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What is comprehensive income?

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Last editedFeb 20212 min read

The comprehensive income statement provides a way for businesses to record earnings from all sources, both earned and unearned. Find out what qualifies as comprehensive income and how to report it below.

Comprehensive income explained

A corporation’s comprehensive income includes both net income and unrealised income. This unrealised income comes from non-owner sources. For example, it might relate to gains and losses from foreign currency transactions, or unrealised gains from hedge financial instruments. At times, companies accrue gains or losses due to fluctuations in asset value, which wouldn’t be recognised under net income.

By including all sources of income, comprehensive income offers a wider view of the business’s total income that might not be available on the income statement. This additional income is reported on the shareholder’s equity section of the financial statement as “accumulated other comprehensive income.” It can cover any accounting period in question, such as a month, quarter, or year.

Comprehensive income examples

There are many different types of profits or losses which aren’t covered in the usual net income. For example, lottery winnings are considered part of comprehensive income for tax purposes, but they wouldn’t constitute regular earned income.

Here are a few more examples:

  • Cash flow hedges: These fluctuate in value depending on market value

  • Debt securities: If these are transferred from available for sale through to maturity, the gains or losses could be unrealised under net income.

  • Foreign currency: Gains and losses of foreign currency transactions are subject to change and fall under comprehensive income.

  • Post-retirement benefits: Gains and losses of these benefits don’t fall under regular earned income but still need to be recorded.

The reason these are separate from net income is that they are not directly earned by the owner’s actions. By contrast, if you sell stock or purchase Treasury shares, this requires direct action to realise a gain or loss.

What is the statement of comprehensive income?

These types of transactions are recorded under a standard statement of comprehensive income, which is attached to the business’s income statement. An income statement is meant to record all revenues and expenses during an accounting period, including any associated taxes and interest. These are tallied up as net income, yet net income only covers earned income and expenses.

This net income is then transferred to the statement of comprehensive income, adjusted to account for non-owner activities. The result gives the company a final, comprehensive figure which can be transferred to the balance sheet under the line “accumulated other comprehensive income.”

Statement of comprehensive income benefits

There are several advantages to recording the comprehensive income statement.

  1. It gives more detailed information about corporate revenue

Stakeholders need to know how and where a company is generating revenue, and which costs are incurred along the way. Net income alone doesn’t give the full picture, but by including a statement of comprehensive income businesses can illuminate the smaller details.

2. It’s useful for investment analysis

Investors want to see all financial reports before making any decisions. Financial statements show earnings per share as well as net profit, giving an indication of how much money the investor might make. Using net profit alone might deflate earnings per share, so it’s important to include all income in this calculation.

Statement of comprehensive income limitations

On the other hand, it’s also important to understand limitations of the statement of comprehensive income.

  1. It doesn’t show assets and liabilities.

Looking at the income statement alone can sometimes be misleading if you’re trying to assess a business’s financial health. While the comprehensive income statement shows unrealised gains and losses related to income, it won’t list these if they’re related to assets and liabilities.

2. It can’t predict the future.

While a company might look great on paper according to the income statement, it can’t tell investors anything about the future potential. There might be lucrative projects in the pipeline, but their earnings won’t yet be realised.

Comprehensive income shows changes in net equity over time. Yet as with any financial documents, the income statement should be looked at in tandem with other metrics before making investment decisions.

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