Understanding Other Comprehensive Income (OCI)
Other comprehensive income (OCI) is a type of financial reporting which groups non-cash and other non-routine items that are not reported on the balance sheet or income statement into one true and fair reporting. Although these items usually do not directly affect the income statement or statement of retained earnings, these items might eventually affect shareholders’ equity. Examples of items that are report under this statement are foreign currency translation gains and losses, assessment adjustments, revaluations, hedge gains and losses, and other non-recurring items.
In addition, OCI items are sometimes referred to as “deferred credits” because these items may eventually become an asset or liability on the balance sheet. For instance, a revaluation of a fixed asset resulting in a gain might eventually become a future increase in net income, if the asset is sold for more than its revalued amount.
Presentation of OCI
In the presentation of OCI items, the items must be classified into separate categories and reported as one net amount. For example, all foreign currency translation gains and losses are to be grouped together and reported as one net figure on the statement. Similarly, all revaluation gains and losses are to be reported under one heading on the statement.
It is also important to note that while the amounts in OCI can be reflected on the balance sheet and income statement, these items are typically not part of the equity transactions and are not reported directly to the income statement. Therefore, the amount of OCI must be reported as a separate item, as a single net figure under its own heading.
Impact On Profit or Loss
In terms of the impact of the items in OCI on profit or loss, it is important to note that these amounts do not directly affect profit or loss. This is because these items do not usually involve an exchange of cash or assets. Instead, they reflect income that cannot be accounted for by the income statement.
However, although these items do not directly affect net income, they can have a long-term impact on the financial statements as these amounts can later be re-classified into an operating income or a non-recurring gain or loss. An example of this would be a foreign currency hedge gains or losses that must be reclassified into net income at the time of a write-down.
In conclusion, other comprehensive income (OCI) refers to a type of financial reporting which groups non-cash and other non-routine items that are not reported on the balance sheet or income statement. It is important to note that these items do not directly affect profit or loss and are typically not part of the equity transactions and are not reported directly to the income statement. However, these items can have a long-term impact on the financial statements as they can later be re-classified into an operating income or a non-recurring gain or loss.
What is Other Comprehensive Income (OCI)?
Other comprehensive income (OCI) is an accounting measure that includes non-cash revenues, expenses, gains, and losses that have yet to be recorded on an income statement. It serves as a useful tool to better understand the financial health of a company that are not ordinarily inflected the bottom line. OCI offers a greater level of insight compared to merely relying on income statements to analyse financial performance.
Generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) have defined certain items to be excluded from the determination of ordinary profits or losses for an entity. These amounts, sometimes known as ‘other comprehensive income’, are certain revenues, expenses, gains, or losses that ordinarily impact a company’s equity side of the balance sheet, but not its income statement.
Alternative Names for OCI
In addition to other comprehensive income, OCI is also known as other comprehensive losses, equity income, and comprehensive income. Depending on the situation, OCI is also referred to as total comprehensive income or total comprehensive losses. All of these terms are essentially referring to a subset of non-cash items that comprise certain financial gains and losses.
What Components Does OCI Include?
Under the GAAP and IFRS guidelines, OCI encompasses a wide range of different items that are excluded from an ordinary income statement. These items can include unrealised gains or losses on investments, foreign currency profits or losses, changes in the powers of certain items such as stocks and options, and gains or losses that are reported in the revaluation of assets or liabilities.
OCI also includes items such as pension expenses, changes in benefit plans, changes in pension liabilities, and deferred taxes. All of these items are components of other comprehensive income that factor into an entity’s performance, but are excluded from the calculation of net income and do not affect the bottom line.
In conclusion, other comprehensive income (OCI) is an accounting item for firms that includes revenues, expenses, gains, and losses that have yet to be recorded on an income statement. It offers insights into a company’s financial health and performance, and provides a greater level of insight than relying solely on ordinary income statements. Items such as unrealised gains or losses on investments, foreign currency profits and losses, changes in share-based payment, and revaluation of assets or liabilities that affect a company’s balance sheet may all be components of OCI.
