Comprehensive Income

What is comprehensive income?

Comprehensive income measures variations in a company’s net assets from non-owner sources during a specific time period. In other words, comprehensive income is the total of all operating and financial events that affect non-owners’ interest in a business. It also provides a holistic view of a company’s income not fully captured on the income statement.

Companies use financial analysis software to monitor the financial performance of their business. Specifically, accounting departments use this type of software to consolidate and compare financial transactions and accounting entries. Other uses include ensuring the accuracy of accounting data to track financial key performance indicators (KPIs) and generating reports for financial compliance purposes.

Examples of comprehensive income

Comprehensive income includes both net and unrealized income. By incorporating all sources, comprehensive income offers an in-depth view of a business's total income. Investments and the sale of financial assets like stocks are two types of comprehensive income. Whether the stock appreciates or depreciates, the equity section of the balance sheet includes the current market value and starting value. 

Uses of statement of comprehensive income

A statement of comprehensive income summarizes standard net income and other comprehensive income. It offers more detailed information with a level of detail that a net income statement doesn’t provide. The statement of comprehensive income tells stakeholders how a company raises revenue and incurs costs. In addition to the cost of daily operating expenses, the statement includes other unrelated costs, such as taxes.

 It’s also a useful tool for investors. Before investing in a company, investors carefully evaluate the statement of comprehensive income and income statement. The statements display earnings per share and net profit and give investors insight into how profitable the business may become.

Limitations of statement of comprehensive income

While a statement of comprehensive income helps shed light on a company’s financial events, it also has its limitations.

• It may be misleading. Sometimes a significant loss or gain is embedded in a company's assets or liabilities, which may affect its long-term viability. A comprehensive income statement shows unrealized gains and losses related to income; however, it won’t list assets and liabilities. 

• It can’t predict the future. Like any financial statement, the statement of comprehensive income shouldn’t be the sole metric for making investment decisions. Instead, investors should remember that while it shows year-over-year operational trends, other factors have to be taken into account to ascertain a company’s future success. 

Comprehensive income vs. other types of comprehensive income

Comprehensive income consists of two sections: net income from the income statement and net income from the other comprehensive income (OCI) statement. It includes realized and unrealized income and provides a more detailed view than the income statement. 

Sometimes called comprehensive earnings, other comprehensive income is part of the calculations accountants use to determine comprehensive income. It includes items that typical profit and loss calculations can’t include because they don’t fall under regular business activities and operations. More specifically, examples of other comprehensive income are:

• Debt securities. These are investment assets that involve debt rather than ownership in a company. Corporate bonds and government bonds are two common examples of debt securities. 
• Cash flow hedges. These fluctuate in value depending on market value. Cash flow hedges can help to decrease the risks associated with sudden changes in cash flow of assets or liabilities rather than the asset or liability itself. 
• Foreign currency transactions. When companies trade one currency for another (like the U.S. dollar for euro), this is known as a foreign currency transaction. Gains and losses of foreign currency transactions are subject to rise and fall under comprehensive income. 
• Derivative instruments. Financial instruments that get their value from the performance of an underlying asset are known as derivative instruments. While derivatives can give exceptionally high returns, they also have considerable risk.
• Retirement plan payments. These include pension payments for retired employees. Although gains and losses of these plan payments don’t fall under regular earned income, they still need to be recorded.