What is the statement of comprehensive income, and what do terms like other comprehensive income mean? The central concept here is comprehensive income, let’s understand that first, and then review the statement of comprehensive income using several examples.
⏱️TIMESTAMPS⏱️
00:00 Introduction to the statement of comprehensive income
00:35 Meaning of comprehensive income
01:05 Net income vs other comprehensive income
01:28 Statement of comprehensive income examples
02:58 Cumulative translation adjustment (“CTA”)
04:45 Unrealized gains and losses on marketable securities
05:05 Debt valuation adjustment
05:59 Accumulated other comprehensive income or loss
06:14 Comprehensive income summary
How are the following financial terms related? Gross Income. Operating Income. Net Income. Comprehensive Income. The first three of these are all on the income statement. The lower you go on the income statement, the more expense line items you deduct. But what does comprehensive income mean, that’s a term you hear far less frequently. Comprehensive means including or dealing with all or nearly all elements or aspects of something. Income is the same as profit or earnings. So Comprehensive Income is a broader concept than Net Income. In fact, the idea is easy to grasp once you understand the calculation. Net Income plus or minus Other Comprehensive Income (OCI) equals Comprehensive Income. Net Income represents earned income and incurred expenses. Other Comprehensive Income represents unrealized gains and losses that have an effect on balance sheet amounts including the equity account, but bypass the income statement. To get an understanding of what is in there, let’s review several real life examples of the statement of comprehensive income.
If you review the annual report of large US-based corporations, you will find the consolidated statement of #comprehensiveincome right next to the consolidated statement of income. Sometimes even printed on the very same page, as they are closely related.
As a first example, let’s look at the consolidated statement of income, and the consolidated statement of comprehensive income, of 3M. The linking pin between the income statement on the left and the statement of comprehensive income on the right is Net Income. The $4.6 billion Net Income near the bottom of the income statement is the same $4.6 billion at the top of the statement of comprehensive income. Simply add or subtract the items of other comprehensive income to net income, and you get to comprehensive income. Let’s zoom into other comprehensive income (or “OCI”).
What are some of the line items that can be part of other comprehensive income? For 3M in 2019, three line items are listed: cumulative translation adjustment, defined benefit pension and postretirement plans adjustment, and cash flow hedging instruments. Each of these represents unrealized gains and losses due to value changes on the balance sheet. We will take the cumulative translation adjustment (or “CTA”) as an example. From the notes to the consolidated financial statements, section foreign currency translation: Local currencies generally are considered the functional currencies outside the United States. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items are translated at average monthly currency exchange rates in effect during the period. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive income (or loss) in shareholders’ equity. Simply put, if a US multinational company has a subsidiary in Europe which operates in Euros as the functional currency, then 100 Euros of net assets might translate to 109 US dollars in one accounting period, and 110 US dollars in the next. The difference of $1 is offset in CTA. Other accounts in other comprehensive income have a similar story: there is a value change somewhere in the balance sheet, that has to be offset in equity in order for the balance sheet to balance.
When reviewing annual reports of large corporations, in many cases I found similar line items, but they are not always named in the same way. For example, Disney basically lists the same line items as 3M, but calls them market value adjustments for investments, market value adjustments for hedges, pension and postretirement medical plan adjustments, and foreign currency translation and other.
The next step is to take the other comprehensive income for the year, and add this to the year-end balance of accumulated other comprehensive income or loss that has been building up over the years within the equity section of the balance sheet of the company.