> OCI: Other Comprehensive Income... and how to interprete it.

OCI: Other Comprehensive Income... and how to interprete it.

Posted on Thursday, December 6, 2012 | No Comments

What is OCI?

Once again, I'll start with a definition from investopedia and go a little deeper.

An entry that is generally found in the equity section of a corporation's balance sheet. Accumulated other comprehensive income measures gains and losses of a business that have yet to be realized.

Basically, each company has a balance sheet which lists at a given date how much the company is worth. (Assets = Liabilities + Shareholder's Equity) Unfortunately, I assume basic accounting knowledge terms are already known so if you're having trouble understanding I would suggest a few very basic accounting textbooks to get you started. The shareholder's equity section of a company's balance sheet simple states how much equity a company has (stocks, retained earnings, etc). Also included in equity is accumulated other comprehensive income. What this does is simply measure gains and losses where the company has not actually received any cash yet. This means they are unrealized gains. Examples of this are simply gains on securities, pension liabilities, options/futures, etc. They are typically intangible objects of some sort.

Why OCI? Why not just include it into net income?

Well to begin with, the fair value of unrealized gains/losses in OCI eventually make it to their way to net income. This happens once companies sell the asset (security, option/future, etc). Companies keep OCI separate at first from net income because, in actuality, OCI really isn't part of a company's main operations (unless it's an investment bank/hedge fund etc). Disregarding financial companies, OCI does not include assets involved in normal, continuous operations of a company. Also, OCI would create higher volatility in net income. From an intuitive standpoint, investments in derivatives in securities are generally a lot more volatile than a company's normal operations and will therefore be very high in some periods and low in others. To keep this bias and volatility at a minimum, it's easier to just create a separate section for it.

What does a smart investor take away from this?

Simple. A smart investor knows that when the equity markets do good, a company's total OCI will increase and can use that as a predictor, even if the company's operations/earnings do bad. It is of course an assumption that a company has relatively competent investing knowledge and performs in a way similar to the market.

Good luck!

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