Point 1 Where did Other Comprehensive Income come from?

Where did Other Comprehensive Income (or short OCI) come from – Prior to 1997, other comprehensive income and its components weren’t required to be reported anywhere in the financial statements, and many items bypassed the income statement and went directly to owners’ equity.

Introduction

In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, established the requirement for reporting and displaying comprehensive income and its components as a required component of a full set of general-purpose financial statements.

SFAS 130 (codified as Accounting Standards Codification® Topic 220, Comprehensive Income) defines OCI as consisting of net income and ‘other comprehensive income’, which refers to revenues, expenses, gains, and losses that, under GAAP, are included in comprehensive income but excluded from net income and are consistent with one of four classifications:

  • foreign currency translation adjustments,
  • available-for-sale marketable securities adjustments,
  • minimum required pension liability adjustments, and
  • adjustments on derivative securities that qualify for cash flow or foreign currency hedge accounting treatment.

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. Comprehensive income is sometimes defined as comprehensive income 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.

In an other definition comprehensive income is defined 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 such 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 organizations.

Clean vs dirty surplus

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.

Other Comprehensive Income,bypass the income statement,all-inclusive income statement,Total comprehensive income,net income line

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 unrealized 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’.

The reporting of comprehensive income has always been controversial due to the lack of a conceptual definition of the difference between ‘net income’ items and ‘other comprehensive income’ items. However, requiring reporting entities to record changes in fair value for many financial instruments (including most loans and issued debt) through other comprehensive income magnifies the difference between net income and total comprehensive income in the financial statements.

Other Comprehensive Income,bypass the income statement,all-inclusive income statement,Total comprehensive income,net income line

Reporting lines in OCI

A complete list of potential reporting lines in other comprehensive income is as follows:

IFRS Reference

IAS1(81A)(a)

Profit for the period

Other comprehensive income

IAS1(82A)(a)(ii)

Items that may be reclassified to profit or loss

IAS1(82A), (7)(da)

Changes in the fair value of debt instruments at fair value through other comprehensive income

IAS1(82A)

Share of other comprehensive income of associates and joint ventures accounted for using the equity method

IAS1(82A), (7)(c), IAS21(32)

Exchange differences on translation of foreign operations

IFRS5(38)

Exchange differences on translation of discontinued operation

IAS1(82A), (7)(e)

Gains on cash flow hedges

IAS1(82A), (7)(g),(h)

Costs of hedging

IAS1(82A),(7)(e)

Hedging gains reclassified to profit or loss

IAS1(82A), (7)(c) IFRS 9 (6.5.13)

Gains on net investment hedge

IAS1(91)

Income tax relating to these items

IAS1(82A)(a)(i)

Items that will not be reclassified to profit or loss

IAS1(82A), (7)(a)

Revaluation of land and buildings

IAS1(82A), (7)(d)

Changes in the fair value of equity investments at fair value through other comprehensive income

IAS1(82A)

Share of other comprehensive income of associates and joint ventures accounted for using the equity method

IAS1(82A), (7)(b), IAS19 (120)(c)

Remeasurements of post-employment benefit obligations

IAS1(91)

Income tax relating to these items

IAS1(81A)(b)

Other comprehensive income for the period, net of tax

IAS1(81A)(c)

Total comprehensive income for the period

IAS1(81B)(b)

Total comprehensive income for the period is attributable to:

Owners of the reporting entity

Non-controlling interests

Total comprehensive income for the period attributable to owners of the reporting entity arises from:

Continuing operations

IFRS5 (33)(d)

Discontinued operations

See also: What is OCI

Other Comprehensive Income

bypass the income statement

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