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Comprehensive Income Comprehensive Income is the changein equity net assets of an entity during a period from transactions and otherevents and circumstances from non-owner sources. It includes all changes in equity during aperiod except those resulting from investments by owners and distributions toowners. It includes net income and otherrevenues, expenses, gains, and losses that under generally accepted accountingprinciples are included in comprehensive income but excluded from

net income. Some parts of comprehensive income presentlybypass the income statement and are reported in a separate equity section ofthe balance sheet. Comprehensiveincome consists of two main categories of net income and other comprehensiveincome. Netincome is an enterprise performance measure favored by many financial statementusers. However, several income items arenot shown on the income statement. Numerous groups of financial statement users have called for revision ofthe number of income items

that bypass the income statement. The accumulated balances of these items arecurrently reported in permanent equity accounts in the balance sheet, not onthe income statement. Although discussedin U.S. accounting literature for over twenty years, the concept of acomprehensive income that captures these income items first became popularoutside the United States. The firstaccounting standard addressing the issue was enacted in

Europe. In 1992, the United Kingdom Accounting StandardsBoard issued Financial Reporting Standard 3 that introduced a statement oftotal recognized gains and losses as a Accounting Standards Committee issued anexposure draft of a new income standard and modified it in 1997. It is conceptually similar to recent U.S.comprehensive income efforts. i In December 1980, the Financial AccountingStandards

Board formally defined comprehensive income in Concepts StatementNo.6, as the change in equity of a business enterprise during a periodfrom transactions and other events and circumstances from non-owner sources. Description of comprehensive concept in Statement 130 covers wider rage ofthings than Statement 6. At the sametime, FASB identified in Statement

No. 5that comprehensive income and its components should be reported as part of afull set of financial statements for a period. This project was added to the Board s agenda in September 1995, at theurging of financial statement users. Inparticular, the Association for Investment Management and Research wanted FASBto expand the reporting for items of comprehensive income.

In June 1997, Financial AccountingStandards Board issued a new Statement of Financial Accounting Standards 130 Income. Thisact was partially triggered by the AIMR s Association for InvestmentManagement and Research call for more explicit Comprehensive Income. The new figure will shine a bright,embarrassing light on items that are now buried

in shareholders equity, aswell as items executives can use to even out bumpy earnings growth, says BearStearns accounting expert Pat McConnell. However even the new statement did not cover what probably it shouldhave covered. The new statement copedonly with reporting and presentation of the components of comprehensive income,but it did not explain when they should be recognized and how they should bemeasured. Nowadays, the market is very volatile andfair market values of the assets might change instantly.

In turn, change in fair market value leads tolosses or gains in general value of a company. If these effects find their reflections on the income statement, it willmean very sudden high and low income reported by the company. The reason why FASB adopted the concept ofcomprehensive income is to give investors a full picture of the financialposition of the company. Traditionalincome statement does not include some of the items, but included in the equitysection of

the balance sheet. Theseitems are Unrealizedgains losses on available-for-sale securities Changein foreign currency exchange rates Adjustmentsto minimum pension liability Hedginggains or losses. Unrealized gains or losses onavailable-for-sale securities take place when the fair market value of thesecurities is different than the one of the balance sheet. To be consistent with accounting regulations,the company has to correct its assets value on the balance

sheet. These gains or losses do not appear on theincome statement because their effect might mislead the investors, in terms oftemporary income of the company. On theother hand, the investors should be aware of these gains or losses, and this isthe reason for comprehensive income to exist. The owner s equity section of the balance sheet accumulates thesechanges in the value of the securities. There are many multinational companiesright now on the market.

