Other Comprehensive Income

In order to guarantee accurate financial reporting, Indian corporations have implemented accounting standards. The Accounting Standards Board (ASB), a body of the Institute of Chartered Accountants of India (ICAI), is in charge of issuing them.

To allow Indian businesses to report internationally, Indian accounting rules are in line with International Financial Reporting rules (IFRS).

What is Other Comprehensive income?

Other Comprehensive Income indicates the objects of income and expenses are unidentified as a component of the profit and loss account. This income comes into view as a line item under the income statement. In normal language, it’s profit or deficit that has not yet been achieved.

For an instance, return or deficit on an investment can be recognized upon sale. Therefore, for investments categorized as ‘For Sale,’ the pending income or loss will be documented beneath Other Comprehensive Income.

Other comprehensive income examples include:

• Unrealized bond gain or loss
• Unrealized profit or loss on commercially available investments
• Gains or losses from translating foreign currencies
• Gains or losses in pension schemes

It is possible to declare other comprehensive income with a single aggregate income tax cost, either before or after connected tax impacts.

What is the recognition process for other comprehensive income?

Indian Accounting Standard 16 specifies the accounting remedy for property, plant, and equipment. In terms of accounting for its investments, a company must identify the investment, decide its carrying value and depreciation, and value reduction if any. When the expenses incurred for obtaining property, plant, or equipment are established as an asset cost, then the company has to establish the carrying amount.

After subtracting the cumulative depreciation and cumulative impairment loss, the asset’s carrying amount is the amount at which it is recorded. The business can use either the cost model or the revaluation model to calculate the carrying amount.

The assets must be revalued on a specified date if the revaluation model is used. The amount that will be revalued will be the fair value on the date of revaluation less any further accrued depreciation and impairment loss. The amount of the asset’s revaluation may exceed or fall short of its carrying value. As a result, the revaluation gain or loss will be recorded in Other Comprehensive Income.  

According to Ind AS 16, revaluation gain or loss is treated as follows:

If the carrying value of an asset increases due to a revaluation, the increase will be recorded as other comprehensive income and accumulated or entered under the heading “Revaluation surplus” on the liabilities side of equity. However, in other circumstances, the rise will be recorded in the profit and loss account to the extent that it reverses a reduction in the asset’s value that was previously recorded in the profit and loss account.

A reduction in the carrying value of an asset due to a revaluation must be recorded in the profit and loss statement. However, to the extent that there is a credit balance in the revaluation excess for that asset, the decrease will be included in Other Comprehensive Income. Under the category of revaluation surplus on the liabilities side, the amount accumulated in equity is decreased by the drop recognized in other comprehensive income.

Components of Other Comprehensive Income

1. Revaluation Surplus

Revaluation surplus arises when a company revalues its tangible or intangible assets. According to Ind AS 16 (Property, Plant, and Equipment), an upward revaluation is recognized in OCI unless it reverses a revaluation decrease previously recognized in profit or loss.

Example: A company revalues its land, and its carrying amount increases by ₹50 lakhs. This increase is reflected in OCI.

2. Actuarial Gains and Losses on Defined Benefit Plans

Under Ind AS 19 (Employee Benefits), actuarial gains or losses from changes in the assumptions used to estimate employee benefit obligations are recognized in OCI. These gains or losses arise due to:

• Changes in actuarial assumptions (e.g., discount rates, salary growth rates).
• Differences between expected and actual outcomes.

For instance, a change in the life expectancy of employees in a pension plan could lead to actuarial adjustments impacting OCI.

3. Gains and Losses on Cash Flow Hedges

Hedging instruments, such as forward contracts, are used to mitigate risks associated with fluctuations in foreign currency rates, interest rates, or commodity prices. According to Ind AS 109 (Financial Instruments), the effective portion of gains or losses from cash flow hedges is recognized in OCI.

This reflects the volatility protection provided by hedging strategies.

4. Foreign Currency Translation Reserve

For multinational companies, the financial statements of foreign operations need to be consolidated into the parent company’s financial statements. Under Ind AS 21 (The Effects of Changes in Foreign Exchange Rates), the exchange differences arising from translating financial statements of foreign subsidiaries into the reporting currency are recognized in OCI.

5. Unrealized Gains or Losses on Debt and Equity Instruments

Debt instruments measured at fair value through OCI (FVOCI) and certain equity instruments not held for trading are reported in OCI under Ind AS 109.

Debt Instruments: Interest income, impairment losses, and exchange differences are recognized in profit or loss, while fair value changes are recognized in OCI.

Equity Instruments: Entities can choose to present fair value changes of certain equity instruments in OCI instead of profit or loss, ensuring alignment with long-term investment strategies.

6. Fair Value Changes of Non-Cash Assets

OCI reflects changes in the fair value of certain non-cash assets, such as investments classified as available-for-sale financial assets. These adjustments remain in OCI until the asset is sold or impaired.

7. Gains or Losses from Remeasurement of Financial Liabilities

When a financial liability is designated at fair value through profit or loss, changes in the liability’s value attributable to changes in the company’s own credit risk are recognized in OCI. This ensures that profit or loss does not include changes solely due to the issuer’s creditworthiness.

Questions to Understand your ability

Q1.) From the below options, which comes under “other comprehensive income” (OCI)?

A) Realized gains from selling stuff

B) Unrealized gain or loss on bonds you haven’t sold yet

C) Profit from flipping assets

D) Expenses tied directly to investments

Q2.) Ind AS 16 says if the value of an asset goes up after revaluation, where does this increase go?

A) Straight to the profit and loss statement

B) It gets placed into Other Comprehensive Income (OCI)

C) Nowhere, it’s ignored

D) It gets shoved into retained earnings

Q3.) Which one of these is NOT part of Other Comprehensive Income (OCI)?

A) Unrealized gains or losses on investments you’re holding

B) Exchange rate changes when translating foreign subsidiaries

C) Interest income from debt investments

D) Pension plan actuarial gains or losses

Q4.) When you revalue an asset and its value increases, where does that increase get reported?

A) Thrown into the profit and loss statement

B) It gets logged under equity reserves, labeled “Revaluation Surplus”

C) Just goes straight to retained earnings

D) It shows up in the cash flow statement

Q5.) What happens if a company remeasures its financial liabilities and the changes are due to its own credit risk?

A) The changes show up in the profit and loss statement

B) These gains or losses get dumped into OCI

C) It’s ignored and not recorded anywhere

D) It gets tossed into the cash flow under financing activities

Conclusion

Finally, Other Comprehensive Income (OCI) gives a more complete view of a company’s financial performance by adding things that do not appear on the profit and loss statement. These factors, such as revaluation surpluses, actuarial profits, and gains or losses from foreign currency translations, provide vital information about a company’s financial situation. Understanding OCI is critical for stakeholders when evaluating a company’s risk, profitability, and long-term financial viability.