First two statements of the complete set of financial statements are balance sheet and income statement. The statement of comprehensive income is the third statement coming immediately after the income statement. This presentation is known as two statement approach. However, the income statement and statement of comprehensive income can be merged into a single statement having two sections. One section for items of income statement (profit or loss) and the other section for items of other comprehensive income.
Now, let’s discuss the statement of comprehensive income. This statement consists details of the total comprehensive income of an entity for an accounting period.
What is total comprehensive income?
It is the sum of following two items:
- Net profit or net income (as explained in our post “income statement”)
- Other comprehensive income
Other comprehensive income mainly includes gains and losses that arise as a result of variations in the values of assets and liabilities of an entity. For e.g., revaluation of property, plant and equipment accounted for under revaluation model may result in revaluation surplus. As per IAS – 16, this revaluation gain will be recorded as other comprehensive income. Similarly, standards of different areas provide guidance about what items would be recorded as other comprehensive income, and should not be included in the income statement.
Examples of items recorded as other comprehensive income / (loss)
Some examples of items recorded as other comprehensive income / (loss) in the statement of comprehensive income are given below.
- Revaluation gains on revaluation of property, plant and equipment.
- Unrealized gains or losses on investments classified as fair value through other comprehensive income (FVOCI investments).
- Unrealized gains or losses on derivatives used for hedging.
- Unrealized gains or losses on retirement benefit plans.
Another difference with net income is that at the end of an accounting period, net income is transferred to retained earnings under equity. Other comprehensive income or loss is not transferred to retained earnings, rather, a separate reserve is created for each category and other comprehensive income or loss is transferred to that reserve. Although, retained earnings and these accumulated other comprehensive income reserves are both part of equity.
You must be wondering why these items are kept separate and not included in the income statement. I believe the items included in other comprehensive income are somewhat extraordinary items, and the management’s good performance or bad performance do not directly affect other comprehensive income. These items are kept separate so that the income statement only includes those items that represent the financial performance of the management. Furthermore, items of income statement are mainly realized gains and losses and therefore result in an accurate measure of profitability of the business. Therefore, for evaluation of management’s financial performance and for analysis of an entity’s profitability, net income and other comprehensive income are kept separate.
The statement of comprehensive income should be presented immediately after the income statement. (However, it could be combined with the income statement.)
Here is a sample statement of comprehensive income of XYZ Company for the year ended 31 December 2020.