for a financial analyst, but looking at OCI can uncover other potentially major items that impact a companys bottom line.
Pension Plans
Another major category in OCI is the impact on corporate retirement plans. Years of low-interest rates have put pension assets of a number of large corporations plans below the obligations they must cover for current and future retirees. Examples of these differences can demonstrate just how big the impact can be on a firm.
Case in point: In 2011, Goodyear reported a standard net income of $343 million, but a loss of $378 million when subtracting retirement plan expenses. In another report that year, industrial giant General Electric logged regular earnings of almost $14.2 billion but had those more than cut in half when factoring in losses on its retirement plans. The extent of future retirement liabilities is certainly an important consideration in estimating a firms future profit prospects.
Other Comprehensive Income
What are some examples of items other comprehensive income?
Here are some common examples of items other comprehensive income includes: Whenever CI is listed on the balance sheet, the statement of comprehensive income must be included in the general purpose financial statements to give external users details about how CI is computed.
What is total comprehensive income?
Total comprehensive income is the combination of profit or loss and other comprehensive income. Examples of items that may be classified in other comprehensive income are as follows:
What is other comprehensive income (OCI)?
Other Comprehensive Income (OCI) refers to any revenues, expenses, and gains / (losses) that not have yet been realized. These items, such as a company’s unrealized gains on its investments, are not recognized on the income statement and do not impact net income. What is the Definition of Other Comprehensive Income (OCI)?
What is the difference between comprehensive income and net income?
However, net income only recognizes earned income and incurred expenses. A statement of comprehensive income, which covers the same period as the income statement, reflects net income as well as other comprehensive income, the latter being unrealized gains and losses on assets that aren’t shown on the income statement.
