What is comprehensive income? Comprehensive income statements let businesses record the earnings they get from all sources. Examples include money that is earned, as well as unearned income. Unrealized income might come from nonowner sources, including gains due to foreign currency transactions, fluctuating asset values, and hedge financial instruments, among other financial events.
What Is Comprehensive Income?
Comprehensive income has two different elements. The first is a set accounting period or stretch of time in which it's tracked, such as a month, quarter, or year. The second is the combination of all revenues, expenses, unrealized gains, or losses that change stockholder equity in that accounting period.
The accounting period in question can be whatever company leaders choose to look at. Reports are generated for those periods so they can see how the business is doing in that span of time.
The income starts with net income or losses, as reported in an income statement. However, the comprehensive income will also include things such as gains or losses from hedging derivatives, translation adjustments to foreign currencies, and unrealized gains or losses on postretirement benefit plans.
What Does Comprehensive Income Include?
Typical net income fails to include a variety of profits and losses that companies might have.
- Cash Flow Hedges: These values fluctuate based on market conditions.
- Debt Securities: If transferred all the way to maturity, losses or gains might be unrealized in the company's net.
- Foreign Currency: Foreign currency transactions might have gains and losses that need to be recorded, even when they're not regular earned earnings.
- Post-Retirement Benefits: These benefits have gains and losses that also need recording even though they're not regular earned income.
Why Is Comprehensive Income Important?
The comprehensive income formula is crucial because the amounts included show the real earnings of a business across a particular period of time. Companies that have a lot invested in different places need this valuable information. If a company isn't faring well for net income but has investments doing well, then realizing some of those assets might keep the company steady when profits aren't where they could be. Likewise, investments do poorly over the long run, comprehensive financial statements might signal it's time to change the investment strategy.
Comprehensive Income vs Net Income
Net income is what you have left of gross revenue after subtracting expenses and costs of your goods sold, whereas comprehensive income combines net income with various unrealized gains not reported as earned income.
What Is a Net Income?
Gross is all the revenue your products and services pull in, regardless of the costs and expenses associated with producing them. After you deduct those costs and expenses, you have your net.
Differences Between Comprehensive Income and Net Income
There are several examples to differentiate comprehensive from net income.
- Net income can be estimated by deducting expenses from the revenue. Comprehensive income totals net and any unrealized earnings.
- Net within a set period might highlight a company's retained earnings. Comprehensive is moved into accumulated earnings.
- Net income reveals a company's capacity to make a profit, but comprehensive income shows a clearer picture of overall financial status.
- Income statements report a company's net. Comprehensive income statements report the comprehensive income of the company.
Comprehensive Income vs Other Comprehensive Income
Other comprehensive income can be abbreviated as OCI. It's often confused with comprehensive income. OCI is sometimes known as comprehensive earnings. While they're not the same, they do factor into each other, so your company needs to be tracking both of them in the same periods to get a clear picture of your financial status that stakeholders want to see.
Comprehensive income has several distinctions.
- It serves as a broad umbrella statement.
- It offers fewer details.
- Net income is included.
- Realized and unrealized are both included.
Other comprehensive income can include details of its own.
- You can add it to net income before doing comprehensive income calculations.
- This is separate from your company's normal income statement.
- You can report this after taxes.
- Alternatively, you might report this before taxes if you use a single tax expenditure line at the conclusion of the statement.
- You can report this under shareholder equity.
- You need to change this to income if an asset is sold.
- It will demonstrate earning impact.
How to Calculate Comprehensive Income
The formula for calculating comprehensive income is rather simple. It's the sum total of OCI plus your net income. By adding other comprehensive with your net from your normal income statement, you will get your company's comprehensive income. Just make sure that both the net and OCI cover the same period of time.
Where Do Companies Record Comprehensive Income?
Companies record their comprehensive income in a few different ways. They include a statement of comprehensive income, an income statement, and tax statements.
- Statement of Comprehensive Income: A statement like this reports comprehensive income which is reported separately from your company's retained earnings. Rather than being reported in the net of your firm, comprehensive income will be reported as being stakeholder equity. This will include net income and OCI to formulate the full picture of your company's income.
- Income Statement: Comprehensive income might also be reported on your company's income statement. The statement will define the overall expenses and revenue of the company generating the report. The net income is included to cover incurred losses and profits. Comprehensive income figures factor in the possible gains from company investments while also accounting for expected losses, such as payments involved with employee pension and retirement plans. Pension costs can cause a company a lot of headaches if left unchecked, and it's important to pay attention to financial reports.
- Tax Statements: Unrealized losses and gains are another way of looking at your company's comprehensive income. These get reported in different ways for government tax purposes based on how gains or losses are realized. OCI might be a realized stock loss and put into the capital loss category if the company closes and liquidates.
Statement of Comprehensive Income: Benefits and Limitations
Net gets moved into a company's statement of comprehensive income where adjustments are made for non-owner activities. This statement has several benefits that stakeholders can take advantage of, but it also has a few limitations that might restrict how truly useful it can be.
Benefits of Statement of Comprehensive Income
A comprehensive income statement has a few advantages to it.
- Detailed Information Regarding Company Revenue: Stakeholders are better off knowing where and how a business is generating its revenue and the costs associated with the investment. Net income doesn't paint the full picture while this might highlight smaller details that prove important.
- Investment Analysis Utilization: Investors need every financial report before they make important decisions. Net profit alone can deflate a company's EPS, but comprehensive income can better indicate how much money investors can make.
Limitations of Statement of Comprehensive Income
A statement of comprehensive income does have several notable limitations.
- No Liabilities or Assets: The income statement won't show the whole financial health of a business. While it shows losses or gains unrealized as they relate to income, the statement won't list them if they're associated with liabilities or assets.
- No Future Prediction: A business might look wonderful on an income statement, but investors can't glean future potential from this. Lucrative projects might be on the horizon, but unrealized earnings won't show up yet.
Understanding comprehensive income is crucial to understanding how your business is doing, and knowing how it's different from other kinds of income reporting is also just as important. For stress-free accounting, contact to our certified CPA firm in Chicago for outsourced accounting services Chicago as they are subject matter experts and can help with financial modeling and other related topics.