Other comprehensive income refers to income, expenses, gains, or losses which under U.S. GAAP are excluded from the income statement. Rather, these transactions are accounted for directly into shareholder’s equity.
The purpose of the other comprehensive income account is to separate certain transactions which may cause unnecessary volatility in a company’s earnings and distort the presentation of the company’s operations. By presenting these items into a separate disclosure, investors can determine to what extent these transactions will influence the company’s value.
The most common items occurring in other comprehensive income include foreign currency translations, and unrealized gains or losses on certain investments.
Foreign currency translations arise when a company has operations in a foreign country. For reporting purposes, the income, assets, liabilities, and equity of the foreign operations must be converted into the U.S. dollar (the “functional currency” for companies listed and reporting in the U.S.). Because exchange rates fluctuate, the company is likely to incur gains or losses on the conversion of the foreign currency to U.S. dollar. Since such gains or losses are tied to random fluctuations in exchange rates and not derived from the company’s operating transactions, the gains or losses are recorded in other comprehensive income rather than in the income statement.
Similarly, certain financial securities are recorded on a “mark to market” basis, where security prices must be recorded at the current market price as of the balance sheet date. Fluctuations in security prices can lead to unrealized gains or losses on certain investments.
Comprehensive Income refers to the sum of accounting net income and other comprehensive income. Companies reporting under U.S. GAAP present a statement of comprehensive income underneath the income statement.
