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Comprehensive Income

Comprehensive Income

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


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


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


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


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;


Comprehensive income; Management Accounting; New York; Dec 1995;

Bisgay, Louis.