F1.04 – Comprehensive Income (1.3)

Question 0

Other Comprehensive Income

Answer 0

Other comprehensive income items are revenues, expenses, gains, and losses that are bypass net income but still affect stockholders’ equity

5 Comprehensive income items

1. Pension Adjustments
2. Unrealized gains and loss from available for sale securities
3. Foreign Currency Items
4. Effective portion of cash flow hedges
5. Revaluation surplus (IFRS only)

Question 1

Comprehensive Income

Answer 1

Comprehensive Income = Change in equity (net assets) from transactions and other events and circumstances from non-owner sources.

Comprehensive Income
= Net income
+ Other comprehensive income

Question 2

OCI #1 – Pension Adjustments

Answer 2

US GAAP
– Changes in funded status of a pension plan due to gains or losses, prior services costs, and net transition assets or obligations are recognized in other comprehensive income in the year the changes occur
– They stop being recognized in other comprehensive income when they become components of net periodic benefit cost. At that point they get recognized in net income

IFRS
– Same items included in comprehensive income, but unlike US GAAP they never get reclassified to net income

Question 3

OCI #2 – Unrealized Gains and Loss Related to Available for Sale Securities

Answer 3

1. Unrealized gains on available-for-sale securities
2. Unrealized gains resulting from a debt security being transferred into the “available-for-sale” category from “held-to-matury”
3. Subsequent increases or decrease in the fair value of available-for-sale securities previously written down as impaired.

Question 4

OCI #3 – Foreign Currency Items

Answer 4

Foreign currency translation adjustments and 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 are include in other comprehensive income.

Foreign currency translation adjustments remain in comprehensive income until the sale or liquidation of the investment in the foreign entity.

Question 5

OCI #4 – Effective Portion of Cash Flow Hedges

Answer 5

Effective portion of a cash flow hedge include in other comprehensive income until the case flows associated with the hedged item are realized.

Question 6

OCI #5 – Revaluation surplus (IFRS)

Answer 6

IFRS only

Revaluation surpluses (gains) are recognized when intangible assets and fixed assets are revalued, and are included in other comprehensive income.

No reclassification to net income

Transferred directly to retained earnings when the related asset is used or derecognized.

Question 7

OCI – Reclassification Adjustments

Answer 7

Reclassification adjustments move other comprehensive income items from accumulated other comprehensive income to the income statement
– This really only happens under US GAAP

Question 8

OCI – Accumulated Other Comprehensive Income

Answer 8

Accumulated OCI = total of OCI for previous and current periods

Accumulated OCI is part of the Stockholders’ Equity on the balance sheet

At the end of each accounting period, all components of comprehensive income are close to the balance sheet

• Net Income is closed to Retained Earnings
• OCI is closed to Accumulated OCI

Question 9

Financial Statement Reporting

Answer 9

Comprehensive Income and its components must be displayed in a financial statement that is presented with the same prominence as the other financial statements that constitute a full set of financial statements unless
– Entity has no comprehensive income items
– Entity is a not-for-profit entity

Both IFRS and US GAAP permit Comprehensive Income to be presented in

1. A single statement of comprehensive income (one-statement approach), or
2. Income statement followed by a separate statement of comprehensive income that begins with net income (two-statement approach)

Question 10

Statement of Comprehensive Income – Single Statement Approach

Answer 10

Single Statement Approach = OCI below net income amount, and totalled with net income for comprehensive income
–No separate income statement

See: Statement of Comprehensive Income – Single Statement Approach

Question 11

Financial Statement Reporting – 2 Statement Approach

Answer 11

Comprehensive Income presented in a separate statement that immediately follows the income statement

See: Statement of Comprehensive Income – Two Statement Approach

Question 12

Other Reporting Issues

Answer 12

Component of Other Comprehensive Income can be reported either net of tax, or before related tax effects shown
– If reported before related tax effects, add in line item for aggregated income tax expense or benefit related to the total other comprehensive income items

Interim Period Reporting – Include a total of comprehensive income in the condensed financial statements of the the interim periods

Question 13

Other Reporting Issues – Required Disclosures

Answer 13

Tax effects of each component include in ICU must be disclosed either as part of the statement presentation or in the notes to the financial statements

Changes in the accumulated balances of each component of OCI must be disclosed either as part of the statement presentation or in the notes to the financial statements

Total accumulated OCI must be disclosed in the balance sheet as an equity item

Changes in accumulated OCI balances by component of OCI must be disclosed
– Disclose reclassification adjustments and current -period OCI

Significant items reclassified out of OCI must be disclosed on the face of the statement where net income is presented, or as a separate disclosure in the notes to the financial statements

OCI components may be presented before-tax or net-of-tax as long as the tax effect is shown in either the financial statement or the notes.

Question 14

IFRS vs GAAP

Answer 14

IFRS
– OCI includes revaluation surplus
– Revaluation surplus recognised when intangible assets and fixed assets are revalued

US GAAP
– No revaluation surpluses
– Long-term asset reevaluation not permitted under US GAAP