Comprehensive income (CI), which is defined as the sum of net income (NI) and other comprehensive income (OCI), gives both the internal and external audiences a 30,000-foot perspective of a company’s valuation. Understanding how it’s broken down, how it’s accounted for, and how it’s interpreted by different audiences is essential to making favorable impressions.
In the banking industry, the Government Accountability Office (GAO) found 2,705 material restatements occurred between the beginning of January 1997 and the first half of 2006. Businesses that fail to report financial information accurately the first time are not uncommon – but this can have harmful effects on their bottom line.
Comprehensive Income Components Defined
Net income, which is the first component of comprehensive income, is the difference between a company’s total revenue and the taxes, interest, and expenses. This shows how profitable a company is during a certain accounting time frame. It’s important to keep in mind that net income, along with all of the deductions taken from the total revenue, are reflected on the income statement because this financial document recognizes only incurred expenses and earned income during a set accounting period.
Other comprehensive income (OCI), the second half of CI, is a way to account for and analyze unrealized or not yet booked gains or losses. This can include investing ventures, cash flow hedges, debt securities, foreign currency exchange rate adjustments, pension obligations, etc. It’s important to keep in mind that along with being reported on the company’s balance sheet, it may also be reported on a separate statement of comprehensive financial statement.
Further Financial Statement Reporting Considerations
On June 17, 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) 2011-05, Comprehensive Income - Topic 220: Presentation of Comprehensive Income.
One of the original three ways that was in effect but has been repealed with this modification from FASB was to report elements of other comprehensive income (OCI) as a portion of the statement of changes in stockholders’ equity. However, many professionals argued that this change simplified the reading and analysis of how OCI impacts a business’ total operations.
Based on FASB’s Accounting Standards Codification (ASC) 220-10-45-1, comprehensive income can be presented in either one statement or two discrete, successive statements.
#1: Single, Successive Statement Option
Based on ASC 220-10-45-1A, the following figures are required to be reported:
Components of net income
Total net income
Components of other comprehensive income
Total for other comprehensive income
Total for comprehensive income
#2: Two Discrete, Successive Statements
Based on ASC 220-10-45-1B, the following two figures are required:
1. Statement of net income
2. Statement of other comprehensive income
The following data for each respective successive financial statement should be included:
1a. Components of net income
b. Total net income
2a. Components of other comprehensive income
b. Total for other comprehensive income
c. Total for comprehensive income
Conclusion
While each business has its own challenges and opportunities, when it comes to preparing financial statements it’s essential to prepare financial statements that are transparent and follow FASB reporting requirements to maintain attractiveness to internal and external stakeholders.
