What Is the All-Inclusive Income Concept?

The all-inclusive, or comprehensive, income concept is an accounting method whereby all gains and losses, including those caused by extraordinary and nonrecurring items, are reported on a company’s income statement.

Key Takeaways

  • The all-inclusive income concept reports all gains and losses, including those not considered to stem from everyday business operations, on the income statement.
  • Accounting bodies concluded that the inclusion of all items affecting earnings makes the profit and loss statement more informative and less subject to judgment.
  • Investors, however, generally prefer to calculate earnings and value companies by focusing only on sustainable income generated from normal recurring operations.

Understanding the All-Inclusive Income Concept

The income statement, one of three financial statements used for reporting financial performance over a specific accounting period, is carefully scrutinized by investors. It tells us how much money a company brought in and, even more importantly, how much of this income it managed to keep hold of.

Sometimes, earnings can be massively inflated or deflated by unusual, one-off events, though. Income may be weighed down by things such as asset write-downs, settlement and litigation fees, a slowdown of operations due to natural disasters, layoffs, and restructuring. It can also be boosted, say, by the sale of land or business divisions or a one-off tax refund.

Over the years, the impact these types of unsustainable items have on reported profit has raised questions about how income should be disclosed. The income from operations (IFO) concept champions excluding extraordinary and nonrecurring gains and losses from income, displaying them instead in the equity statement. Under the all-inclusive income concept, on the other hand, all revenues, expenses, gains, and losses recognized during an accounting period are recorded as income, regardless of whether they are considered to be the result of everyday operations.

At present, non-recurring gains or losses are often factored into net income (NI), the part of the income statement where all incomings and outgoings are tallied up to calculate earnings per share (EPS). Unrealized gains and losses from fluctuations in the value of certain assets, such as hedge/derivative financial instruments and foreign currency transactions, meanwhile, are filed separately after the bottom-line NI figure as other comprehensive income and displayed as an adjustment to stockholders' equity on the balance sheet.  

Criticism of the All-Inclusive Income Concept

The all-inclusive income concept paints the fullest picture of an enterprise. However, it also increases income volatility and can be misleading.

One-off costs such as redundancies and the sale of assets might eat away at or boost income. What most investors really want to know, though, is how much money the company is capable of consistently churning out from its everyday business operations.

A company must regularly generate earnings from operations to succeed in the long term. If it makes most of its money from non-core activities, it could be cause for concern and serve as a potential red flag. For instance, a car company may be headed for trouble if it is making far more money from its financing and credit operations than from selling automobiles.

Important

Companies provide earnings figures that conform to the all-inclusive concept, as well as others that exclude one-time items to enable investors to judge its underlying business more directly.

As a result, investors often focus on income from continuing operations, an alternative income reporting concept, to calculate profitability and earnings. Using this technique, extraordinary and nonrecurring gains and losses are excluded from income. Because those gains and losses go directly to equity and bypass the income statement, this is sometimes called the "dirty surplus" method.

History of the All-Inclusive Income Concept

For many years, the Securities and Exchange Commission (SEC) was supportive of the all-inclusive approach. The American Institute of Accountants, now known as the American Institute of Certified Public Accountants (AICPA), however, generally favored only including income generated from normal recurring operations.

In 1966, the AICPA then had a change of heart, determining that including all the items affecting earnings makes the profit and loss statement (P&L) more informative and less subjective. 

The Financial Accounting Standards Board (FASB), the body responsible for setting and maintaining disclosure rules for companies in the United States, gradually moved closer to the all-inclusive income determination method when issuing Statement no. 130, "Reporting Comprehensive Income", in 1997. Twenty years later, in 2017, the FASB combined its guidance for income statements and comprehensive income into Topic 220.