Other comprehensive income consists of revenues, expenses, gains, and losses that, according to the GAAP and IFRS standards, are excluded from net income on the income statement. Revenues, expenses, gains, and losses that are reported as other comprehensive income are amounts that have not been realized yet.
What’s included in Other Comprehensive Income?
Other comprehensive income is shown on a company’s balance sheet. It is similar to retained earnings, which is impacted by net income, except it includes those items that are excluded from net income. This helps reduce the volatility of net income as the value of unrealized gains/losses moves up and down.
Common items included in the account include:
Gains or losses on investments available for sale
Gains or losses on derivatives held as cash flow hedges
Reporting Standards for Other Comprehensive Income
According to accounting standards, other comprehensive income cannot be reported as part of a company’s net income and cannot be included in its income statement. Instead, the figures are reported as accumulated other comprehensive income under shareholders’ equity on the company’s balance sheet.
Only unrealized items are recorded as other comprehensive income. Once the transaction has been realized (e.g., the company’s investments have been sold), it must be removed from the company’s balance sheet and recognized as a realized gain/loss on the income statement.
Importance of Other Comprehensive Income
Other comprehensive income is a crucial financial analysis metric for a more inclusive evaluation of a company’s earnings and overall profitability. While the income statement remains a primary indicator of the company’s profitability, other comprehensive income improves the reliability and transparency of financial reporting.
The other income information cannot uncover the company’s day-to-day operations, but it can provide insight on other essential items. For example, an analyst can obtain insight regarding the management of the company’s investments. The reported investments’ unrealized gains/losses may forecast the company’s actual, realized gains or losses on its investments.
Also, if a company runs overseas operations, the other income section can contribute to the understanding of the dynamics of the company’s foreign operations and assess the impact of foreign exchange fluctuations. Finally, it helps determine the extent to which a company’s future pension liabilities may affect unrealized profits.
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