Hello Dear Reader
I hope you enjoyed my last post on Basics of Accounting. For me, self study mode has always worked. However, while preparing for the CPA exam, I realized some topics needed deeper research and time constraint was the biggest challenge. At that point in time, I wished, if there was a "ready to eat" affordable package available. My endeavor is to help other CPA candidates who are in the same boat as I was.
Today's topic of discussion is Comprehensive Income and I chose this first because it is bound to be repeated over and over and is a good idea to start with.
With the introduction of new FASB Accounting Standards Codification, it is now cited as Codification Topic 220, Comprehensive Income (formerly known as FASB Statement 130).
Note that this Codification is not applicable to Not for Profit Organizations.
Simply stated, Comprehensive Income is a summation of Net income and Other Comprehensive Income “OCI”. It is “the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.”
OCI includes items that must bypass the income statement because they have not been realized, and are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole.
Components of OCI
Unrealized holding gains and losses on available for sale securities;
Effective portion of gain or loss on derivative instruments (cash-flow hedge);
Foreign currency translation adjustments; and
Minimum pension liability adjustments.
Presentation and Disclosure
Comprehensive Income can be presented in any of the following three ways:
Single Statement Approach, wherein items of OCI are added to Net Income and is termed as the Statement of Income and Comprehensive Income;
A stand-alone Statement of Comprehensive Income describing the items in OCI; or
In a Statement of Changes in Stock-holders equity.
Note: - The components of OCI may be shown net of tax. However, if the items are shown gross of tax, tax effects related to all components has to be reported on a single, separate line. Further, using gross approach necessitates disclosure of tax effects of each component in the Notes to Financial Statements.
Reclassification adjustments, usually triggered through a sale, must be kept in mind to avoid double counting - once in net income in the current year and also in OCI in the earlier period. For e.g., the sale of an available-for-sale security in the current period will prompt an adjustment for the gains/losses that were included in OCI previously.
Points to Ponder
Understand components of OCI in more detail which I will attempt to cover subsequently.
Remember to avoid double count. Only minimum pension liabilities will not require reclassification adjustments because they will not be reported in net income in any future period.
The tax effects of items reported in OCI must also be included in OCI.
Statement of changes in equity must display accumulated balance of OCI separately.
I hope you will continue to remain with me and share the little I have.
With Warm Regards