OLC SUPPLEMENT – CHAPTER 6
In Chapter 3 we presented the multiple-step income statement, which includes the results of
operations for a specific accounting period as well as the effects of discontinued operations
and extraordinary items. Over the years, accounting academics and standard setters have
debated whether the income statement should include additional elements reflecting unrealized
changes in the values of certain assets and liabilities. The increased complexity of economic
and financial transactions and the need for relevant information for decision making purposes
have rendered the measurement and of net income and reporting of its various elements a
complicated task that requires increasingly sophisticated accounting knowledge and
Globalization of the financial markets hastened the need for convergence of accounting
standards across nations. As a result, the Canadian Accounting Standards Board (AcSB)
followed the lead of the Financial Accounting Standards Board (FASB) and the International
Accounting Standards Board in requiring public companies to disclose additional information
either in the income statement proper or in a separate statement. Hence, Canadian public
companies are required to disclose additional information in a Statement of Comprehensive
Income for fiscal years starting on or after October 1, 2006.1 The additional components of
income reflect the financial effect of events that cause changes in shareholders’ equity other
than investments by shareholders or distributions to shareholders. Specifically, the elements
of comprehensive income would include the following, among others:
Net income, as reported on the income statement,
Unrealized gains or losses on translating the financial statements of companies that have
operations in other countries, but are controlled by the Canadian reporting entity. The
financial statements of the foreign companies are first translated into the Canadian
currency for the purpose of combining their financial statement items with those of the
controlling Canadian company. Since foreign currencies change in value against the
Canadian dollar over time, the translation of financial statements results in unrealized
foreign currency gains or losses.
Unrealized gains or losses on financial assets that are available for sale, as discussed in the
OLC Supplement, “Accounting for Passive Investments in Securities,” related to Chapter
Gains or losses on derivatives transactions that are designated as cash flow hedges.2
Refer to Comprehensive Income, Section 1530 of the CICA Accounting Handbook.
A derivative is a legal contract between two or more parties that fixes both the future date and price at which
some specified transaction will occur. It is called a derivative because the value of a derivative contract is always
based on, or derived from the value of some underlying asset or liability. The transaction defined in a derivative
contract may be a purchase or sale of a commodity such as oil, or a trade such as an interest rate swap. A
derivative provides one way for corporations to hedge or limit their exposure to one financial risk by taking on an
offsetting financial risk. It is similar to other debt contracts because it fixes the terms of payment between two
parties. However, where most debt contracts assure the transfer of money from one party to another, a derivative
either transfers or spreads the risk of the loss of cash from one party to other parties. Examples of derivatives are
provided in OLC Supplement, “Financial Instruments,” related to Chapter 10.
A number of Canadian companies started reporting the required information in their annual
reports, including Potash Corporation of Saskatchewan, which is the world’s largest producer
of fertilizer, industrial and animal feed products. Potash’s financial statements for fiscal year
2007 include the following separate statement of comprehensive income.
Potash’s net comprehensive income comprises two components: Net Income of US $1,103.6
million, which is reported in the company’s income statement, and Other Comprehensive
Income of US $1,309.9 million for a total Comprehensive Income of US $2,413.5 million.
Potash’s net other comprehensive income resulted from unrealized gains or losses related to
financial instruments, most notably its investments in securities that are available for sale.
Notice that Potash’s other comprehensive income exceeds the amount of net income, which
underscores the significance of this income component that has not reported in the company’s
annual reports for previous years.
Potash Corporation also prepares a separate statement of accumulated other comprehensive
income. The accumulated other comprehensive income had a balance of US $869 million at
the beginning of 2007. This balance was augmented by US $1,103.6 million during 2007 to
produce an ending balance of US $2,178.9 million. This latter amount is a component of
shareholders’ equity as reported on Potash’s balance sheet at December 31, 2007.
Excerpt from the balance sheet of Potash Corporation of Saskatchewan as at December 31, 2007
Measurement of the various components of other comprehensive income (loss) is rather complex,
and is covered in intermediate and advanced accounting courses. The coverage in this supplement
is limited to the reporting of comprehensive income and its components.