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Comprehensive Income-What You Need To Know

by Brett Backues on October 13, 2015
The use of comprehensive income (CI) as a measure of a company's finances is an example of a fair value measurement. Using a comprehensive measure of income has resulted in increased amounts of unrealized gains and losses. These fair value measurements can also affect the accounting for financial instruments as well as pension accounting as they increase the items that are reported as both unrealized income and expenses in the name of transparency. The comprehensive designation is an important distinction for accounting services used to only working with net income.

What's the Difference Between Comprehensive and Net Income?

You might be thinking why we need a new comprehensive measure of income when we have net income already. The difference between comprehensive and net income basically comes down to the difference between realized and unrealized gains and losses. Net income reflects realized gains and losses, while income measured comprehensively mostly reflects unrealized gains and losses. As accounting services have shifted towards using more fair value measurements, financial statements are starting to reflect more unrealized gains and losses. As the Financial Accounting Standards Board (FASB) was ironing out where to put these unrealized gains and losses, they had a decision to make. FASB certainly could have decided to put them in net income, but they instead chose to place them in a different income bucket that they've classified as comprehensive.

CI reflects all changes in equity during an accounting period except those changes in equity that result from investments or distributions by owners. The biggest difference when we measure income comprehensively is that we're looking for all changes. Net income falls short of being comprehensive because it's not concerned with all changes in equity during an accounting period. The items excluded from net income include those things called "other comprehensive income." So there are things that, because they are excluded from net income, do not give us a full financial picture of the company. This means that we need a more comprehensive or fuller version of income that encompasses all the changes in equity during the accounting period.

How CI Statements Are Filed

A comprehensive measure of income can be presented along with net income in the same report. It can also be shown in a separate presentation to capture the unrealized gains and losses that have taken place during the business's reporting period. If a firm is looking at their financial statements or their 10K, one option they have is to release two statements. They can first release an income statement (revenue minus expenses). They can then also release a statement of income that's more comprehensive, which is their CI statement. In the CI statement, they'll start with net income and add in other income that's left out of the net income statement.

A CI statement is basically including side items that bypass the income statement. It's a redress for the fact the net income statement doesn't include certain things. While a CI statement can be filed separately from the net income report, many firms just add the other sources of income onto the existing income statement. The final way that firms can deal with this mandatory CI report is to include it in their statement of stockholder's equity. The statement of stockholder's equity is similar to the statement of retained earnings, which is basically a T account for stockholder's equity.

There's going to be fair value measurements that cause an unrealized gain or loss to take place until such time as a company disposes of the asset or the liability. This means that accounting for pensions, financial instruments, goodwill impairments, asset impairments and any debt restructuring are all affected by fair value accounting. Due to the need to apply fair value, you have a potential unrealized gain or loss. The FASB guidelines on revenue recognition have all those unrealized gains and losses going into the CI statement.