Comprehensive Income
Candlefocus EditorComprehensive income is reported in the shareholder's equity section of the balance sheet. This gives investors and creditors an improved view of a company's financial performance over the time period in question, as some of the items omitted from traditional net income may be sizeable. Generally speaking, the higher a company's comprehensive income, the more healthy its financial position.
Some of the items typically included in comprehensive income include unrealized gains and losses on securities, foreign exchange gains and losses, pre-tax gains and losses on derivatives and hedging activities, actuarial gains and losses on pension plans, and changes in the fair value of certain items. The goal of comprehensive income is to measure the total value of a company's activities—both from operations and from other sources—to give investors and creditors a better view of a company's performance over a period of time.
Comprehensive income is a much newer concept than traditional net income, so its components may vary slightly based on the accounting standards used. GAAP is the most widely accepted form of accounting in the U.S., but international firms may use the International Financial Reporting Standards (IFRS). Thus, it is important for investors to understand the context in which a company is reporting their comprehensive income in order to compare performance over time.
In summary, comprehensive income is a financial metric that gives investors and creditors a wider view of a company's performance and equity over a period of time. It is calculated by including items that are not included in traditional net income, such as foreign exchange gains or losses, Unrealized gains or losses on securities, and adjustable pension obligations. It is important to understand both the traditional net income and comprehensive income for a company in order to get the most accurate understanding of a company's financial performance.