Comprehensive Income: What It Is and How It Works (2023) - Shopify (2024)

Businesses face ongoing challenges in effectively communicating their performance to stakeholders,beyond the traditional bottom line. Enter the statement of comprehensive income, a financial document that goes beyond a conventional income statement. While net income has long been the cornerstone of financial analysis, the comprehensive income statement offers another view of a company’s financial health.

Comprehensive income extends beyond revenue from a business’s core operations, including any and all realized and unrealized gains and losses. Here’s what you need to know about comprehensive income, its benefits, and its potential drawbacks.

What is comprehensive income?

Comprehensive income is a financial reporting measure that includes all changes in equity over a certain period of time. It includes both traditional income that is reported on the income statement and income from other activities. Specifically, comprehensive income consists of:

• Your company’s net income. Net income is the traditional measure of a company’s profit. You calculate it by subtracting all expenses from revenues—earned income minus incurred expenses like cost of goods sold, accrued interest, and taxes.
• Other comprehensive income (OCI). Other comprehensive income refers to unearned income from sources like foreign currency transaction adjustments, income from cash flow hedges, and certain pension-related adjustments.

Comprehensive income excludes investments by owners and distributions to owners, such as changes in equity from the sale of stock or a stock buyback.

What is a statement of comprehensive income?

A statement of comprehensive income is a financial statement that includes net profit (revenue minus expenses) and other comprehensive income (OCI) for a particular accounting period. Statements of comprehensive income are only required for companies with unrealized gains or losses from non-owner sources like hedge accounting adjustments and changes in the value of available-for-sale assets.

A comprehensive income statement typically breaks down into four sections:

• Translation adjustments. Companies that operate using foreign currencies include gains or losses caused by fluctuations in currency rates as part of their other comprehensive income.

• Available-for-sale securities. Available-for-sale securities are financial assets that a company holds for investment purposes with the intent to sell them in the future.

• Cash flow hedges. Hedging is the process of using a financial instrument to mitigate risk. Cash flow hedges are hedges designed to manage variability in cash flows for a particular asset or liability.

• Pension and other benefits. Employers contribute to pension funds and invest them on their employees’ behalf with the intention to pay out their employees upon retirement. These funds fluctuate in value over time.

Publicly traded companies are generally required to present statements of comprehensive income as part of their financial reporting in accordance with generally accepted accounting principles (GAAP), whereas smaller companies are not.

Benefits of a statement of comprehensive income

More complete view of financial performance

The statement of comprehensive income combines both net income and other comprehensive income (OCI), providing a holistic overview of a company’s financial performance. It allows stakeholders to see the direct operational results and the impact of certain gains and losses that may not be immediately reflected in net income. This transparency helps stakeholders understand the broader financial implications and risks faced by the company.

Improved risk management

Companies often use comprehensive income reporting to manage risks related to certain financial instruments or economic exposures. Stakeholders can assess how well a company is managing risks associated with changes in fair values, currency exchange rates, or other market fluctuations.

Adherence to GAAP

For publicly traded companies and those following comprehensive accounting standards, preparing a statement of comprehensive income is often a requirement for compliance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). Compliance helps ensure that financial statements are prepared in accordance with recognized accounting principles.

Following comprehensive accounting standards ensures consistency in financial reporting across companies and industries. This consistency allows for comparisons between companies so investors and analysts can make meaningful judgments when evaluating investment opportunities.

Drawbacks of a statement of comprehensive income

• Subjective valuation
• Added complexity
• Impact of volatility

Although a statement of comprehensive income can help you evaluate your company’s status in terms of its overall income, it has potential limitations, including:

Subjective valuation

Since they rely, in part, on unrealized gains and losses, comprehensive income statements are not a dependable predictor of a company’s current and future performance. To assess a business’s potential success, investors analyze multiple factors, such as other financial statements and data related to intangible assets like brand loyalty.

Used improperly, a statement of comprehensive income can mislead companies into making poor decisions based on assumptions. For example, a statement of comprehensive income might mislead owners and stakeholders into believing that a particular unrealized gain from a security will translate into profit, even though this assumption may not come to fruition.

Added complexity

The presentation of comprehensive income involves additional line items and calculations, potentially adding complexity to financial statements. This complexity may make it challenging for some users to interpret and understand the information.

Statements of comprehensive income are particularly valuable for larger corporations with diverse financial portfolios, including unrealized gains and losses, in contrast to smaller ecommerce startups. For a smaller company with minimal OCI, it may not be worth the hassle of creating a statement of comprehensive income.

Impact of volatility

The inclusion of items such as unrealized gains and losses on available-for-sale securities can introduce volatility into comprehensive income. This volatility may not necessarily reflect the company’s operational performance and can be influenced by external market conditions. If a disruption in the stock market affects the paper value of a company’s pension fund, for instance, it could have an outsize impact on the appearance of a company’s income—even when the business’s fundamentals are strong.