Nearly 70% of the top Fortune 500 companies show other comprehensive income (OCI) in their reports. This figure is key to understanding a company’s financial health, especially the big ones.
AdvertisementOCI is about revenues, expenses, gains, and losses not yet realized. These won’t show up in the usual net income. This number bridges the gap between net and comprehensive income. It’s often seen in bond portfolios not marked as ‘held-to-maturity’. Changes in their values show up in OCI until the bonds are sold or mature.
The Financial Accounting Standards Board (FASB) says OCI must be shown separately. This way, it helps bigger companies assess their real value. For investors and analysts, grasping OCI gives a deeper look into a company’s financial health and risks.
Key Takeaways
- Other comprehensive income (OCI) includes unrealized revenues, expenses, gains, and losses excluded from net income.
- FASB requires companies to report OCI separately from net income on financial statements.
- OCI is crucial for valuing larger corporations, as it captures unrealized amounts not reflected in net income.
- Common OCI items include bond portfolios, foreign currency transactions, pension plans, and cash flow hedges.
- OCI provides insights into a company’s potential future performance and risks.
Understanding Other Comprehensive Income
The Financial Accounting Standards Board (FASB) commands companies to break down their comprehensive income into two parts. These are net income and other comprehensive income (OCI). OCI includes revenues, expenses, gains, and losses that are unrealized. This means they aren’t part of the income statement’s net income.
What is other comprehensive income (OCI)?
Other comprehensive income (OCI) refers to the portion of a company’s income that is not included in net income. It includes items such as unrealized gains or losses on investments, foreign currency translation adjustments, and pension plan adjustments. OCI is reported separately from net income on the balance sheet and is not included in the calculation of earnings per share (EPS) .
OCI shows items that haven’t been fully experienced yet. Their complete financial effect is unknown. For example, unrealized gains or losses. These are shown on the balance sheet under shareholders’ equity. They aren’t in net income on the income statement.
This aligns with the principle that only fully experienced items go into net income.
Common Examples of OCI
Typical OCI items are:
- Unrealized gains/losses on investments available for sale, like a bond portfolio. They may change in value until the bonds mature or are sold
- Gains/losses on cash flow hedge derivatives
- Foreign currency exchange adjustments for companies working globally
- Pension plan gains/losses, which show potential future costs
Difference from Net Income and Comprehensive Income
Net income is the basic profit or loss from the income statement. Comprehensive income is the total of net income and OCI. It gives a fuller view of a company’s financial health. While net income includes only made revenue and costs, OCI considers the part that’s unrealized.
Accumulated OCI is the total of these unrealized amounts on the balance sheet.
Other Comprehensive Income and Financial Statements
According to financial standards, other comprehensive income (OCI) can’t go in the net income on the profit and loss statement. Instead, we see OCI under stockholder’s equity on the balance sheet. Only actual gains and losses are in the income statement. Those that are not realized stay in OCI on the balance sheet.
Reporting Standards for OCI
OCI gives us more than the usual income statement. It tells us about the potential performance of investment portfolios. This can show us what we might gain or lose in the future.
For businesses working in more than one country, OCI shows the effects of foreign currency changes. It also hints at how future retirement plan costs could impact profits.
Impact on Financial Analysis
Few small businesses deal with OCI often, but big companies find it very important. Multinationals must meet OCI reporting standards by groups like the Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB), and others.
Experts like certified public accountants and financial analysts use OCI. They look at it to understand the value of things like investments. And they predict the risks, such as changes in currency, that could hurt profits.
Importance of OCI for Large Corporations
For big corporations, OCI matters a lot. It doesn’t come up as much for small businesses. But these paper gains and losses can affect taxes for big businesses. This is according to rules like U.S. GAAP, IFRS, and U.S. tax code.
The table below shows typical OCI items. It shows how they can change equity accounts and stockholder’s equity:
| OCI Item | Description | Impact on Equity |
|---|---|---|
| Unrealized Gains/Losses on Investments | Changes in fair value of available-for-sale securities | Increases/decreases stockholder’s equity |
| Gains/Losses on Cash Flow Hedges | Changes in value of hedging transactions | Increases/decreases stockholder’s equity |
| Foreign Currency Translation Adjustments | Gains/losses from translating foreign subsidiaries’ financials | Increases/decreases stockholder’s equity |
| Pension/Postretirement Plan Adjustments | Changes in projected benefit obligations and plan assets | Increases/decreases stockholder’s equity |
Conclusion
Other comprehensive income shows important changes in money that aren’t in the net income. It includes unrealized gains, losses, and changes in values that aren’t on the main income statement. By showing these on a different part of the balance sheet, companies give a clearer view of their financial state. This is key for understanding how companies are really doing, particularly the big ones.
Items in other comprehensive income can be things like how investments went up or down, shifts in currency value, or the cost of dealing with pensions. Even though it makes things a bit more complex, understanding other comprehensive income is crucial for full financial analysis.
The comprehensive income statement brings together the net income with other comprehensive income. MetLife and Goodyear have shown big differences between their standard profits and the bigger financial picture. This is because of things like investment gains, changes in foreign currency, and pension fund changes. During the financial crisis, Bank of America showed a profit in its net income. But its comprehensive income was in the red because of bad investment results.
For smaller businesses, these special income items might not come up as often. But for large companies with many investments, global branches, or lots of pension commitments, it’s vital. The Financial Accounting Standards Board (FASB) requires companies to report OCI. This makes financial statements clearer and easier to trust. Looking at both net income and OCI helps investors and analysts get a deeper look at a company’s health and where it’s going.
FAQ
What are some common examples of OCI items?
Items under OCI can include the money you haven’t made on investments yet. It also includes the money you might lose or gain on futures. Currency changes and shifts in pension fund values are other examples.
How is OCI different from net income and comprehensive income?
Net income is what a business earned or lost. Comprehensive income adds OCI to the net income. So, OCI is the part that’s not real profit yet but still affects the overall picture.
How is OCI reported in financial statements?
GAAP and IFRS rules keep OCI out of the net income part of an income statement. Instead, it’s under shareholders’ equity on a balance sheet. There, it’s called accumulated OCI.
Why is OCI important for financial analysis, especially for large corporations?
OCI offers a deeper look into a company’s financial health than just the income statement. For big companies, it’s key. It hints at future investment earnings or losses. It also shows the impact of changing currencies. Plus, it warns about possible expenses from pension changes. For big, complex companies, OCI is vital in judging their worth.
Source Links
- https://www.investopedia.com/ask/answers/071415/what-are-some-examples-items-count-comprehensive-income.asp
- https://www.investopedia.com/ask/answers/102714/what-are-differences-between-comprehensive-income-and-other-comprehensive-income.asp
- https://corporatefinanceinstitute.com/resources/accounting/other-comprehensive-income/
- https://www.investopedia.com/articles/fundamental-analysis/12/other-comprehensive-income.asp
- https://corporatefinanceinstitute.com/resources/accounting/statement-of-comprehensive-income/