These companiesare subject to gains or losses, the origin of which is change in exchange ratesof the currencies. These gains or lossesdo not happen due to routine operation of the company and that is why theymight mislead investors opinion of the company. The effect of these changes is included inthe comprehensive income. Underfunded pension obligation necessitatesan adjustment to the minimum liability in order to be consistent

withaccounting regulations. It is not anobligation for the company, but certainly influence future net incomes, andthat is why it should be included in comprehensive income. Thehedging gains or losses arise due to futures contracts. A change is the market value of a futurescontract that qualifies as a hedge of an asset reported at fair value, unlessearlier recognition of a gain or loss in income is required because highcorrelation

has not occurred SFAS 115 .There are three ways to present comprehensive income Aseparate income statement is prepared Acomprehensive income is combined with income statement Acomprehensive income is represented as a part of the statement of stockholder sequity Forsome of the companies implementation of reporting comprehensive income had negative or positive effect on bottom-line income. For instance, General Motor s had negative impact -64.1 and

Citibank had positive 18.3 . Out of 24 major corporations,15 reported a lower comprehensive income than their net income, and only nineof them displayed an increase in comprehensive income in comparison with netincome. Increased decreased by General Motors -64.10 Wal-mart -15.00 Coca-Cola -14.90 Procter amp Gamble -11.70 Chase-Manhatan -11.50 Ford Motor -10.80 IBM -9.70 Johnson amp

Johnson -9.40 Texaco -7.70 Eli Lilly -6.30 Phillip Moris -3.90 Exxon -2.80 Mobil -1.60 Dupont -0.60 Merck -0.30 Chrysler 0 Hewlett Packard 0 Disney 0.10 BankAmerica 0.60 Microsoft 0.70 AT amp T 0.80 Intel 1.40 NationsBank 2.90 Pepsico 3.50 General Electric 7.60 Citibank 18.30 Suchnew standards are often a source of frustration,

especially to smaller,nonpublic entities and their CPAs. Thisfrustration, often called standards-overload, arises both from the frequentissuance of new and often complicated standards and from the lack of perceivedinformation benefit in financial statements. The overload and implementation costs stemming form SFAS 130 can besubstantially eliminated through reclassification of the available-for-salesecurities

as trading securities, and this is what small private corporationsusually do. Regarding reporting financial performance,international standards say the following IAS 1requires presentation of a statement showing changes in equity. Various formats are allowed 1 Thestatement shows a each item of income and expense, gain or loss, which, asrequired by other IASC Standards, is recognized directly in equity, and thetotal of these items,

certain foreign currency translation gains and losses IAS 21, The Effects of Changes in Foreign Exchange Rates , and changes in fairvalues of financial instruments IAS 39, Financial Instruments Recognition and Measurement and b netprofit or loss for the period, but no total of a and b . Owners investments and withdrawals ofcapital and other movements in retained earnings

and equity capital are shownin the notes.2 Sameas above, but with a total of a and b sometimes called comprehensiveincome . Again, owners investments andwithdrawals of capital and other movements in retained earnings and equitycapital. An example of this would be thetraditional multicolumn statement of changes in shareholders equity. Bibliography i The impact of reportingcomprehensive income, Ohio CPA Journal Columbus Jan-Mar 1999 Richard JSchmidt.

Comprehensiveincome reporting and analysts valuation judgements, Journal of AccountingResearch Chicago D Eric Hirst Patrick E Hopkins. Howcompanies are complying with the comprehensive income disclosure requirements Ohio CPA Journal Columbus Jan-Mar 1999 Linda Campbell Dean Crawford Diana R Ranz. ReportingComprehensive

Income The SecuredLender New York Mar Apr 1998 Eran Echreiber. Discussionif comprehensive income reporting and analysts valuation judgements Journal of Accounting Research Chicago 1998 Marlys Gascho Lipe http www.iasc.org.uk Avoidingthe implementation costs of SFAS 130 The CPA Journal New York Jun 1999 Norman H

Godwin C WayneAlderman Disclosureof comprehensive income may be confusing Texas Banking Austin Oct 1996 Harrison, John S Lynch,Chris Thecall for reporting comprehensive income Financial Analysts Charlottesville Mar Apr1996 Cope, Anthony T Johnson, L Todd Reither. Comprehensiveincome Management

Accounting New York Dec 1995 Bisgay, Louis.