The Concept of Comprehensive Income

by Walter Johnson

Comprehensive income is a concept used in accounting to render the analysis of a firm's activities easier to follow. Income is defined in this case as any alteration to a firm's stock values or equity in a specific period of time. This measure is, in other words, an overview of the firm's business activities in a period of time.


The idea of “income” is not a simple one. In fact, a company's income is multifaceted because practically anything can be the cause of a change in equity values. Therefore, the Financial Accounting Standards Board defines the measure of comprehensive income as a single figure taking all forms of business gain or loss almost without exception. The point is to bring all changes in the firm's stock in a specific period of time “under one roof.”


Comprehensive income at its simplest, refers to any change whatsoever in the value of a firm's stock with one, sole exception. This is the “internal” increase in income. An internal increase is an increase or decrease in income that derives from the actions of its owners. As a simple example, suppose a major stockholder of the firm was to sell her house in Florida and use the proceeds to buy some extra delivery trucks for the firm. This increase in income would not be included as part of the comprehensive measure. The only change in equity that is not covered by the comprehensive idea is that which derives from the action of its owners. The business, not its owners, must create the gain or loss that is recorded as comprehensive.


In the most general terms, all variables that alter the equity of the firm are included under comprehensive income. You should not assume that income refers to money coming into the firm. It can also refer to losses. The variables that alter the equity of the firm are virtually inexhaustible, but commonly include normal revenue, including sales, taxes, profits, losses, interest payments, gains through currency transactions and losses through inflation. Therefore, the idea of "comprehensive" is far greater than what is usually meant by the term "income.”


The comprehensive income measure is meant, among other things, to alert auditors to any irregularities in the firm's value. For example, assume a certain firm is failing. Its sales are down, it is laying off workers and it is closing plants abroad. On the other hand, the IRS notes that its cash income is up and continuing to rise because the firm is heavily invested in Russian oil and African diamonds. This is more than making up for any losses the firm is presently suffering, and its major executives are gaining huge increases in salaries as a result. Only the comprehensive income figure would alert any auditor to this strange turn of events, since that measure must include all sources of income or loss. This is because the comprehensive measure must include all alternations in the firm's fortunes through external investments and subsidiaries.

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