Measuring Performance and Other Comprehensive Income.

Bottom-line Earnings or Other Comprehensive Income.

Which Earnings Number is relevant? Net Income versus Other Comprehensive Income

A common source of confusion for users of financial statements is that, there appear to be two forms of profit numbers sometimes in the same presentation of income statement namely the net income and other comprehensive income (commonly called OCI). Net income is often referred to as clean surplus accounting whereas OCI is referred to as dirty surplus accounting. Under IFRS, IAS 1 Presentation of financial statements details how the statement of comprehensive income should be presented. The standard defines Other Comprehensive Income as changes in the equity of a business enterprise other than transactions with the owners and therefore not reported in the income statement. Reporting companies have a choice to present OCI either in Statement of recognized income and expense or in the statement of changes in equity directly.

OCI primarily results from re-measurements of assets and liabilities and consists of different components. Changes in these components represent unrealized gains or losses. While some of these unrealized gains or losses permanently reside in OCI, some of these gains or losses are subsequently ‘recycled’ such that recognition in income statement occurs in future periods. The technique has been applied to a number of transactions, primarily due to a desire to see large gains and losses excluded from earnings, but with no underlying conceptual basis. For example, gains or losses on cash flow hedges are recognized in OCI and moved to income statement on settlement of hedge instrument. To give a perspective on what OCI items involves, typically, the components of OCI include:

§  Gains and losses on reclassification of available for sale investments: Unrealized gains or losses on ‘available for sale’ securities measured at fair value are initially recognized in other comprehensive income. Only when such securities are sold, or where the value falls and the asset is impaired, is the resulting gain or loss recognized in net income. Note however that, with the introduction of IFRS 9, available for sale financial instruments will disappear, hence this category of OCI component will cease to exist.

§  Effective portion of gains and losses of hedging instruments: Gains and losses arising on financial instruments qualifying as cash flow hedges are initially recognized in other comprehensive income and recycled to net income in the same period the hedged transaction is recognized.

§  Foreign currency translation gains and losses: Exchange differences related to the translation of foreign entities using the closing rate method are included in other comprehensive income and are recycled to net income when the entity is sold.

§  Actuarial gains and losses on defined benefit pension and post retirement plans: Actuarial gains and losses on pension and other postretirement obligations are generally recognized in OCI and not recycled into the income statement.

§  Changes in revaluation surplus: Asset revaluations are permitted under IFRS. Gains are included in other comprehensive income but are not subsequently recycled into income statement. Only in the event that the related asset is disposed off  such gains can be realized. Note also that, should there be an impairment of the assets subsequent to the revaluation, such impairment charges are first matched against previous revaluations surplus. In cases where the impairment charge is larger than the revaluation gain previously recognized in favor of the asset, the excess impairment charge is recognized in the income statement.

Other Comprehensive Income at top Ghanaian Banks

Standard Charted Bank ,Ghana Commercial Bank, Cal Bank and EcoBank all present OCI in a separate statement of recognized income and expenses, thus outside the income statement. When looking at the materiality of OCI items, it is important to note that items that constitute OCI are non –recurring and unlikely to be material year-on-year or repetitive.

Analyzing the Materiality of Other Comprehensive Income
	Standard Chartered Bank		Ghana Commercial Bank		Cal Bank		EcoBank
All amounts in thousands of  Gh¢	2009	2010	2009	2010	2009	2010	2009	2010
Net income (A)	57,497	72,208	18,855	56,102	8,303	9,466	53,853	60,117
Foreign Currency Translation gains and losses (B)
Fair value changes of financial instruments available for sale (C )	5,092	14,025	(7,261)	308	1,908	455	382	664
Changes in Revaluation Reserves (D)					19	10,986	14,315	0
Actuarial gains and losses of defined benefit pension plans  (E )
Income Taxes on Components of OCI (F)							(801)	(166)
Other Comprehensive Income (Total OCI= B+C+D+E+F)	5,092	14,025	(7,261)	308	1,927	11,441	13,896	498
Total income recognized in equity (A+ B+C+D+E+F)	62,589	86,233	11,594	56,409	10,230	20,907	67,749	60,615
OCI as a Percentage of Total Comprehensive Income	8%	16%	-63%	1%	19%	55%	21%	1%
Net income as a Percentage of Total Comprehensive Income	92%	84%	163%	99%	81%	45%	79%	99%
Source: Annual Reports, Own Calculation

Though it might look straight forward to identify the net income number from the income statement, gauging its drivers is certainly more challenging. Users should beware of the fact that some components of OCI are likely drivers of net income as they are recyclable in future period profits and can be (in) material. In particular, such fair value re-measurements could impact the income statement if an entity disposes of the assets in question. For example, CalBank, revalued its office premises in 2010 resulting in a c50% increase in value of the premises. This unrealized gain resides in OCI as revaluation surplus and will be recycled to profits in the event that the asset is sold off and would significantly impact profits. Overall, careful interpretation and review of the notes to the financial statements to identify the sources of OCI items may prove useful.