Prior to 1997, other comprehensive income (OCI) 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.
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, Where did Other Comprehensive Income come from?
- available-for-sale marketable securities adjustments,
- minimum required pension liability adjustments, and Where did Other Comprehensive Income come from?
- 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. Where did Other Comprehensive Income come from?
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.
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. Where did Other Comprehensive Income come from?
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 OCI magnifies the difference between net income and total comprehensive income in the financial statements. Where did Other Comprehensive Income come from?