Other Comprehensive Income

Based on accounting conventions, certain items of revenue and expense are excluded from the net income calculation. These excluded items are referred to as ‘other comprehensive income.’

Under both IFRS and US GAAP, there are four types of items that are treated as ‘other comprehensive income:

• foreign currency translation adjustments: these result from the translation of foreign subsidiaries’ balance sheet assets and liabilities at current exchange rates when consolidating the foreign subsidiaries’ financial statements;
• unrealized gains or losses on derivatives contracts which are accounted for as hedges: these are treated as ‘other comprehensive income’ and therefore bypass the income statement;
• unrealized holding gains and losses on available-for-sale securities; and
• certain costs related to a company’s defined benefit post-retirement plans are not recognized in the current reporting period.

Under IFRS, ‘other comprehensive income’ also includes certain changes in the value of long-lived assets that are measured using the revaluation model.

Question

Which of the following is least likely an item that is treated as ‘other comprehensive income’?

1. Foreign currency translation adjustments.
2. Realized holding gains and losses on available-for-sale securities.
3. Unrealized gains or losses on derivatives contracts which are accounted for as hedges.

Solution

The correct answer is B.

Realized holding gains and losses on available-for-sale securities are not treated as ‘other comprehensive income.’ Realized gains and losses are reported in the income statement and are reflected in net income. If instead the holding gains and losses on the available-for-sale securities are unrealized, then they would bypass the income statement and go directly to shareholders’ equity through other comprehensive income.

The other statements (option A and C) are both examples of items that are treated as ‘other comprehensive income.’