Is "comprehensive income" or "net income" a better yardstick for earnings?

Hi fellow forummers,

This is an accounting question. Maybe those with accounting background know better.

I have been using net income for assessing company performance all this while for the sake of convenience. The data providers provide net income, not comprehensive income. I was wondering if it might be better to use comprehensive income. Comprehensive income includes unrealized gains/losses that have yet to be realized in the net income statement. Some examples are forex translation, unrealized gains/losses in investment assets etc. When we assess our own investment performance at the end of the year, we don't ignore unrealized gains/losses, right?

As investors, may I know what is your preference (comprehensive income or net income)? Or you don't care? Or don't know?

(07-11-2011, 07:55 PM)hyom Wrote: Hi fellow forummers,

This is an accounting question. Maybe those with accounting background know better.

I have been using net income for assessing company performance all this while for the sake of convenience. The data providers provide net income, not comprehensive income. I was wondering if it might be better to use comprehensive income. Comprehensive income includes unrealized gains/losses that have yet to be realized in the net income statement. Some examples are forex translation, unrealized gains/losses in investment assets etc. When we assess our own investment performance at the end of the year, we don't ignore unrealized gains/losses, right?

As investors, may I know what is your preference (comprehensive income or net income)? Or you don't care? Or don't know?

Hi there,

I use net income. Comprehensive income is basically marked-to-market losses, not crystallized real losses. If an exchange loss is crystallized and booked into normal P&L, then yes it should count against net income. But if I have an open currency position which still may fluctuate, I see no point in accounting for the loss as a "real" loss until my position is closed. The same goes for investment losses/profits - they are not crystallized till they are sold/realized/disposed.

Being accounting-trained myself, my view is that the academics are getting over-zealous in "disclosure and corporate governance" especially after the 2001 Enron Debacle.

Quote:I use net income. Comprehensive income is basically marked-to-market losses, not crystallized real losses. If an exchange loss is crystallized and booked into normal P&L, then yes it should count against net income. But if I have an open currency position which still may fluctuate, I see no point in accounting for the loss as a "real" loss until my position is closed. The same goes for investment losses/profits - they are not crystallized till they are sold/realized/disposed.

Nice to have a trained accountant answer my question. Thank you. I will continue to use net income for most companies for the sake of convenience. However, I think companies whose main business is asset management should be assessed using comprehensive income. One example is Asiasons Capital. In FY10, net earnings grew > 100% compared to previous year. Comprehensive earnings shrunk almost 30% in comparison because of unrealized losses in the financial assets under management. One could have bought the shares on the basis of impressive earnings growth which is not true when comprehensive earnings is considered. As investors ourselves, I doubt if any of us here would ignore unrealized losses when we assess our own performance.

(07-11-2011, 07:55 PM)hyom Wrote: Hi fellow forummers,

This is an accounting question. Maybe those with accounting background know better.

I have been using net income for assessing company performance all this while for the sake of convenience. The data providers provide net income, not comprehensive income. I was wondering if it might be better to use comprehensive income. Comprehensive income includes unrealized gains/losses that have yet to be realized in the net income statement. Some examples are forex translation, unrealized gains/losses in investment assets etc. When we assess our own investment performance at the end of the year, we don't ignore unrealized gains/losses, right?

As investors, may I know what is your preference (comprehensive income or net income)? Or you don't care? Or don't know?

Depend but usually net profit after tax(or non controlling interests) for comparision.

Other comprehensive income is important but looking at it yoy doesn't provide very good information.

A better place to look is consolidated change of equity statement. It contain lot of information including accounting treatments that the company is using and what kind of assets the company has.

Stuffs that can be found in Other comprehensive income include movement in AFS, asset revalution, hedging reserves, stock options, foreign operation translation reserves, etc.

Note : There are a few kind of forex translation. (don't mixed them up)
1) Normal course of operation. realised or unrealised accounted for in P&L. i.e before net profit.
2) Due hedging - Depend on the nature, can be P&L or other comprehensive income
3) Translation diff due consolidation or foregin operation accounted for in other comprehensive income.
4) Other

Using common sense, for unrealised lost in stock investment, to me is real lost. Ignoring them seem to be dangerous.

Situation i may not consider eg. investment into car and facilities, to keep operation going in foreign land. Forex translation of such assest to value seem no point in considering them. Question is, are they part of comprehensive scope ?

Cash portion wise parked in foreign bank to keep operation running or other purposes, i may view them as real lost/gain due to forex exposure.