Other Comprehensive income. Examples. Disclosure

What is other comprehensive income?

Other comprehensive income (OCI) are income and expenses recognised outside of profit or loss, as required by particular IFRS Standards. Income and expenses are taken to OCI only if there is more relevant information or faithful representation of financial statements to the users.

In a financial statement, OCI summarises all unrecognised gains and losses affecting a company's equity during the reporting period. 

It is essential to understand this concept because it can provide valuable insights into a company's overall financial health. 

For example, suppose there are large fluctuations in OCI from one year to the next. In that case, it could indicate something wrong with the business. Investors and analysts will often closely scrutinise this line item to better understand what's happening with a company.

The most common example of other comprehensive income is a revaluation surplus which arises when an entity decides to account for an increase in the value of land and buildings.

Example : 

Entity A owns land and buildings that are accounted for using the revaluation model in IAS 16 Property, Plant and Equipment. Entity A revalued these assets from $350 million to $400 million at the reporting date. IAS 16 stipulates that the $50 million gain must be recognised in other comprehensive income.

Journal entry

Statement of financial position:

Dr Non-current asset – land $50 Million

Cr Revaluation surplus (within equity) $50 million

Criticism of OCI

-Many users ignore OCI since the gains and losses reported are unrelated to an entity's trading cash flows. As a result, material expenses presented in OCI may not be given the attention they require.

- Reclassification from OCI to profit or loss results in profits or losses being recorded in a different period from the change in the related asset or liability. This contradicts the definitions of income and expenses in the conceptual Framework.

List of accounting standards under IFRS impacting OCI

1. Equity instruments are measured at fair value through other comprehensive income (FVOCI) (if shares are not held for trading) under IFRS 9.
2. Revaluation gains as per IAS 16 are credited to the revaluation surplus. The revaluation gain is shown as other comprehensive income.
3. Foreign currency exchange gains and losses arising from the consolidation of a foreign operation are reported in other comprehensive income (OCI).
4. Remeasurement of actuarial gains or losses on long-term employee benefits is charged or credited to other comprehensive income.

Examples of Disclosure of OCI

Academic research on Other Comprehensive Income 

The Value Relevance of Comprehensive Income under IFRS and US GAAP: Empirical Evidence from Germany

• This study compares the value relevance of comprehensive income under IFRS and US GAAP, finding that comprehensive income under IFRS provides more incremental value-relevant information.
• (Ernstberger, 2008).

Assessing the Value Relevance of Total Comprehensive Income under IFRS: An Empirical Evidence from European Stock Exchanges

• The study aims to verify whether total comprehensive income is more value-relevant than net income, concluding that TCI does not significantly provide more value relevance.
• (Devalle & Magarini, 2012).

The Predictive Power of Comprehensive Income and its Individual Components Under IFRS

• This paper examines the predictive power of comprehensive income and its components in German IFRS firms, finding no superior predictive power for future performance.

Credit Value-Relevance of Earnings, Other Comprehensive Income, and Comprehensive Income: A Study on IFRS Adoption Stage in Indonesia

• This research examines the credit value-relevance of net income, OCI, and comprehensive income in Indonesian firms, finding that OCI is irrelevant to credit..

Bridge over Troubled Water: Is it Possible to Define Other Comprehensive Income?

• The paper discusses the arguments for the current use of OCI under IFRS. It suggests a definition to ensure uniform application and reduce inconsistencies.
• (Ryttersgaard, 2021).

The Usefulness of OCI for Predicting Future Earnings

• This study investigates whether OCI predicts a firm’s future performance. It finds that OCI is positively associated with future earnings in Korean-listed companies.

 Other suggested reading to improve concepts on accounting

• Materiality concept
• Conceptual framework
• Going concern