Understanding Other Comprehensive Income: Key Examples Explained

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Other comprehensive income (OCI) is the group of gains, losses, revenues and expenses that a company has recognized in its financial statements but is required to keep out of net income, usually because the gains or losses are unrealized. Net income plus OCI equals comprehensive income. Typical examples are fair value changes on available-for-sale debt securities, foreign currency translation adjustments, certain pension adjustments and the effective portion of cash flow hedges. Each period’s OCI flows into accumulated other comprehensive income (AOCI), a separate line in the shareholders’ equity section of the balance sheet.

Why some gains and losses skip net income

Net income is meant to show the results of a company’s operations and completed transactions for the period. Some value changes are real in an accounting sense but not yet settled. A bond the company still holds may rise or fall many times before it is sold or matures, and a foreign subsidiary’s assets change in dollar terms whenever exchange rates move. If those swings ran through net income, earnings would move with markets rather than with the business.

FASB Accounting Standards Codification Topic 220, which grew out of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, requires these items to be shown so investors can see them, but in a separate section. Companies present net income and other comprehensive income, with the total labeled comprehensive income, either in one continuous statement of comprehensive income or in a separate statement placed immediately after the income statement. Once an investment, hedge or pension item is sold or settled, the gain or loss becomes realized and is normally “recycled” into net income.

What OCI includes under US GAAP

• Unrealized gains and losses on available-for-sale debt securities. These are debt investments not classified as held-to-maturity or trading. Held-to-maturity bonds are carried at amortized cost, and trading securities run their fair value changes through net income, so neither produces OCI.
• Foreign currency translation adjustments. These arise when a foreign subsidiary’s financial statements are translated into the parent’s reporting currency.
• Pension and other postretirement benefit adjustments. Examples include actuarial gains and losses and prior service cost not yet recognized in net periodic benefit cost.
• Cash flow hedges. Gains and losses on derivatives that are designated as, and qualify as, cash flow hedges.
• Own credit risk on certain liabilities. When a company elects the fair value option for a financial liability, the part of the fair value change caused by its own credit risk goes to OCI.

Items are shown net of tax, or before tax with the related tax effect disclosed.

Example: how OCI builds AOCI

Company XYZ reports $1.5 million of OCI in the first quarter and $1.2 million in the second. Its second-quarter balance sheet would show $2.7 million of AOCI in shareholders’ equity, assuming it started the year at zero and had no reclassifications.

Now a hypothetical bond case. A company buys an available-for-sale bond for $100,000. At year end it is worth $106,000, so $6,000 of unrealized gain (before tax) goes to OCI and into AOCI. Net income is unaffected. The next year the company sells the bond for $106,000. The $6,000 gain is now realized: it is removed from AOCI through a reclassification adjustment and reported in net income. Total comprehensive income over the two years counts the gain once, not twice.

Exceptions that change the answer

Foreign currency transactions are different from translation. A gain on a receivable billed in euros and collected in dollars is a transaction gain and goes to net income. Only translation of a foreign operation’s statements goes to OCI.

Equity investments no longer use OCI under US GAAP. Since ASU 2016-01 took effect for public companies in 2018, fair value changes on most equity securities run through net income. The available-for-sale category now applies to debt securities.

IFRS treats some items differently. Under IFRS, certain OCI items are never recycled into profit or loss: remeasurements of defined benefit plans, revaluation surplus on property, plant and equipment, and equity investments a company elects to measure at fair value through OCI. On sale, these amounts may be transferred within equity, for example to retained earnings. IFRS reporters often label the equity balance an “OCI reserve.”

A debit balance is possible. If accumulated losses exceed accumulated gains, AOCI carries a debit balance and reduces total shareholders’ equity. That reflects net unrealized losses; it is not a charge against earnings unless and until the items are reclassified.

FAQs

The Bottom Line

Investors and analysts reading a balance sheet should look at AOCI alongside net income, since it holds unrealized gains and losses that earnings leave out. A large AOCI balance, positive or negative, can signal future amounts that will reach net income once securities are sold or hedges settle. Companies reporting under IFRS may never recycle certain items, so comparisons across reporting standards need care.