57 STUDY GUIDE Flashcards
2113.02
Comprehensive income is defined in SFAC 6 as “the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.” Thus, comprehensive income includes not only net income but also other components of comprehensive income that are not included in net income. This relationship is illustrated as follows:
Revenues and gains $XXX
Expenses and losses XXX
Income before income taxes XXX
Income taxes XXX
Net income XXX
Other comprehensive income XXX
Comprehensive income $XXX
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SFAC 6 includes a discussion of concepts of capital maintenance with its discussions of comprehensive income. A concept of maintenance of capital or recovery of cost is a prerequisite for separating return on capital from return of capital because only inflows in excess of the amount needed to maintain capital are a return on equity. Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept (which is often expressed in terms of maintaining operating capability; that is, maintaining the capacity of an enterprise to provide a constant supply of goods or services). The major difference between them involves the effects of price changes on assets held and liabilities owed during a period. Under the financial capital concept, if the effects of those price changes are recognized, they are called “holding gains and losses” and are included in return on capital. Under the physical capital concept, those changes would be recognized but called “capital maintenance adjustments” and would be included directly in equity and would not be included in return on capital. Under that concept, capital maintenance adjustments would be a separate element rather than gains and losses.
The financial capital concept is the traditional view and is generally the capital maintenance concept in present primary financial statements. Comprehensive income as defined in SFAC 6 is a return on financial capital.
2113.01
In recent years, the FASB has required that various “gains” and “losses” be excluded from the income statement and reported as direct charges or credits to equity. Even though various pronouncements required specific disclosure of these items in the notes to the financial statements, they did not require them to be reported in the body of a financial statement. As a result of the increasing number of these items, the FASB decided to readdress the issue of how these direct charges and credits to equity should be reported. The FASB decided that these direct charges and credits to equity (other comprehensive income) should be reported in a formal financial statement rather than only disclosed in the notes.
2113.03
Other comprehensive income (OCI) is defined as revenues, expenses, gains, and losses that under GAAP are included in comprehensive income but excluded from net income. The following items should be reported as direct charges or credits to equity; thus, the items that currently constitute other comprehensive income include the following:
Foreign currency translation adjustments
Gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity, commencing as of the designation date
Gains and losses on intra-entity foreign currency transactions that are of a long-term-investment nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting entity’s financial statements
Gains and losses on derivative instruments that are designated as, and qualify as, cash flow hedges
For derivatives that are designated in qualifying hedging relationships, the difference between changes in fair value of the excluded components and the initial value of the excluded components recognized in earnings under a systematic and rational method
Unrealized holding gains and losses on available-for-sale debt securities
Unrealized holding gains and losses that result from a debt security being transferred into the available-for-sale from the held-to-maturity category
Amounts recognized in other comprehensive income for debt securities classified as available-for-sale and held-to-maturity related to an other-than-temporary impairment recognized if a portion of the impairment was not recognized in earnings
Subsequent decreases (if not an other-than-temporary impairment) or increases in the fair value of the available-for-sale debt securities previously written down as impaired
Gains or losses associated with pension or other postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost)
Prior service costs or credits associated with pension or other postretirement benefits
Transition assets or obligations associated with pension or other postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost)
Changes in fair value attributable to instrument-specific credit risk liabilities for which the fair value option is elected
2113.04
An entity shall present, either in a single continuous statement of comprehensive income or in a statement of net income and statement of other comprehensive income, all items that meet the definition of comprehensive income for the period in which those items are recognized. Components included in other comprehensive income shall be classified based on their nature. A specific format is not required, but an entity must display net income as a component of comprehensive income in that financial statement.
