What is Other Comprehensive Income?
Some gains or losses are yet to be realized or settled, and therefore they cannot be reported as part of a company’s net income. Other Comprehensive Income can include revenue, gains and losses, or expenses that have yet to be realized, and therefore are excluded from net income on an income statement. These items need to be reported under Other Comprehensive Income (OCI). OCI and net income together make up a company’s comprehensive income.
Why is Other Comprehensive Income Important?
Other Comprehensive Income is important because it provides additional information and transparency about a company’s financial performance. It includes the gains and losses not reported under net income, which gives stakeholders a fuller picture of the company’s overall financial health. OCI also smooths out short-term fluctuations in reported earnings and captures unrealized gains or losses that may impact the company in the future. In summary, OCI enhances financial reporting by offering a broader perspective on performance, aiding informed decision-making.
Examples of Other Comprehensive Income
- PepsiCo holds an available-for-sale bond that hasn’t reached its maturity date. At the end of a reporting period, the market interest rate has changed, making the bond more valuable. PepsiCo reports a gain from the immature bond as other comprehensive income. The gain will be realized when the bond is sold or reaches maturity.
- When a company like Amazon operates internationally and holds monetary assets or liabilities in foreign currencies, changes in exchange rates can affect its financial statements. If the exchange rate between the reporting currency (U.S. Dollars) and a foreign currency strengthens, the company reports a gain from currency exchange rates as other comprehensive income.
- Johnson & Johnson sponsors a pension plan for its employees. They invest the assets of this plan in various financial instruments. If the fair value of these investments increases during a reporting period due to favorable market conditions, Johnson & Johnson reports a gain from investments in the pension fund as other comprehensive income.
Where is Other Comprehensive Income Reported?
As the gains and losses of OCI have not occurred yet, OCI is not reported with net income on the income statement. Instead, the figures appear in an account called “accumulated other comprehensive income” in the liabilities section of the balance sheet. When the transaction is complete, they are removed from the balance sheet and become gains or losses on the income statement.
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