What Is Comprehensive Income?
Comprehensive income is the variation in the value of a company's net assets from non-owner sources during a specific period. It includes net income and unrealized income. Unrealized income can be unrealized gains or losses on, for example, hedge/derivative financial instruments and foreign currency transaction gains or losses.
Comprehensive income provides a complete view of a company's income, some of which may not be fully captured on the income statement.
- Comprehensive income reflects the changes to owners' equity that originate from non-owner sources and traditional income.
- Comprehensive income includes adjustments made to the prices of securities held for sale by the firm and/or derivatives used to hedge such positions, foreign currency exchange rate changes, and adjustments to pension liabilities.
- It excludes owner-caused changes in equity.
- Details on comprehensive income often appear in the footnotes to a company's financial statements.
- Some companies produce a separate statement of comprehensive income.
Understanding Comprehensive Income
Comprehensive income is the total of a company's net income and other comprehensive income.
For companies, comprehensive income sheds light on changes in equity. Since it includes net income as well as unrealized income and losses, it provides the big picture of a company's value.
For investors, comprehensive income is useful for its fuller statement of a company's financial information. Having this information can help their decision-making where the feasibility of the company as a potential investment is concerned.
The purpose of comprehensive income is to show all operating and financial events that affect non-owners' interests in a business. As well as net income, comprehensive income includes unrealized gains and losses on available-for-sale investments. It also includes cash flow hedges, which can change in value depending on the securities' market value, and debt securities transferred from 'available for sale' to 'held to maturity', which may also incur unrealized gains or losses. Gains or losses can also be incurred from foreign currency translation adjustments and in pensions and/or post-retirement benefit plans.
Income excluded from the income statement is reported under "accumulated other comprehensive income" of the shareholders' equity section.
Income from non-owner sources results in an increase in the value of the company. However, since it is not from the ongoing operations of the company's normal line of business, it is not appropriate to include it in the traditional income statements.
Comprehensive income excludes owner-caused changes in equity, such as the sale of stock or purchase of Treasury shares.
Comprehensive income represents the sum of a company's net income and its other comprehensive income (OCI).
Statement of Comprehensive Income
A company's income statement provides details about revenues and expenses, including taxes and interest. Its bottom line is net income. However, net income only recognizes earned income and incurred expenses.
A statement of comprehensive income, which covers the same time 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. The statement of comprehensive income gives company management and investors a fuller, more accurate idea of income.
The net income section provides information derived from the income statement about a company's total revenues and expenses. The amount is adjusted to account for non-owner activities.
Net income is arrived at by subtracting cost of goods sold, general expenses, taxes, and interest from total revenue.
Other Comprehensive Income
The other comprehensive income section provides information on the company's unrealized gains, losses, revenue, and expenses. Here are some examples of other comprehensive income that you may find on the comprehensive income statement:
- The unrealized gains and losses on securities that a company has for sale
- Gains and losses on cash flow hedge instruments
- The unrealized gains and losses on debt securities that result when they're transferred from the available for sale category to the held to maturity category
- Foreign currency translation adjustments
- Foreign currency transaction gains and losses related to a foreign investment hedge.
- Pension or post-retirement benefit plan gains or losses
At the end of the statement is the comprehensive income total, which is the sum of net income and other comprehensive income.
In some circumstances, companies combine the income statement and statement of comprehensive income into one statement or it will be included as footnotes. However, a company with other comprehensive income will typically file this form separately. The statement of comprehensive income is not required if a company does not meet the criteria to classify income as comprehensive income.
Financial statements, including that showing comprehensive income, only show activity from a certain period or a specific point in time. They can't guarantee future performance.
Comprehensive Income Examples
Consider an example in which a co-worker wins the lottery. The lottery winnings are considered part of their taxable or comprehensive income but not regular earned income. This is because the lottery winnings are unrelated to their employment. However, they still must be accounted for.
Another example would be a stock investment that company A makes in company B. This transaction is recorded on company A's balance sheet at the purchase price and is carried forward at this price until the stock is sold.
However, if the stock price were to appreciate, then the balance sheet entry would be erroneous. Other comprehensive income would rectify this by adjusting it to the stock's prevailing market value and stating the difference (gain in this instance) in the equity section of the balance sheet.
Advantages and Disadvantages of the Statement of Comprehensive Income
- It provides a more comprehensive view of a company's income than the income statement alone.
- Company management can use the added information about income to inform smarter planning for revenue and costs as well as operational decisions.
- Investors can gain better insight into a company's profitability and the stability of earnings. They can use it as a tool to compare companies as potential investments.
- The inclusion of unrealized gains and/or losses can distort the view of a company's financial health.
- The values for other comprehensive income relate to assumptions, not actual results.
- Comprehensive income doesn't assure future profitability. It only presents a picture of a company's profitability for a particular period of time in the past.
It details income statement info plus unrealized income and losses
It provides a more complete picture of profitability
Investors can use it for better investment decision-making
Unrealized values may misrepresent actual financial well-being
No guarantee of future results
The statement of comprehensive income may report amounts per month, quarter, or year.
What's Other Comprehensive Income?
Contrary to net income, other comprehensive income is income (gains and losses) not yet realized. It reflects income that cannot be accounted for by the income statement. Some examples of other comprehensive income are foreign currency hedge gains and losses, cash flow hedge gains and losses, and unrealized gains and losses for securities that are available for sale.
What's the Benefit of the Comprehensive Income Statement?
It provides a comprehensive view for company management and investors of a company's profitability picture. It's also a way for a company to record more than simply net income. The statement shows net income as well as other comprehensive income.
What's the Difference Between Net Income and Comprehensive Income?
Net income is the actual profit or gain that a company makes in a particular period of time. Comprehensive income is the total of that net income plus the value of yet unrealized profits (or losses) in the same period.
The Bottom Line
Comprehensive income is the total of a company's net income, as recorded on the income statement, and unrealized income (or "other comprehensive income") that is not included on an income statement but is recorded in the statement of comprehensive income. The statement of comprehensive income displays both net income details and other comprehensive income details. It is appreciated for its more comprehensive view of a company's profitability picture for a particular period of time.