Fair value through other comprehensive income

Fair value through other comprehensive income—financial assets may be measured at fair value through other comprehensive income if:

  • the contractual cash flows represents payments solely payments of principal and interest (SPPI test), and
  • the objective of the entity’s business model (Business model test) is achieved both by
    1. collecting contractual cash flows and
    2. selling financial assets. ( 1 plus 2 together ‘Hold to collect and sell’)

Financial assets should be classified as fair value through profit or loss if they do not meet the criteria for fair value through other comprehensive income or amortised cost.


Why Other comprehensive income?

When you sell an investment, you include the amount of money you received on the income statement as part of your income. Suppose you haven’t sold an investment, but it lost $10,000 in value in the past year. If you include that loss with your income it will make your company look less profitable than it really is. Likewise, an increase in value would pad your income.

The solution is to include it in a separate category, “other comprehensive income.” This section of the statement covers gains and losses that don’t affect your income but do affect the equity, the worth of your business assets. You can combine income and comprehensive income into one statement, or separate them into two.


Comprehensive income is derived from the concept of the all-inclusive income statement, which refers to all the changes in assets and liabilities other than those that involve transactions with owners. Statement of Financial Accounting Concepts (SFAC) No. 6, Elements of Financial Statements, defines comprehensive income as “the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distribution to owners.” As Loudell Ellis Robinson notes in “The Time Has Come to Report Comprehensive Income,” it satisfies financial statement users’ desire for one figure encompassing all the components of income that lead to changes in the overall financial position of organisations (Accounting Horizons, June 1991).

The concept of comprehensive income is closely related to the income statement concept of “clean” vs. “dirty” surplus. Under the clean surplus approach, all income items must pass through the income statement; they sometimes are referred to as items that are reported above the line (the net income line) or items that pass through the income statement. Thus earned surplus (equivalent to retained earnings) is “clean” of these items.

Under the dirty surplus approach, certain items skip the income statement and are reported directly in the statement of owners’ equity. Accordingly, the notion of a dirty surplus includes items that are reported below the net income line, such as unrealised holding gains and losses on available-for-sale securities, additional minimum pension liability adjustments, currency translations, gains and losses of cash flow hedges, and asset revaluations. Items that used to bypass the income statement were then given the name “Other Comprehensive Income.”

Fair value through other comprehensive income

Fair value through other comprehensive income Fair value through other comprehensive income Fair value through other comprehensive income 

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