Other Comprehensive Income and Equity

Abstract

The view of earnings in accounting shifted from the revenue and expense view of earnings to the asset and liability view of earnings, with the result that comprehensive income now occupies an important position alongside current net profit as an indicator of financial performance. Comprehensive income is the change in net asset of an entity during a period resulting from transactions and other economic events (excluding capital transactions). Comprehensive income for a period includes current profit or loss plus “other comprehensive income” (OCI) recognized in that period. In Japan, “revaluation differences on other securities”, “deferred profit or loss on hedge transactions”, “retirement benefit adjustments” and “currency translation adjustments” can be presented in “statement of income and comprehensive income” or “comprehensive income statement” as the OCI. These items originate in external economic events that the management can not control, such as price, interest rate and exchange rate fluctuations.

In this article, the essence and the characteristics of comprehensive income and OCI are explicated, and then the accounting treatment (in particular, the presentation method) of “accumulated OCI” is theoretically examined. In conclusion, “accumulated OCI” should be stated as “enterprise equity” (or fund equity) on the basis of the equity concept (restriction to assets) under Vatter’s Fund Theory of Accounting.