What Is Comprehensive Income?

Foreword from ShareInvestor

This article “What Is Comprehensive Income?” by Cai Haoxiang was first published in The Business Times on 15 Sep 2014 and is reproduced in this blog in its entirety.

BELOW every “net profit” line comes “total comprehensive income”.

What’s the difference? Which profit line should investors pay attention to?

Total comprehensive income is net profit adjusted for the value of foreign investments as well as fluctuations in the values of assets that are available for sale.

These items are unrealised gains or losses, hence investors usually pay less attention to them.

After all, investment values, particularly when foreign currencies are involved, can go up or down.

Think of it like this.

You are employed in a Singapore job and getting paid in Singapore dollars, while holding on to a wad of foreign currency bank notes.

If that currency appreciates against the Singapore dollar this year, you are richer – but only if you decide to exchange them back to Singapore dollars.

The currency can very well depreciate next year, leaving you poorer.

But if you do not go to the moneychanger to change the notes back to Singapore dollars, the foreign currency fluctuations have nothing to do with how much you have actually earned in that period, which is net income.

But maybe you want a broader measure of net income that includes the currency fluctuations.

So you call it total comprehensive income.

At the end of every year, you also want to measure how much you are worth. This is known as equity at the end of every year.

You might think you just want to add how much you earned in that year (net income) to how much you were worth at the start, or equity at the beginning of the year.

But fluctuations in currency affect how much you are worth at the end of the year.

So a better measure to figure out equity at the end of the year is to add comprehensive income for the year to equity at the beginning of the year.

These calculations are presented quarterly under a section known as changes in equity.

Reserve Accounts

Every year, changes in the value of foreign investments go into a separate account in equity called the “currency translation reserve”.

Investors could check it to see if the company has a large portion of unrealised foreign currency losses that could hit profits at a future date.

If a foreign country is managed poorly and suffers from high inflation, its currency tends to depreciate dramatically. Investments in that country would suffer a drop in value. If a company owns a subsidiary in that foreign country, it will realise a loss if it gets out of that investment.

There are other reserve accounts in equity, and we can discuss them another time.

Presentation Currencies

Finally, note that the reporting (“presentation”) currency of Eratat is Chinese yuan. This is seen right at the top: “RMB’000”, or thousands of yuan.

This means Eratat has decided to use the Chinese yuan for its financial statements.

This is because the currency environment in which Eratat operates in, or its “functional currency”, is that of the Chinese yuan.

Its raw materials come from China, its factories are in China, and it earns Chinese yuan from selling its shoes and clothes.

Hence there is no need for any foreign currency adjustment.

However, if Eratat also owns a retailer in Singapore, the “functional currency” of that retailer is likely to be the Singapore dollar.

There might thus be foreign currency adjustments every quarter when the Singapore subsidiary is “translated” back to the Chinese yuan to be reflected on Eratat’s books.

‘A better measure to figure out equity at the end of the year is to add comprehensive income for the year to equity at the beginning of the year. These calculations are presented quarterly under a section known as changes in equity.’