Accumulated other comprehensive income
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Note: Reference cited below, FAS130, remains the most current accounting literature in the United States on this topic.
In 1997 the United States Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 130 entitled “Reporting Comprehensive Income”. This statement required all income statement items to be reported either as a regular item in the income statement or a special item as other comprehensive income. It is commonly referred to as FAS130.
Comprehensive income is the total non-owner change in equity for a reporting period. This change encompasses all changes in equity other than transactions from owners. Most of these changes appear in the income statement. A few special types of gains and losses are not shown in the income statement but as special items in shareholder equity section of the balance sheet.
Since these comprehensive income items are not closed to retained earnings each period they accumulate as shareholder equity items and thus are entitled “Accumulated Other Comprehensive Income” and is sometimes referred to as "AOCI".
Accumulated other comprehensive income is a subsection in equity where "other comprehensive income" is accumulated (summed or "aggregated").
The balance of AOCI is presented in the Equity section of the Balance Sheet as is the Retained Earnings balance, which aggregates past and current Earnings, and past and current Dividends.
Other comprehensive income is the difference between net income and comprehensive income and represents the certain gains and losses of the enterprise. It is commonly referred to as "OCI." In practice, it comprises [five] general items:
- Unrealized Gains and losses on available for sale securities as required by Statement of Financial Accounting Standards No. 115 ("FAS115") - "Accounting for Certain Investments in Debt and Equity Securities"
- Gains and losses on derivatives held as cash flow hedges as required by Statement of Financial Accounting Standards No. 133 ("FAS133") - "Accounting for Derivative Instruments and Hedging Activities".
- Gains and losses resulting from converting foreign currency subsidiaries to the parent currency as required by Statement of Financial Accounting Standards No. 52 ("FAS52") - "Foreign Currency Translation", and
- Minimum pension liability adjustments, as required by Statement of Financial Accounting Standards No. 158 ("FAS158")- "Employers' Accounting For Defined Benefit Pension And Other Postretirement Plans".
- Unrealized gains and losses from a foreign currency hedge of a net investment in a foreign operation as required by FAS133.
While the AOCI balance is presented in Equity, the annual accounting entries, as flows, are presented sometimes in a Statement of Comprehensive Income. This statement expands the traditional Income Statement beyond Earnings to include OCI in order to present Comprehensive Income.
Flows presented initially in OCI sometimes are reclassified into Earnings when certain conditions are met. For the five types of OCI described above, the triggers for reclassification are presented in the accounting standard that gives rise to the OCI flow.
In the United States further alterations to this OCI definition occur when a new standard (including a revision of a previously issued accounting standard) identifies an item that can be measured, should be measured in the financial statements, represents a "flow" variable rather than a stock, or snapshot, variable, and does not represent a flow variable that should be presented in the Income Statement as a component of Earnings. The flow variable that is both measurable and should be recognized is then added to the list above of items that a reporting entity would include in AOCI.
In the third quarter of 2008 the United States Securities and Exchange Commission received several proposals to allow the recognition in AOCI of certain fair value changes on financial instruments. This proposal was initially well received by representatives of the banking community who felt that Earnings recognition of these fair value changes during the concurrent "credit meltdown of 2008" would be inappropriate. The effect of this proposal, on balance, would be to remove sizeable losses from Earnings and thus Retained Earnings of banks, and assist them in preserving their regulatory capital. The regulatory capital of banks in the US and generally worldwide includes contributed equity capital and retained earnings but excludes AOCI, even though it is reported as a component of the Equity section of the Balance Sheet.
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