Definition: Comprehensive income is the net change in equity for a period not including any owner contributions or distributions. In other words, it includes all revenues, gains, expenses, and losses incurred during a period as well as unrealized gains and losses during an accounting period. In this sense, it gives external users a full view of all the accounts that affect equity during a period.
What Does Comprehensive Income Mean?
You can think of comprehensive income as an expanded version of net income. Since net income only accounts for revenues and expenses that actually occurred during the period, external users don’t get a complete view of the company activities behind the scenes.
For example, net income does not take into account any unrealized gains or losses because they haven’t actually occurred yet. This means that any market adjustments for available for sale securities are not reflected in the net income number on the income statement. FASB and many investors believe that reporting unrealized numbers unnecessarily increase earnings and make companies look more profitable than they are. Thus, the income statement doesn’t include these numbers.
Instead investors and creditors must look on the statement of stockholder’s equity, a combined statement of comprehensive income, or a second separate income statement if they want to see the affects of unrealized gains and losses on equity. These reports list all of the unrealized gains and losses that took place during the year and show how they contribute to the overall equity balance of the company.
Currently, there are no rules forcing companies to report these comprehensive numbers separately in the equity section of the balance sheet, but FASB strongly encourages management to include an accumulated other comprehensive income section for external users to see the affects in the equity section of the face of the balance sheet.