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Comprehensive Income

Comprehensive Income is the change in equity (net assets) of an entity 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 distributions to owners.  It includes net income and other revenues, expenses, gains, and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income.  Some parts of comprehensive income presently bypass the income statement and are reported in a separate equity section of the balance sheet."  Comprehensive income consists of two main categories of net income and other comprehensive income. 

"Net income is an enterprise performance measure favored by many financial statement users.  However, several income items are not shown on the income statement.  Numerous groups of financial statement users have called for revision of the number of income items that bypass the income statement.  The accumulated balances of these items are currently reported in permanent equity accounts in the balance sheet, not on the income statement.  Although discussed in U.S. accounting literature for over twenty years, the concept of a comprehensive income that captures these income items first became popular outside the United States.  The first accounting standard addressing the issue was enacted in Europe.  In 1992, the United Kingdom Accounting Standards Board issued Financial Reporting Standard 3 that introduced a statement of total recognized gains and losses as a Accounting Standards Committee issued an exposure draft of a new income standard and modified it in 1997.  It is conceptually similar to recent U.S. comprehensive income efforts."[i]

In December 1980, the Financial Accounting Standards Board formally defined comprehensive income in Concepts Statement No.6, as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.” Description of comprehensive concept in Statement #130 covers wider rage of things than Statement #6.  At the same time, FASB identified in  Statement No. 5 that comprehensive income and its components should be reported as part of a full set of financial statements for a period.  This project was added to the Board's agenda in September 1995, at the urging of financial statement users.  In particular, the Association for Investment Management and Research wanted FASB to expand the reporting for items of comprehensive income.

In June 1997, Financial Accounting Standards Board issued a new Statement of Financial Accounting Standards #130 “Reporting Comprehensive Income.”  This act was partially triggered by the AIMR's (Association for Investment Management and Research) call for more explicit Comprehensive Income.  “The new figure will shine a bright, embarrassing light on items that are now buried in shareholders’ equity, as well as items executives can use to even out bumpy earnings growth,” says Bear Stearns accounting expert Pat McConnell.  However even the new statement did not cover what probably it should have covered.  The new statement coped only with reporting and presentation of the components of comprehensive income, but it did not explain when they should be recognized and how they should be measured. 

Nowadays, the market is very volatile and fair market values of the assets might change instantly.  In turn, change in fair market value leads to losses or gains in general value of a company.   If these effects find their reflections on the income statement, it will mean very sudden high and low income reported by the company.  The reason why FASB adopted the concept of comprehensive income is to give investors a full picture of the financial position of the company.  Traditional income statement does not include some of the items, but included in the equity section of the balance sheet.  These items are: 

·     Unrealized gains (losses) on available-for-sale securities

·     Change in foreign currency exchange rates

·     Adjustments to minimum pension liability

·     Hedging gains or losses.  

Unrealized gains or losses on available-for-sale securities take place when the fair market value of the securities is different than the one of the balance sheet.  To be consistent with accounting regulations, the company has to correct its assets’ value on the balance sheet.  These gains or losses do not appear on the income statement because their effect might mislead the investors, in terms of temporary income of the company.  On the other hand, the investors should be aware of these gains or losses, and this is the reason for comprehensive income to exist.  The owner's equity section of the balance sheet accumulates these changes in the value of the securities. 

There are many multinational companies right now on the market.  These companies are subject to gains or losses, the origin of which is change in exchange rates of the currencies.  These gains or losses do not happen due to routine operation of the company and that is why they might mislead investors' opinion of the company.  The effect of these changes is included in the comprehensive income. 

Underfunded pension obligation necessitates an adjustment to the minimum liability in order to be consistent with accounting regulations.  It is not an obligation for the company, but certainly influence future net incomes, and that is why it should be included in comprehensive income.

The hedging gains or losses arise due to futures contracts.  A change is the market value of a futures contract that qualifies as a hedge of an asset reported at fair value, unless earlier recognition of a gain or loss in income is required because high correlation has not occurred (SFAS #115).

