On almost every Fundamental and Professional level Financial Accounting paper, there are some marks for the correct treatment of items that go to OCI (Other Comprehensive Income). However, the notion of OCI is one that students find difficult to comprehend.
Here’s a quick overview:
IAS1 now provides a Single Statement of Total Comprehensive Income that reflects all non-owner changes in equity. However, the nature and characteristics of items included in OCI are conceptually different from the nature of items included in profit or loss, and that they have different predictive value. Items that are deemed to not provide useful information about the likely amount and timing of future cash flows are presented separately in OCI.
The framework does not define profit or loss, and nor does it provide criteria for distinguishing the characteristics of items that should be included in profit or loss from those items that should be excluded from profit or loss. However, all items of non-owner changes in equity meet the definitions of income and expenses in the Framework.
Since the 2007 amendment to IAS 1, the following items go in OCI:
- Foreign currency translation adjustments on foreign subsidiaries per IAS 21
- Changes in the fair value of items recognised at Fair Value through Other Comprehensive Income (FVTOCI) per IFRS 9.
- Remeasurements on defined benefit pension plans per IAS 19
- Revaluations of property, plant and equipment per IAS 16
- Changes in the fair value of a financial instrument in a cash flow hedge per IFRS 9
Foreign currency translation adjustments are recognised in OCI but are then recognised again in earnings when the underlying item is sold. This practice is referred to as re-cycling previously recognised gains.
For Pension Remeasurements and Property Revaluations, there is no recycling of previously recognised gains. Similarly, gains and losses on items classified as FVTOCI are never recycled to profit or loss.
An entity may present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate amount of income tax relating to those items. In all cases, reporting entities will be required to allocate income tax between items that may be recycled and those that are not recycled.