OTHER COMPREHENSIVE INCOME | CAP CLASSES

OTHER COMPREHENSIVE INCOME

What is Other Comprehensive Income (OCI)?  

As per the Framework – ‘Income’ means increase in assets or decrease in liabilities, ultimately increase in equity other than contribution by equity participants. This includes realised and unrealized gains or profits example revaluation gain – it is an income but it won’t be routed through the statement of P&L.

Such type of income or expenses which are not routed through Statement of P&L should be routed through the OCI and which are permitted by other Ind AS.

An entity shall present a SINGLE STATEMENT of profit and loss, with profit or loss and other comprehensive income presented in TWO sections. The sections shall be presented together, with the profit or loss section presented first followed directly by the other comprehensive income section.

Understand few words

Reclassification adjustment

These are amounts reclassified to the statement of profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods.

For Example;

I hope you heard about FCTR (Foreign currency translation reserve), which arises due to foreign currency changes in translating a foreign operation financial statements into functional currency of the entity. Initially, the fluctuation gain or loss will be transferred to FCTR (It is an income or expense – directly transferred to Reserve through OCI) and when the foreign operation is disposed off, this amount routed through (reclassification adjustment) the statement of P&L. 

Some items of OCI will never be reclassified to the statement of P&L, like revaluation reserve – when it arises, it will be routed through OCI but when the asset is disposed off, the related revaluation reserve amount will be directly transferred to retained earnings (but not through the statement of P&L)

Other Comprehensive Income (OCI) shall be classified into  

(A) Items that will not be reclassified to profit or loss

(i)                 Changes in revaluation surplus;

(ii)               Re-measurements of the defined benefit plans;

(iii)              Equity Instruments through Other Comprehensive Income;

(iv)    Fair value changes relating to own credit risk of financial liabilities designated at FVTPL;

(v)     Share of OCI in Associates and Joint Ventures, to the extent not to be classified into P&L; and

(vi)          Others (specify nature).

 (B) Items that will be reclassified to profit or loss;

(i)       Exchange differences in translating the financial statements of a foreign operation;

(ii)             Debt instruments through Other Comprehensive Income;

(iii)        The effective portion of gains and loss on hedging instruments in a cash flow hedge;

(iv)         Share of OCI in Associates and Joint Ventures, to the extent to be classified into P&L; and

(v)            Others (specify nature)

SUMMARY

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.  

OCI - EXAMPLE

For example; if an entity chooses revaluation model, 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.

Disclosure of Other Comprehensive income

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

Example: 1

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 2016 . It opts for the revaluation method. On 30th June 2016 it revalues the asset at Rs. 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 2017, 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 2017, 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.