Statement of Comprehensive Income

Running a business requires you to carefully consider profits, costs, and overall accounting. The accounting and finance departments of a business have to work together closely. These departments must account for the full activities of an enterprise and do so in a simple and effective manner. One way they do this is through the use of a financial report. These reports are based on results and show the financial strengths and weaknesses of a company to help businesses better achieve their business goals.

One important financial statement is the statement of comprehensive income.

What is the Statement of Comprehensive Income?

A comprehensive income statement is a financial statement. This statement summarizes the standard net income and Other Comprehensive Income (OCI). The net income refers to the results of compiling the standard income statement. The “Other Comprehensive Income” refers to unrealized gains and losses that are not otherwise listed on an income statement. It refers to money the company hasn’t collected – or lost – yet. Comprehensive income statements offer a broader, more robust look at the financial situation of a company. These statements help large corporations understand and make investments across multiple countries.

Large corporations and enterprises should prepare comprehensive income statements, as should growing companies looking to entice new investors or expand operations into other countries. The actual statement of comprehensive format can include one document or be made up of several. So long as a company abides by the IFRS or GAAP standards for accounting for comprehensive income, there should be no problems or difficulties with reporting it.

Comprehensive Income in Financial Statements

The income statement is one of the essential financial statements there is. The income statement displays a comprehensive overview of income and expenses, including interest on investments/loans and tax payments. Financial statements end with the net income, however, this net income only recognizes income and expenses earned or incurred over the financial period.

Some companies, in particular large firms, see gains or losses from their assets fluctuating in value over time. The results of these changes appear in the cash flow statement, but the overall impact these changes have on earnings is represented in the “comprehensive income” or “other comprehensive income” section of an income statement.

As well as appearing in the income statement, the comprehensive income also appears in a statement of comprehensive income. Both of these financial statements refer to the same period, but there are some differences between a statement of comprehensive income vs an income statement.

For example, the statement of comprehensive income format includes two main sections – net income (taken from the income statement) and other comprehensive income, such as hedges. There is a total comprehensive income at the end of the statement, which represents the sum of net income and any other comprehensive income on the statement.

Some companies choose to combine their income statement with the statement of comprehensive income to create a single comprehensive statement covering everything. However, companies that have other comprehensive income to consider typically file their comprehensive income statements separately. Please keep in mind that not every business needs to file such a statement. Companies that don’t have a comprehensive income because they don’t meet the requirements to classify income as comprehensive do not need to file a statement of comprehensive income.

This is another difference for the statement of comprehensive income vs income statement – every business has an income statement, but not every business has comprehensive income.

Why is Comprehensive Income Important?

What makes comprehensive income important is that the amounts in the statement offer a better reflection of how much income a company actually generates over a particular period. As the name suggests, these statements offer a deeper, more comprehensive, look at the financial situation of a business.

Having this information to hand is invaluable, especially for businesses with many investments to keep track of. If the company investments are performing well, but the company itself isn’t, then knowing which assets are performing well can help businesses stay afloat during periods of reduced profit. If the investments aren’t performing well, and this is reflected across several comprehensive income statements, then this is a clear sign the organization should rethink its investments. These statements help organizations make more effective financial decisions.

What are the Limitations of a Statement of Comprehensive Income?

As important as a statement of comprehensive income can be, these statements do have their limitations. The two main limitations are misrepresentation and difficulties in making predictions based on them.

1. Misrepresentation

While income statements are the key document for assessing the financial situation at a company, these statements fall short in some areas. The standard income statement encompasses the current revenue from sales and accounts receivables, covering money the company is owed but hasn’t received.

The income statement also covers the present and accrued expenses, referring to expenses a company hasn’t paid yet. This presents problems because if there are large unrealized gains or losses in the assets and liabilities of a company, these figures could have a drastic impact on the long-term viability of a company. Income statements may be misleading and misrepresent important financial information.

2. Problems When Making Predictions

Another limitation of income statements is that they can’t predict future success in a company. The income statement might show operational trends for a company, but it doesn’t show the potential or timing for when large Other Comprehensive Income items are recognized in an income statement. It becomes difficult to make accurate predictions about the future financial situation of a business without this data.

What are Examples of Comprehensive Income?

Let’s use someone winning the lottery as a statement of comprehensive income example. The winnings they get are considered to be part of the taxable or comprehensive income for the winner but are not classed as regular earned income.

For businesses, comprehensive income includes any unrealized gains and losses for investments. The statement of comprehensive income format also includes potential cash flow hedges, which may change in value depending on the market value. Gains and losses can come from a variety of sources, including exchanging foreign currency for your local currency and money spent on retirement and pension plans.

Final Thoughts

A statement of financial income is an important part of the accounting process. This document covers income changes to the net equity of businesses over a set period. There are two key parts to every comprehensive income statement; the net income section and the other comprehensive income (OCI) section. This latter section includes items excluded from an income statement.

Comprehensive income includes a variety of different things, all of which are important for getting a thorough look at the financial situation of a company. These statements serve a number of purposes but are not without their limitations. Be wary of misrepresented data and missing data that can make it more challenging to create effective predictions for the future of your business. Please don’t hesitate to consult financial experts who have a better understanding of what this all means and how it can affect you and your company.