Accounting: The Language of Business - Vol. 2 (Intermediate: Part 57)

Oil production, energy production are growing, though the latter has gone down by about 1 percent here, I believe... By the way, we occupy the first place in the world in gas export, accounting for 20 percent of the world market. We are also first in the sphere of liquid hydrocarbons export.

Vladimir Putin

Statements of Net income and Comprehensive Income (Part L)

by

Charles Lamson

Net income, Noncontrolling Interest and Earnings per Share

Companies present net income on the income statement after discontinued operations. We discuss net income and two other items related to net income---noncontrolling interest and earnings per share---in this section. 

Net income is the sum of the income from continuing operations and income, gains, or losses from discontinued operations. Companies commonly separate net income into net attributable to their stockholders and net income attributable to the noncontrolling interests. Companies close net income attributable to their shareholders to retained earnings.

There is a noncontrolling interest when one company controls another company (e.g., a subsidiary) but owns less than 100% of its voting shares. The controlling company adds all of the subsidiary's income to its own because it controls the subsidiary's ability to generate income. however, because it does not own 100% of the subsidiary, the controlling company must identify the amount that is attributable to noncontrolling owners. The noncontrolling interest line item on the income statement represents the income attributable to the portion of a subsidiary owned by others (We briefly discuss noncontrolling interest in this post because it is a common item reported on the income statement. The accounting for the ownership and control of other companies is commonly covered in advanced accounting courses and texts.) The portion of income (loss) attributed to the noncontrolling interest is deduced (added) on the income statement to arrive at income attributed to the controlling interest.

Exhibit 5.8, shown previously in Part 49 and reintroduced below, presents the net income statement of Kimberly-Clark Corporation. Kimberly-Clark reported $2,219 million of net income in 2016. Of this, $2,166 million is attributable to its shareholders and will be added to retained earnings, and $53 million is attributable to the noncontrolling interests. 

EXHIBIT 5.8 Income Statement, Kimberly-Clark Corporation, Financial Statement, December 31, 2016 (https://www.kimberly-clark.com/-/media/kimberly/pdf/annual-report/kmb-2016-10k_umbracofile.pdf)

Earnings per share represents the amount of earnings assigned to each outstanding share of the company's common stock. Companies report earnings per share for continuing operations, discontinued operations, and net income in a supplemental section of the income statement, directly below net income or loss for the period. Companies report earnings per share on both a basic and diluted basis. We will cover the computation of earnings per share in a later post.

The Statement of Comprehensive Income

So far we have focused our discussion on the statement of net income, which does not include other comprehensive income (OCI). Companies may choose to report comprehensive income in one statement (usually called the statement of comprehensive income) or in two consecutive statements (the statement of net income and the statement of comprehensive income). The primary difference is whether a firm presents the income statement(s) on one page or two. In this section, we outline the elements presented and the format used for the statement of comprehensive income, note that these areas are consistent between the one and two statement alternatives.

Companies presenting in two statements are required to include the statement of comprehensive income immediately after the statement of net income (i.e, on the next page of the financial report). The statement of comprehensive income begins with net income and then presents the components of other comprehensive income, ultimately arriving at a figure for comprehensive income. Firms presenting one statement of comprehensive income combine the statement of net income with a presentation of OCI.

Statement of Comprehensive Income Elements

The codification [In US accounting practices, the Accounting Standards Codification is the current single source of United States Generally Accepted Accounting Principles. It is maintained by the Financial Accounting Standards Board (Wikipedia).]  does not clearly define the concepts of net income versus OCI. However, U.S. GAAP provides a full list of the elements that should be included in OCI. The key line items consist of:

1. Unrealized gains and losses from the available for sale portfolio of debt investment securities and derivatives classified as cash flow hedges.

2. Foreign currency translation gains and losses.

3. On recognized pension costs (benefits)  from adjustments needed to bring the accounting pension asset or liability to the funded status of the pension plan.

The items reported as other comprehensive income typically have at least one of these three characteristics:

1. There is a low probability of cash realization in the short run.

2.  These items are transitory components of income; excluding them from the income statement reduces earnings volatility.

3. The majority of these items are not part of the entity's normal operations.

Although not included in the net income statement, the disclosure of OCI items significantly improves the usefulness of the financial statements. For example, the disclosure of the unrealized gain or loss on available for sale investments can enhance an analyst's ability to understand how effectively a company is managing its investment portfolio. This information also assists the analyst in identifying potential realized gains or losses on future disposals of the investments. Similarly, OCI will provide information regarding future realized gains or losses from the sale of assets held by foreign subsidiaries or the liquidation of insignificant pension obligations. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 193-195*

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