Comprehensive Income vs. Other Comprehensive Income: An Overview
In financial accounting, corporate income can be broken down in a multitude of ways, and firms have some latitude on how and when to recognize and report their earnings. To compensate for this, the Financial Accounting Standards Board (FASB) has firms collect and report information using certain universally recognized measurements to help provide perspective for investors and analysts and report them on financial statements. Two such measurements are comprehensive income and other comprehensive income. Obviously, they sound (almost) like the same thing. Let us examine how they differ.
Other Comprehensive Income
We will start with other comprehensive income (OCI), for reasons that will become clear later on. Also known as comprehensive earnings, this is a catch-all classification for the items that cannot be included in typical profit and loss calculations because they do not stem from the company's regular business activities and operations. Hence, they have to bypass the company's net income statement—the sum of recognized revenues minus the sum of recognized expenses—which does include changes in owner equity.
More specifically, other comprehensive income charts the change in a company's net assets from non-owner sources over a certain time period, including all revenues and expenses that have not yet been realized, such as a capital gain or loss from an investment that has not yet been sold. (Once the gain or loss is realized, the amount is reclassified to net income.) Other examples of the types of changes captured by other comprehensive income include:
- Gains and losses from derivative instruments
- Unrealized gains and losses from debt securities
- Pension or other retirement plan gains and losses
- Foreign currency transactions
- Available-for-sale securities unrealized gains and losses
[Important: Other comprehensive income is not listed with net income, instead, it appears listed in its own section, separate from the regular income statement and often presented immediately below it.]
Comprehensive income (CI), is more of an umbrella term—and in fact, an umbrella statement. Usually, it appears within the stockholders' equity section of a financial report or balance sheet. The comprehensive income consists of two sections:
- The net income from the income statement
- The net income from the other comprehensive income statement
The sum total of comprehensive income, also known as accumulated other comprehensive income, is calculated by adding net income to other comprehensive income.
- Other comprehensive income items occur rather infrequently for smaller businesses, so it is most important for valuing larger corporations.
- It shows how overseas operations and currency hedging affect corporate performance.
- It might show how the unrealized performance of a firm's investment portfolio can reveal the possibility of major losses down the road.
- Comprehensive income provides a more complete view of a company's income and revenues.
- It is used to chart the changes in the overall net assets of a company; by so doing, it marks the change in the value of an owner's interest in a business.