Accumulated other comprehensive income
Encyclopedia
Note: Reference cited below, FAS130, remains the most current accounting literature in the United States on this topic.
In 1997 the United States
Financial Accounting Standards Board
issued Statement on Financial Accounting Standards No. 130 entitled “Reporting Comprehensive Income”. This statement required all income statement
items to be reported either as a regular item in the income statement or a special item as other comprehensive income. It is commonly referred to as FAS130.
is the total non-owner change in equity for a reporting period. This change encompasses all changes in equity other than transactions from owners. Most of these changes appear in the income statement. A few special types of gains and losses are not shown in the income statement but as special items in shareholder equity section of the balance sheet.
Since these comprehensive income items are not closed to retained earnings each period they accumulate as shareholder equity items and thus are entitled “Accumulated Other Comprehensive Income” and is sometimes referred to as "AOCI".
Accumulated other comprehensive income is a subsection in equity where "other comprehensive income" is accumulated (summed or "aggregated").
The balance of AOCI is presented in the Equity section of the Balance Sheet as is the Retained Earnings balance, which aggregates past and current Earnings, and past and current Dividends.
as in the Income Statement
(Profit or Loss Account) and comprehensive income
, and represents the certain gains and losses of the enterprise not recognized in the P&L Account. It is commonly referred to as "OCI".
In practice, it comprises the following items:
While the AOCI balance is presented in Equity section of the balance sheet
, the annual accounting entries, as flows, are presented sometimes in a Statement of Comprehensive Income. This statement expands the traditional Income Statement
beyond Earnings to include OCI in order to present Comprehensive Income.
Under the revised IAS 1, all non-owner changes in equity (comprehensive income
) must be presented either in one Statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income).
In the third quarter of 2008 the United States Securities and Exchange Commission received several proposals to allow the recognition in AOCI of certain fair value changes on financial instruments. This proposal was initially well received by representatives of the banking community who felt that Earnings recognition of these fair value changes during the concurrent "credit meltdown of 2008" would be inappropriate. The effect of this proposal, on balance, would be to remove sizeable losses from Earnings and thus Retained Earnings of banks, and assist them in preserving their regulatory capital. The regulatory capital of banks in the US and generally worldwide includes contributed equity capital and retained earnings but excludes AOCI, even though it is reported as a component of the Equity section of the Balance Sheet.
In 1997 the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Financial Accounting Standards Board
Financial Accounting Standards Board
The Financial Accounting Standards Board is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles within the United States in the public's interest...
issued Statement on Financial Accounting Standards No. 130 entitled “Reporting Comprehensive Income”. This statement required all income statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
items to be reported either as a regular item in the income statement or a special item as other comprehensive income. It is commonly referred to as FAS130.
Comprehensive income
Comprehensive incomeComprehensive income
Comprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...
is the total non-owner change in equity for a reporting period. This change encompasses all changes in equity other than transactions from owners. Most of these changes appear in the income statement. A few special types of gains and losses are not shown in the income statement but as special items in shareholder equity section of the balance sheet.
Since these comprehensive income items are not closed to retained earnings each period they accumulate as shareholder equity items and thus are entitled “Accumulated Other Comprehensive Income” and is sometimes referred to as "AOCI".
Accumulated other comprehensive income is a subsection in equity where "other comprehensive income" is accumulated (summed or "aggregated").
The balance of AOCI is presented in the Equity section of the Balance Sheet as is the Retained Earnings balance, which aggregates past and current Earnings, and past and current Dividends.
Other comprehensive income
Other comprehensive income is the difference between net incomeNet income
Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...
as in the Income Statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
(Profit or Loss Account) and comprehensive income
Comprehensive income
Comprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...
, and represents the certain gains and losses of the enterprise not recognized in the P&L Account. It is commonly referred to as "OCI".
In practice, it comprises the following items:
- Unrealized gains and losses on available for saleAvailable for saleAvailable for sale is an accounting term used to classify financial assets.AFS is one of the three general classifications, along with held for trading and held to maturity, under the U.S. Generally Accepted Accounting Principles , specifically, the FASB 115...
securitiesSecurity (finance)A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
[IAS 39/ "FAS 115" - "Accounting for Certain Investments in Debt and Equity Securities"] - Gains and losses on derivativesDerivative (finance)A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
held as cash flow hedgeCash flow hedgeA cash flow hedge is a hedge of the exposure to the variability of cash flow that# is attributable to a particular risk associated with a recognized asset or liability...
s (only for effective portions) [IAS 39/ "FAS 133" - "Accounting for Derivative Instruments and Hedging Activities"] - Gains and losses resulting from translating the financial statements of foreign subsidiaries (from foreign currency to the presentation currency) [IAS 21/ "FAS 52" - "Foreign Currency Translation"],
- Actuarial gains and losses on defined benefit plans recognized (Minimum pensionPensionIn general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
liability adjustments) [IAS 19/ "FAS 158" - "Employers' Accounting For Defined Benefit Pension And Other Postretirement Plans"] - Changes in the revaluation surplus [IAS 16 and IAS 38].
While the AOCI balance is presented in Equity section of the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
, the annual accounting entries, as flows, are presented sometimes in a Statement of Comprehensive Income. This statement expands the traditional Income Statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
beyond Earnings to include OCI in order to present Comprehensive Income.
Under the revised IAS 1, all non-owner changes in equity (comprehensive income
Comprehensive income
Comprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...
) must be presented either in one Statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income).
Reclassification to profit or loss (P&L)
Flows presented initially in OCI sometimes are reclassified into Earnings (Profit or Loss) when certain conditions are met. For the five types of OCI described above, the triggers for reclassification are presented in the accounting standard that gives rise to the OCI flow.Alterations to definition of OCI
In the United States further alterations to this OCI definition occur when a new standard (including a revision of a previously issued accounting standard) identifies an item that can be measured, should be measured in the financial statements, represents a "flow" variable rather than a stock, or snapshot, variable, and does not represent a flow variable that should be presented in the Income Statement as a component of Earnings. The flow variable that is both measurable and should be recognized is then added to the list above of items that a reporting entity would include in AOCI.In the third quarter of 2008 the United States Securities and Exchange Commission received several proposals to allow the recognition in AOCI of certain fair value changes on financial instruments. This proposal was initially well received by representatives of the banking community who felt that Earnings recognition of these fair value changes during the concurrent "credit meltdown of 2008" would be inappropriate. The effect of this proposal, on balance, would be to remove sizeable losses from Earnings and thus Retained Earnings of banks, and assist them in preserving their regulatory capital. The regulatory capital of banks in the US and generally worldwide includes contributed equity capital and retained earnings but excludes AOCI, even though it is reported as a component of the Equity section of the Balance Sheet.
See also
- Comprehensive incomeComprehensive incomeComprehensive income is a specific term used in companies' financial reporting from the company-whole point of view. Because that use excludes the effects of changing ownership interest, an economic measure of comprehensive income is necessary for financial analysis from the shareholders' point...
- Reserve (accounting)Reserve (Accounting)In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting...
- Balance sheetBalance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
- Statement of comprehensive income
- Hedge accountingHedge AccountingHedge accounting is an accountancy practice.-Why is hedge accounting necessary?:Many financial institutions and corporate businesses use derivative financial instruments to hedge their exposure to different risks .Accounting for derivative financial instruments under International Accounting...