Comprehensive Income

These lectures cover CPA questions covering comprehensive income, accumulated other comprehensive income and statement of stockholders’ equity.

Comprehensive Income

Companies generally include in net income all revenues, expenses, gains, and losses recognized during the period. These items are classified within the income statement so that financial statement readers can better understand the significance of various components of net income. Changes in accounting principles and corrections of errors are excluded from the calculation of net income because their effects relate to prior periods.

In recent years, the use of fair values for measuring assets and liabilities has increased. As a result, reporting of gains and losses related to changes in fair value have placed a strain on income reporting. Because fair values are continually changing, some argue that recognizing these gains and losses in net income is misleading. The FASB agrees and has identified a limited number of transactions that should be recorded in other comprehensive income (CI). The aggregate amount of the other CI item is reported in stockholders’ equity as Accumulated Other CI. One example is unrealized gains and losses on available-for-sale debt investments. These gains and losses are excluded from net income, thereby reducing volatility in net income due to fluctuations in fair value. At the same time, disclosure of the potential gain or loss is provided.

Companies include these items that bypass the income statement in a measure called comprehensive income. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. CI therefore, includes the following: all revenues and gains, expenses and losses reported in net income, and all gains and losses that bypass net income but affect stockholders’ equity. These items—non-owner changes in equity that bypass the income statement—are referred to as other comprehensive income.

Companies must display the components of other CI  in one of two ways: (1) a single continuous statement (one statement approach) or (2) two separate, but consecutive statements of net income and other comprehensive income (two statement approach). The one statement approach is often referred to as the statement of comprehensive income. The two statement approach uses the traditional term income statement for the first statement and the comprehensive income statement for the second statement.

Under either approach, companies display each component of net income and each component of other comprehensive income. Companies are not required to report earnings per share information related to comprehensive income.

One Statement Approach

In this approach, the traditional net income is a subtotal, with total comprehensive income shown as a final total. The combined statement has the advantage of not requiring the creation of a new financial statement. However, burying net income as a sub-total on the statement is a disadvantage.