There are three ways to present comprehensive income: 

·     A separate income statement is prepared

·     A comprehensive income is combined with income statement

·     A comprehensive income is represented as a part of the statement of stockholder’s equity

For some of the companies implementation of reporting comprehensive income had "negative" or positive effect on "bottom-line income."  For instance, General Motor's had

negative impact (-64.1%) and Citibank had positive (18.3%).  Out of 24 major corporations, 15 reported a lower comprehensive income than their net income, and only nine of them displayed an increase in comprehensive income in comparison with net income. 

Increased (decreased) by

General Motors -64.10%
Wal-mart -15.00%
Coca-Cola -14.90%
Procter & Gamble -11.70%
Chase-Manhatan -11.50%
Ford Motor -10.80%
IBM -9.70%
Johnson & Johnson -9.40%
Texaco -7.70%
Eli Lilly -6.30%
Phillip Moris -3.90%
Exxon -2.80%
Mobil -1.60%
Dupont -0.60%
Merck -0.30%
Chrysler 0
Hewlett Packard 0
Disney 0.10%
BankAmerica 0.60%
Microsoft 0.70%
AT&T 0.80%
Intel 1.40%
NationsBank 2.90%
Pepsico 3.50%
General Electric 7.60%
Citibank 18.30%

Such new standards are often a source of frustration, especially to smaller, nonpublic entities and their CPAs.  This frustration, often called standards-overload, arises both from the frequent issuance of new and often complicated standards and from the lack of perceived information benefit in financial statements.  The overload and implementation costs stemming form SFAS #130 can be substantially eliminated through reclassification of the available-for-sale securities as trading securities, and this is what small private corporations usually do. 

Regarding reporting financial performance, international standards say the following:

·     IAS 1 requires presentation of a statement showing changes in equity.  Various formats are allowed:

1)      The statement shows (a) each item of income and expense, gain or loss, which, as required by other IASC Standards, is recognized directly in equity, and the total of these items, certain foreign currency translation gains and losses (IAS 21, The Effects of Changes in Foreign Exchange Rates), and changes in fair values of financial instruments (IAS 39, Financial Instruments:  Recognition and Measurement)) and (b) net profit or loss for the period, but no total of (a) and (b).  Owners’ investments and withdrawals of capital and other movements in retained earnings and equity capital are shown in the notes.

2)      Same as above, but with a total of (a) and (b) (sometimes called “comprehensive income”).  Again, owners’ investments and withdrawals of capital and other movements in retained earnings and equity capital.  An example of this would be the traditional multicolumn statement of changes in shareholders’ equity.


[i] The impact of reporting comprehensive income, Ohio CPA Journal; Columbus; Jan-Mar 1999; Richard J Schmidt.

            Comprehensive income reporting and analysts’ valuation judgements, Journal of Accounting Research; Chicago; D Eric Hirst; Patrick E Hopkins. 

            How companies are complying with the comprehensive income disclosure requirements; Ohio CPA Journal; Columbus; Jan-Mar 1999;  Linda Campbell;  Dean Crawford; Diana R Ranz.

            Reporting Comprehensive Income;  The Secured Lender; New York;  Mar/Apr 1998;  Eran Echreiber.

            Discussion if comprehensive income reporting and analysts’ valuation judgements;  Journal of Accounting Research;  Chicago;  1998;  Marlys Gascho Lipe; 


            Avoiding the implementation costs of SFAS #130;  The CPA Journal;  New York;  Jun 1999;  Norman H Godwin;  C Wayne Alderman; 

            Disclosure of comprehensive income may be confusing;  Texas Banking;  Austin;  Oct 1996;  Harrison, John S;  Lynch, Chris; 

            The call for reporting comprehensive income;  Financial Analysts;  Charlottesville;  Mar/Apr 1996;  Cope, Anthony T;  Johnson, L Todd;  Reither.

            Comprehensive income;  Management Accounting;  New York;  Dec 1995;  Bisgay, Louis. 

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