To gauge a company’s overall value, investors should consider the status of its comprehensive income—or all assets and liabilities that may still affect the company’s value without directly engaging its core business.
Comprehensive income includes both realised and unrealised gains and losses during a financial period and allows investors to determine if there is a heightened risk for loss.
What’s the difference between net income and comprehensive income?
Net income reveals finances directly related to a company’s core business and reflects the company’s profitability after tax and other liabilities are taken out. It is calculated by subtracting company expenses (operational, administrative, etc.), taxes, and product/service costs from its net revenue in a given period.
Comprehensive income includes unrealised loss or gains from any asset held by the company. This includes properties and assets that do not directly engage its main business but could affect the company’s value due to its price movements.
Comprehensive income statements are more detailed versions of the income statement.
What is other comprehensive income?
Other comprehensive income indicates sources of unrealised financial gains and losses that are considered “non-owner changes to the owner’s equity”. Despite its name, items listed as other comprehensive income are not actual gains or losses of income during the reporting period.
When other comprehensive incomes become realised, the realised value would be transferred to the income statement.
All unrealised gains and losses are listed under the accumulated other comprehensive income, which is used to compute for comprehensive income.
What does ‘non-owner change to owner equity’ mean?
Owner equity is basically the entity’s value minus its financial liabilities such as taxes and debts.
Non-owner change means any financial movement without the owner’s direct involvement or is not part of the company’s day-to-day income producing activities.
Non-owner change to owner equity means any gains or losses outside main income producing activities that can affect an entity’s value.
Comprehensive income at play: An example
For instance, manager Bob has an equity of $500,000 with $100,000 of it invested in shares for retirement. If the shares he owns decreased in value to $80,000 in a financial year and he didn’t sell them, Bob would have to declare the $20,000 unrealised loss as “other comprehensive income.”
Likewise, if Bob received a $300,000 inheritance in the same year, this would also be reported as other comprehensive income because it was not income produced from his usual work.
If, however, Bob received a $30,000 bonus for working in the same company for 30 years, then it would be part of his net income statement.
Why is comprehensive income not included in income statements?
Income statements are also focused on the incoming and outgoing financial transactions made by the company in a given time frame.
Comprehensive income is excluded from the income statement is ensure that businesses would not seem more profitable than they truly are. Comprehensive income is also declared in a separate statement for investors—to give them an idea of how well a company manages other assets that could affect the value of their investments.
Separating the two statements prevents confusion so that investors could make informed decisions when planning the future of their investments.
This information has been sourced from Investopedia and Accounting Coach.