What Is Comprehensive Income?
Comprehensive income is the variation in the value of a company's net assets from non-owner sources during a specific period. It includes net income and unrealized income. Unrealized income can be unrealized gains or losses on, for example, hedge/derivative financial instruments and foreign currency transaction gains or losses.
Comprehensive income provides a complete view of a company's income, some of which may not be fully captured on the income statement.
Key Takeaways
- Comprehensive income reflects the changes to owners' equity originating from non-owner and traditional income sources.
- Comprehensive income includes adjustments made to the prices of securities held for sale by the firm and/or derivatives used to hedge such positions, foreign currency exchange rate changes, and adjustments to pension liabilities.
- It excludes owner-caused changes in equity.
- Details on comprehensive income often appear in the footnotes to a company's financial statements.
- Some companies produce a separate statement of comprehensive income.
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Understanding Comprehensive Income
Comprehensive income is the sum of a company's net income and other comprehensive income.
For companies, comprehensive income sheds light on changes in equity. Since it includes net income and unrealized income and losses, it provides the big picture of a company's value.
For investors, comprehensive income is useful because the information can help their decision-making where the company's feasibility as a potential investment is concerned.
What's Included
The purpose of comprehensive income is to show all operating and financial events that affect non-owner interests. As well as net income, comprehensive income includes unrealized gains and losses on available-for-sale investments. It also includes cash flow hedges, which can change in value depending on the securities' market value, and debt securities transferred from 'available for sale' to 'held to maturity'—which may also incur unrealized gains or losses. Gains or losses can also be incurred from foreign currency translation adjustments and in pensions and/or post-retirement benefit plans.
Income excluded from the income statement is reported under "accumulated other comprehensive income" of the shareholders' equity section.
Income from non-owner sources increases the value of a company. However, since it is not from the ongoing operations of the company's normal line of business, it is not appropriate to include it in the traditional income statements.
Comprehensive income excludes owner-caused changes in equity, such as the sale of stock or purchase of Treasury shares.
Statement of Comprehensive Income
A company's income statement details revenues and expenses, including taxes and interest. Its bottom line is net income.However, net income only recognizes earned income and incurred expenses.
A statement of comprehensive income, which covers the same period as the income statement, reflects net income as well as other comprehensive income, the latter being unrealized gains and losses on assets that aren't shown on the income statement. The statement of comprehensive income gives company management and investors a fuller, more accurate idea of income.
Net Income
The net income section provides information derived from the income statement about a company's total revenues and expenses. The amount is adjusted to account for non-owner activities.
Net income is arrived at by subtracting cost of goods sold, general expenses, taxes, and interest from total revenue.
Other Comprehensive Income
The other comprehensive income section provides information on the company's unrealized gains, losses, revenue, and expenses. Here are some examples of other comprehensive income that you may find on the comprehensive income statement:
- The unrealized gains and losses on securities that a company has for sale
- Gains and losses on cash flow hedge instruments
- The unrealized gains and losses on debt securities that result when they're transferred from the 'available for sale category' to the 'held to maturity category'
- Foreign currency translation adjustments
- Foreign currency transaction gains and losses related to a foreign investment hedge.
- Pension or post-retirement benefit plan gains or losses
At the end of the statement is the comprehensive income total, which is the sum of net income and other comprehensive income.
In some circ*mstances, companies combine the income statement and statement of comprehensive income, or it will be included as footnotes. However, a company with other comprehensive income will typically file this form separately. The statement of comprehensive income is not required if a company does not meet the criteria to classify income as comprehensive income.
Financial statements, including those showing comprehensive income, only portray activity from a certain period or specific time. They can't guarantee future performance.
Comprehensive Income Example
Like other publicly-traded companies, Ford Motor Company files quarterly and annual reports with the SEC. In its first quarter filing for 2023, it published its consolidated statements of comprehensive income, which combines comprehensive income from all of its activities and subsidiaries (featured below).
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Pros and Cons of the Statement of Comprehensive Income
Pros
It provides a more comprehensive view of a company's income than the income statement alone
Company management can use the added information about income to inform smarter planning for revenue and costs as well as operational decisions
Investors can gain better insight into a company's profitability and the stability of earnings. They can use it as a tool to compare companies as potential investments
Cons
The inclusion of unrealized gains and/or losses can distort the view of a company's financial health
The values for other comprehensive income relate to assumptions, not actual results
Comprehensive income doesn't assure future profitability. It only presents a picture of a company's profitability for a particular period of time in the past
What's Other Comprehensive Income?
Contrary to net income, other comprehensive income is income (gains and losses) not yet realized. It reflects income that cannot be accounted for by the income statement. Some examples of other comprehensive income are foreign currency hedge gains and losses, cash flow hedge gains and losses, and unrealized gains and losses for securities that are available for sale.
What's the Benefit of the Comprehensive Income Statement?
It provides a comprehensive view for company management and investors of a company's profitability picture. It's also a way for a company to record more than simply net income. The statement shows net income as well as other comprehensive income.
What's the Difference Between Net Income and Comprehensive Income?
Net income is the actual profit or gain that a company makes in a particular period. Comprehensive income is the sum of that net income plus the value of yet unrealized profits (or losses) in the same period.
The Bottom Line
Comprehensive income is the sum of a company's net income, as recorded on the income statement, and unrealized income (or "other comprehensive income") that is not included on an income statement but is recorded in the statement of comprehensive income.
The statement of comprehensive income displays both net income details and other comprehensive income details. It is appreciated for its more comprehensive view of a company's profitability picture for a particular period.
