Question

Your client, Jeffrey Smith, President and CEO of Malico Corporation of, took accounting a number of years ago and was unaware of comprehensive income reporting. He is not convinced that any accounting standards exist for comprehensive income.

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Write a formal business letter to your client in good form. Provide the following information to Mr. Smith:

a. What authoritative literature addresses comprehensive income? When was it issued?

b. Provide the definition of comprehensive income.

c. Define classifications within net income; give examples

d. Define classifications within other comprehensive income; give examples.

e. What are reclassification adjustments?

Answer 1

The link was not working so I am giving the answers to the given questions here.

Dear Mr. Smit,

To resolve your concerns regarding the treatment of items considered as other comprehensive income, I have conducted some research and would like to share the details for your reference.

The Statement of Financial Accounting Standards No. 130 : Reporting Comprehensive Income is the Acoounting standard which deals with the for reporting of comprehensive income including its components i.e. revenues, expenses, gains, and losses, which was issued by FASB in June 1997.

This standard required the companies to include Statement of Comprehensive Income as a part of its full-set of generel purpose financial statements. Although no specifiec format is defined in the standard, the standard requires the companies to classify items of OCI by their nature in their financial statements and report the accumulated balance of OCI under the equity, separately from retained earnings and additional paid-in capital in the financial statements.

OCI includes those revenues, expenses, gains and losses which have not been realised and therefore are not considered to be part of Net Income calculated in the statement of profit and loss.

The Net Income under the statement of profit and loss contains recognized incomes and expenses, which includes incomes from continuing and discontinued operations and any realised extraordinary income. Incomes are considered to be unrealised, when the underlying transaction is yet to be completed. Eg. Increase in market value of the company;s investments which have not yet been sold, but are available for sale, is considered to be unrealised income and is not considered to be a part of Net Income. When these bonds are sold, any profit or loss on them will be realised and thus will become part of our net income calculations.

The items in OCI are included based on their nature. Eg. OCI shall be classified seperately into foreign currency gains/losses, unrealised gains/losses on certain investments, gain/losses associated with pension and other retirement benefits.

When an item, which was cosidered to be a part of OCI in the current or prior periods, is dispalyed as a part of net income for a period, a reclassification adjustment is required to be made to avoid double counting of such item. Eg. For investments on which unrealised gains were included in the OCI, when they are sold, any net profit/loss will be reported in that period's net income and the unrealised gains/losses of prior periods need to be deducted from OCI to avoid them from being considered twice.

I hope this resolves your doubts. In case you have any further concerns, feel free to contact me.

Regards,

ABC

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