Question

Orland Restaurants Inc. reports the following comprehensive income in its 2016 consolidated financial statements ($ in millions):

Comprehensive income:
Net earnings	$576.7
Other comprehensive income (loss):
Foreign currency adjustment	(0.3)
Change in fair value of marketable securities net of tax	(8.4)
Change in fair value of derivatives, net of tax	(6.6)
Net unamortized gain (loss) arising during period, including amortization of unrecognized net actuarial loss, net of taxes	25.6
Other comprehensive income (loss)	10.3
Total comprehensive income	$587.0

1.    In general, why do net earnings and comprehensive income differ?
2. How do foreign currency adjustments affect comprehensive income?
3.    During the year did the U.S. dollar strengthen or weaken vis-à-vis the foreign currencies that Orland uses?

Answer 1

a. Comprehensive income includes the net earnings of the company. The net earnings includes the realized gains or losses whereas the comprehensive income would include the unrealized gains or losses as well. Comprehensive Income is calculated as net earnings plus other comprehensive income or loss. The difference between the two income is the unrealized part and therefore they differ.

b. The financial statements of subsidiaries are converted into US$ before consolidation with that of the U.S. parent company. The conversion into US$ may change the balance sheet values, the increase or decrease in these values is not reflected in the income statement but is shown as part of other comprehensive income. If there is gain on translation this would increase the comprehensive income and if there is loss it would decrease the comprehensive income.

c. The U.S Dollar strengthened in relation to that of the foreign currency of orland. The net assets of the foreign subsidiary reduced due to conversion and so the foreign currencies weakened in relation to dollar as the value of assets and liabilities were worth less when converted into U.S dollars.