Question

1. Discuss the purpose of other comprehensive income and accumulated other comprehensive income.

Answer 1

Other comprehensive income consists of financial items which have not yet been realized. They are listed after net earnings in the income statement and form part of other comprehensive income. They can be revenues, expenses, gains and losses. For example, a company buys land and the value of the land changes. Then the difference between the value and the price paid for it, is recognized as profit or loss in other comprehensive income. It will be realized only when the land is actually sold.

Accumulated other comprehensive income is recorded in the equity section of the balance sheet. It records the accumulated value of unrealized gains or losses which are part of other comprehensive income.Some unrealized gains/losses which are recorded in accumulated other comprehensive income are: translation gains/losses due to foreign currency, pension plans gains/losses, prior service credits/costs of pension and unrealized gains/losses on investments which are available for sale.

Other comprehensive income and accumulated comprehensive income are important because unrealized gains/losses can be big enough to impact the financial analysis of a company, yet they cannot be shown as regular line items in the income statement or balance sheet.