This is more of an advanced topic that will only apply to large firms. There is a lot of information about OCI available elsewhere, so I won’t rehash what is already available. I just wanted to mention a couple things that I hadn’t seen clearly stated elsewhere in my wanderings on the Internet.
How OCI behaves
One of the financial statements used by large firms is called Other Comprehensive Income. It behaves almost identically to the Income Statement. Here’s a graphic I made to show what I mean.
Net Income, from the Income Statement, flows to Retained Earnings. In an identical manner, the total from the OCI statement flows to an equity account called Accumulated Other Comprehensive Income (AOCI). So the manner in which the OCI statement behaves should make perfect sense to anybody who understands an Income Statement’s relationship to the Balance Sheet.
What OCI does for firms
One of my financial accounting professors at UIUC explained the purpose of the OCI statement this way. He said that it does two different things:
- It keeps the Balance Sheet at FMV
- It keeps the Income Statement at amortized cost
That made a lot of sense to me, which is to say I understood what he meant. I don’t mean to say that I agree that this is a good thing, but I don’t necessarily disagree either. I’m not really sure what to think about it, mainly because I haven’t worked for large firms so don’t understand their reporting needs in an intimate or intuitive way.
Given my bookkeeping background, and what my professor said, it makes sense to me to think of the OCI statement as sort of like a reconciliation statement. It accounts for the difference between the FMV reporting and the amortized cost reporting on the financial statements.
However, off the top of my head, there is something inconsistent about this. The two most important financial statements used by large firms and investors are required to be reported on different bases. Intuitively, I don’t like that but I can’t articulate an argument against it at this time.
Earlier, in a different financial accounting course, I wrote a paper about OCI. It was based on a study from Georgia Tech, the results of which suggested that firms were using OCI to “manage” their earnings.