There are certain downsides to looking at a company's income statement or statement of profit and loss. While the statement is one of the most important factors in determining a company's stock success, it is still a subjective metric that may be manipulated. For example, businesses have considerable leeway in the timing and effect of charges and other costs disclosed on the statement on a quarterly and yearly basis. There are additional factors to examine besides a company's revenue generation and profit transformation processes. Other comprehensive income (OCI) has long been recognized as an important indicator of a company's financial health by the Financial Accounting Standards Board (FASB).

Other Comprehensive Income: What Does It Mean?

Revenues, costs, gains, and losses that are not included in net income on the income statement due to not meeting GAAP or IFRS criteria are included in other comprehensive income. In other comprehensive income, unrealized revenues, costs, profits, and losses are disclosed.

What Are the Components of Other Comprehensive Income?

The other comprehensive income of a corporation is shown in the balance sheet. Similar to retained profits, which are affected by net income, except that it also contains things not included in net income. Since the value of unrealized gains and losses fluctuates, this helps smooth out the resulting swings in net income. The account often includes the following:

• Gains or losses on investments offered for sale.
• Gains or even losses on derivatives used to protect cash flow.
• Gains or losses from the foreign currency exchange.
• Gains or losses in one’s pension plan.

Why Is Comprehensive Income Important?

The figures used to calculate a company's comprehensive income are significant since they are indicative of the company's actual earnings for a given period. Organizations making substantial expenditures will find this data to be quite helpful. If the firm is struggling, but its investments are performing well, realizing some of the company's assets might help it weather the low-profit period. If assets continue to perform badly, as shown by several comprehensive income statements, it could be time for the corporation to reconsider its investment strategy. The following will assist in emphasizing how crucial other comprehensive income is:

• The main goal of OCI is to show stakeholders the real financial situation of a company. This helps potential investors decide if they want to invest in the company or not. Disclosure of OCI makes financial statements clearer in some ways.
• Income stability is improved with OCI. This is because the value of unrealized gains and losses, which fluctuate often, is not shown in the income statement.
• Analysts can learn more about a company's investments if they understand OCI.
• Studying OCI is helpful for comprehending a firm's abroad activities and the effect of the foreign currency, if the company has any.
• It's also useful for gauging the potential financial effect of a company's pension obligations in the future.

Some people worry that the inclusion of OCI items will make reading the financial statements more difficult, which is a disadvantage. It might also cause confusion amongst investors who aren't aware of the OCI.

Real-Life Example of OCI

Using a statement from MetLife, we can better understand the many parts that makeup OCI. An SEC Form 10-K filing made by the company in 2012 revealed a regular net income of $6.7 billion and cumulative other comprehensive income of roughly $5.9 billion, of which $4.9 billion originated from the current fiscal year. That factor alone accounts for a significant portion of the company's annual earnings.

The $1 billion in unrealized gains from derivatives instruments as well as the $4.5 billion in unrealized investment gains, as well as the negative $100 million &'' negative $500 million in foreign currency translation adjustments and defined benefit plan adjustments were all components of comprehensive income for the full year.

Conclusion

To do effective financial analysis, particularly for financial institutions, it is essential to comprehend and analyze OCI. Comprehensive income would be ideal since it combines ordinary net income and OCI into a single number, but savvy financial analysts may use both figures to construct more complete financial projections.

The existing disclosures have simplified analysis by itemizing comprehensive income and its components either at the bottom of the income statement or on the next page in a separate schedule. Many financial experts have questioned the inclusion of OCI in equity on the balance sheet, but it may be found in a variety of areas that provide light on the company's health and overall financials if you look closely enough.