Other Comprehensive Income – Meaning & Applicability

Accounting standards are adopted by the companies in India to ensure accurate reporting of financial information. They are issued under the supervision of Accounting Standards Board (ASB), which is a committee under the Institute of Chartered Accountants of India (ICAI).

Indian Accounting standards are in tune with the International Financial Reporting Standards (IFRS) to enable Indian companies to report globally.

What is Other Comprehensive income?

Other Comprehensive Income refers to items of income and expenses that are not recognized as a part of the profit and loss account This Income appears as a line item below the income statement.  In simple words it is gain or loss that has not been realized. For example, gain or loss on an investment can be realized when it is sold.  Hence for investments classified as ‘Available for Sale’, the unrealized income or loss will be reported under Other Comprehensive income.

Examples of Other Comprehensive income are:

• Unrealized gain or loss on bonds
• Unrealized gain or loss on investments that are available for sale
• Foreign currency translation gains or loss
• Pension plans gain or losses

Other comprehensive income can be reported either net of related tax effects or before related tax effects with a single aggregate income tax expense. 

How is Other Comprehensive income recognized?

Indian Accounting standard 16, prescribes the accounting treatment for Property,  Plant and Equipment. For the purpose of accounting for its investments a company must recognize the investment,  determine its carrying amount* and depreciation and impairment loss if any. When the cost incurred for acquiring a property, plant or equipment is determined as an asset cost then the company must determine the carrying amount.

*Carrying amount is the amount at which the asset is recognized after deducting the accumulated depreciation and accumulated impairment loss. In order to determine the carrying amount the company can use cost model or revaluation model.

If revaluation model is chosen the assets must be revalued on a said date. Revalued amount will be the fair value as on revaluation date less any subsequent accumulated depreciation and subsequent accumulated impairment loss When the asset is revalued the amount can be more or less than the carrying amount. Hence this gain or loss on revaluation will be included in Other Comprehensive Income.  

The treatment of revaluation gain or loss as per Ind AS 16 is as follows :

• If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised as Other comprehensive income and accumulated/entered on the liabilities side in Equity under the heading – Revaluation surplus. However, In certain cases, the increase shall be recognised in the profit and loss account to the extent that it reverses a revaluation decrease of the same asset previously recognised in the profit and loss account.
• If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in the profit and loss account. However, the decrease shall be recognised in Other comprehensive income to the extent of credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in Other comprehensive income reduces the amount accumulated in the Equity, under the heading of revaluation surplus on the liabilities side.

Why is the disclosure of Other Comprehensive income important?

A company’s performance can be viewed by its Profit and Loss statement. While the items reported in profit and loss accounts throw light on the company’s operations,  looking at the unrealized profit or loss can prepare investors for the future and also help them to take decisions accordingly.

Illustrations

Let us simplify the above-mentioned treatment for movement in asset value through these illustrations:

Micro Ltd purchases a machinery for Rs.25,85,000 on 25th April 2020 . It opts for the revaluation method. On 30th June 2020 it revalues the asset at Rs.30,50,000.  The difference of Rs.4,65,000 will be shown under Other Comprehensive income and on the liabilities side under Equity in Revaluation surplus. On 30th September 2020, the company again revalues the asset. The revalued amount is Rs.20,10,000. Now the decrease of Rs.5,75,000 will be treated as follows:

• Rs.4,65,000 will be reduced from revaluation surplus
• Rs.1,10,000 will be shown in the profit and loss account.

On 31st March 2021, the company again revalues the asset.  The revalued amount is Rs.31,58,000. Now the increase of Rs.5,73,000 will be treated as follows

• This amount of 1,10,000 which was shown in profit and loss will be adjusted
• The balance of Rs.4,63,000  will be shown in Other Comprehensive income and Revaluation surplus.