Other Comprehensive Income

Revenues, expenses, gains, and losses excluded from net income

What is Other Comprehensive Income?

Other comprehensive income comprises 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 incomes have not been realized yet.

 

Other Comprehensive Income

 

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 move up/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
  • Foreign currency exchange gains or losses
  • Pension plans gains or losses

 

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 can be claimed as other 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 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 the company’s earnings and overall profitability. While the income statement remains a primary indicator of the company’s profitability, it is a subjective measure that can be easily manipulated. On the other hand, 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 investment’s unrealized gains/losses may forecast the company’s potential 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 company’s future pension liabilities may affect unrealized profits.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

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