What it means
Net income is the measure most people think of as a company's result, but it is not the only way the company's equity changes. A company with an overseas subsidiary sees the sterling value of that subsidiary rise and fall with the exchange rate; a company holding bonds as long-term investments sees their market value move with interest rates; a company with a pension scheme sees its obligation change as discount rates and life expectancy assumptions change.
These are gains and losses in the sense that the shareholders are richer or poorer, but standard setters concluded that putting them through net income would make profit swing with markets in ways that obscured operating performance, and that some of them would reverse before being realised. The solution was other comprehensive income: a second category of gains and losses, recognised in equity, reported below net income, and totalled with it as comprehensive income.
The items in OCI are specified by the standards, not chosen by companies. Under IFRS the main ones are: revaluation gains on property, plant and equipment and intangibles carried at revalued amounts; remeasurements of defined benefit pension plans (actuarial gains and losses); gains and losses on equity investments designated at fair value through OCI; the effective portion of cash flow hedges; exchange differences on translating foreign operations; and changes in the fair value of a company's own debt attributable to its own credit risk.
US GAAP has a similar list, with differences in detail (for example, pension items and certain investment gains are treated differently). A further distinction matters: some OCI items are reclassified (recycled) to net income when the underlying item is realised, and some are not.
Exchange differences on a foreign subsidiary are recycled to profit when the subsidiary is sold; cash flow hedge gains are recycled when the hedged transaction affects profit; but revaluation surpluses and pension remeasurements under IFRS are never recycled, and equity investment gains at fair value through OCI are transferred within equity, not through profit, on disposal. The statement shows the two groups separately.
For readers, comprehensive income serves three purposes. It reconciles the change in equity: opening equity plus comprehensive income plus owner transactions equals closing equity.
It reveals value changes that net income omits: a company whose net income is stable while its OCI shows large pension losses or currency losses has been getting poorer in a way the profit figure did not show. And it prompts scrutiny of the boundary: analysts ask whether an item in OCI is a temporary fluctuation or a permanent loss that management is content to keep out of earnings.
Comprehensive income is not used for earnings per share, dividends or most performance measures, which rest on net income. Its role is disclosure: to ensure that everything that has changed the shareholders' wealth is reported somewhere, with the operating result and the other movements distinguished.
In practice
Real-world examples.
Example
A bank reports net income of $2 billion and OCI losses of $3 billion on its bond portfolio as interest rates rise, so comprehensive income is negative.
Example
A multinational reports a $300 million translation gain in OCI as its reporting currency weakens, which does not affect its earnings per share.
Example
A company with a large pension scheme reports pension remeasurement swings of hundreds of millions in OCI from year to year while net income is stable.
Think of it
“Comprehensive income includes profits plus other gains that don't go through regular earnings.
Formula
Calculation
Comprehensive Income = Net income + Other comprehensive income (net of tax)
Other Comprehensive Income = Sum of: Foreign currency translation differences + Unrealised gains and losses on FVOCI investments + Effective cash flow hedge gains and losses + Pension remeasurements + Revaluation surpluses + Own credit risk adjustments, each net of related tax
Change in Equity = Comprehensive income + Shares issued minus Buybacks minus Dividends
Accumulated OCI (closing) = Accumulated OCI (opening) + OCI for the period minus Amounts reclassified to net income
Worked example. A manufacturing group with overseas subsidiaries, a defined benefit pension scheme, a portfolio of bonds held as long-term investments and a programme of currency hedges reports for the year:
Net income: $42,000,000.
Other comprehensive income items (before tax, then net of tax at 25% where applicable):
- Exchange differences on translating the euro subsidiaries (the euro fell 6% against the reporting currency; net assets of the subsidiaries $180,000,000): loss of $10,800,000; no tax (will be recycled on disposal)
- Cash flow hedges: forward contracts hedging next year's dollar purchases gained $3,200,000 (effective portion); tax $800,000; net gain $2,400,000 (will be recycled when the purchases occur)
- Bonds at fair value through OCI: market value fell $4,000,000 as rates rose; tax $1,000,000; net loss $3,000,000 (recycled on sale under IFRS for debt instruments)
- Pension remeasurement: the discount rate rose, reducing the obligation by $15,000,000, but asset returns were $6,000,000 below the assumed return; net gain $9,000,000; tax $2,250,000; net gain $6,750,000 (never recycled under IFRS)
- Revaluation of the head office property: surplus $5,000,000; deferred tax $1,250,000; net $3,750,000 (never recycled)
Other comprehensive income = minus $10,800,000 + $2,400,000 minus $3,000,000 + $6,750,000 + $3,750,000 = minus $900,000.
Of which items that may be reclassified to profit: minus $10,800,000 + $2,400,000 minus $3,000,000 = minus $11,400,000. Items that will not be reclassified: $6,750,000 + $3,750,000 = $10,500,000.
Comprehensive income = $42,000,000 minus $900,000 = $41,100,000.
Equity reconciliation: opening equity $520,000,000; comprehensive income $41,100,000; dividends paid $18,000,000; shares issued under employee schemes $2,500,000; closing equity = $520,000,000 + $41,100,000 minus $18,000,000 + $2,500,000 = $545,600,000.
Reading: net income of $42,000,000 is the operating story. The OCI shows that the group's shareholders lost $10,800,000 of value on the euro subsidiaries and $3,000,000 on the bond portfolio, gained $6,750,000 on the pension scheme through a discount rate change that could reverse, and gained $3,750,000 on a property revaluation. An analyst notes that the currency loss is the third in a row (accumulated translation losses now $28,000,000), that the pension gain is an assumption change rather than cash, and that the bond loss will be realised if the bonds are sold before maturity. Comprehensive income of $41,100,000 is close to net income this year, but the composition differs materially from a year in which net income and OCI were both positive.Case study
Seen in the real world.
A regional bank reported steady net income of about $180,000,000 a year and a dividend covered twice. Over three years, rising interest rates reduced the market value of its portfolio of long-dated bonds, classified at fair value through OCI, by $900,000,000; the losses appeared in OCI each year and accumulated in equity, and net income was unaffected because the bonds had not been sold. Comprehensive income over the three years was negative in total.
The bank's reported equity fell from $2,100,000,000 to $1,400,000,000, its regulatory capital ratio (which under its regime included the OCI losses) approached the minimum, and when depositors noticed, a run began. The bank was sold to a larger institution over a weekend.
Analysts who had read the statement of comprehensive income had seen the position deteriorate for three years; those who had read only the income statement had seen a profitable, well-covered bank. The regulator's review noted that the losses had been fully disclosed in OCI throughout, and that the failure had been one of reading rather than of reporting.
Watch out
Common mistakes.
- Reading net income as the whole change in shareholders' wealth. OCI can be large, persistent and in the opposite direction.
- Treating all OCI items alike. Some will recycle to profit when realised (currency, hedges, some investments); some never will (revaluations, pension remeasurements under IFRS); the distinction matters for forecasting earnings.
- Ignoring accumulated OCI in equity when assessing capital, particularly for banks and insurers whose regulatory capital may include it.
Questions
People also ask.
What is the difference between net income and comprehensive income?
Net income is the profit reported in the income statement. Comprehensive income adds other comprehensive income, the gains and losses recognised directly in equity. Comprehensive income is the total change in equity from non-owner sources.
Why are some gains and losses kept out of net income?
Because standard setters judged them too volatile, too uncertain or too unrelated to operating performance to include in profit; putting them in OCI reports them without distorting the operating result.
Is comprehensive income used for earnings per share?
No. EPS, dividend cover and most performance measures use net income. Comprehensive income is a disclosure of the full picture.
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