Other Comprehensive Income (OCI) consists of items of income and expense that are not recognized in profit or loss as required or permitted by International Financial Reporting Standards (IFRS). It includes revenues, expenses, gains, and losses that are excluded from net income on the income statement and are instead recorded in shareholders’ equity.
Types of Other Comprehensive Income
Revaluation Gains and Losses
OCI includes revaluation gains and losses on certain types of assets such as
- Financial assets at fair value through OCI (FVOCI)
- Property, plant, and equipment (PPE)
Foreign Currency Translation Adjustments
Changes due to the translation of financial statements of foreign subsidiaries into the reporting currency are recorded in OCI.
Actuarial Gains and Losses
Changes in the present value of the defined benefit obligations and gains or losses on the return of plan assets of post-employment benefit plans are part of OCI.
Cash Flow Hedges
The effective portion of gains and losses on cash flow hedging instruments is recognized initially in OCI and reclassified to profit or loss in the period when the forecasted transaction affects profit or loss.
Special Considerations
Exclusion from Profit or Loss
OCI items are not included in the calculation of profit or loss, which emphasizes the difference between net income and total comprehensive income.
Impact on Financial Analysis
OCI is a critical component for analysts watching financial health, as significant changes can affect overall profitability, leverage ratios, and risk exposure.
Examples of Other Comprehensive Income
Unrealized Gains or Losses on Investments
A company holds an investment whose fair value increases or decreases. The unrealized gain or loss is reported in OCI.
Foreign Currency Exchange Gains or Losses
A multinational corporation might experience currency exchange rate volatility affecting its foreign operations. The gains or losses from these translations are reported in OCI.
Historical Context
The concept of OCI was introduced to provide a broader perspective on an entity’s performance by including items that affect equity but are excluded from net income. This approach enhances transparency and comparability across financial statements globally.
Applicability to Financial Statements
Statement of Comprehensive Income
OCI is reported in a separate section of the statement of comprehensive income, which complements the traditional income statement.
Equity Section of Balance Sheet
Accumulated OCI is presented in the equity section of the balance sheet, reflecting a cumulative balance of these comprehensive income items over time.
Related Terms
- Comprehensive Income: The total of net income and other comprehensive income, providing a holistic view of an entity’s performance.
- Revaluation Reserve: A reserve created to account for the revaluation of assets, directly linked to revaluation gains and losses in OCI.
FAQs
Why is OCI important?
How does OCI differ from net income?
Can OCI be negative?
References
- International Financial Reporting Standards (IFRS)
- IAS 1 Presentation of Financial Statements
- Accounting Standards Codification (ASC) 220 - Comprehensive Income
Summary
Other Comprehensive Income (OCI) captures items of income and expense recognized directly in equity rather than through profit and loss, ensuring financial statements provide a complete overview of a company’s financial performance. By understanding and analyzing OCI, stakeholders gain additional insights into the quality and sustainability of earnings beyond what net income can show.
