What Other Comprehensive Income Is and Where It Sits

Other comprehensive income (OCI) is the set of gains and losses that US GAAP reports in comprehensive income but keeps out of net income. Its running total, accumulated other comprehensive income (AOCI), is a separate component of equity on the balance sheet, so OCI is not a balance sheet line itself.

Net income plus OCI makes up comprehensive income, which is why the label "statement of comprehensive income" appears in the lease guidance. The usual OCI items are unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, gains and losses on qualifying cash flow hedges, and pension adjustments. The list further down covers the same four.

The short answer for lease accounting: a lessee's lease cost is not one of those items. It sits in profit or loss, and the sections below show where OCI can still touch a lease.

In the complex landscape of financial reporting, other comprehensive income (OCI) and the Accounting Standards Codification (ASC) 842, which governs lease accounting, occupy critical yet distinct roles. The connection between ASC 842 and OCI is narrow: a lessee's lease cost is recognized in profit or loss, not in OCI (ASC 842-20-25-5 and 25-6). This article shows the few places where leases and OCI do meet, and flags the indirect effects that are possible but not required by the standard.

Understanding OCI and Its Components

Accumulated OCI (AOCI) is a component of shareholders' equity on the balance sheet that captures gains and losses not recognized in the net income. These amounts are eventually recycled into net income when the underlying transactions are realized. Key components of OCI include:

  1. Unrealized gains or losses on available-for-sale securities: These are changes in the fair value of securities not classified as trading securities, nor held to maturity.
  2. Foreign currency translation adjustments: Resulting from the translation of financial statements of foreign operations.
  3. Unrealized gains or losses on cash flow hedges: Reflecting changes in the fair value of hedging instruments that are included in the assessment of effectiveness.
  4. Pension and other post-retirement plan adjustments: Including changes in plan assets and benefit obligations not recognized in net income.

The Impact of ASC 842 on OCI

ASC 842, which sets forth the principles for lease accounting, primarily affects the balance sheet by requiring lessees to recognize right-of-use (ROU) assets and lease liabilities for most leases. While the standard directly targets lease accounting, any link to OCI is indirect and depends on the company's other activities. The possibility below is not a requirement of ASC 842:

One possibility is lease-related financial instruments. Companies may engage in hedging activities to manage risks associated with lease liabilities, especially those with variable lease payments linked to an index or rate. Under ASC 842, these lease liabilities become more prominent on the balance sheet, potentially altering a company's hedging strategies.

When a derivative qualifies as a cash flow hedge under ASC 815, its gain or loss included in the assessment of effectiveness is recorded in OCI. It is later reclassified to earnings (ASC 815-30-35-3, per PwC).

Practical Implications and Strategies

For financial reporting professionals and analysts, understanding the indirect effects of ASC 842 on OCI is crucial. If you hedge a lease-related exposure, review the hedging relationships to confirm they are still effective and appropriately reflected in OCI.

While ASC 842 primarily reshapes lease accounting, it sends lease cost to profit or loss. OCI reaches a lease through other topics, mainly foreign currency translation (ASC 830-30-45-12) and a qualifying ASC 815 cash flow hedge.

Lessee Lease Cost Stays Out of OCI

Operating and finance lease cost both go through profit or loss, unless the cost is included in the carrying amount of another asset. For an operating lease, ASC 842-20-25-6 requires the lessee to recognize a single lease cost in profit or loss. ASC 842-20-45-4(b) requires that expense to sit in income from continuing operations. For a finance lease, ASC 842-20-25-5 requires amortization of the right-of-use asset and interest on the lease liability in profit or loss.

The wording trips people up. ASC 842-20-45-4 is headed "Statement of Comprehensive Income," so a reader scanning the Codification might expect lease items in OCI. They are not there. The heading names the performance statement, and the paragraph says where lease cost lands inside it.

Lessors use the same label. For sales-type and direct financing leases, ASC 842-30-45-3 requires a lessor to present lease income in the statement of comprehensive income or disclose it in the notes. If it is not presented separately, the lessor discloses which line items include it.

For line-by-line presentation, see lease accounting on the income statement, and for the balance sheet side, the ASC 842 balance sheet impact. Cash classification is covered in lease cash flows.

Why a lease still does not create AOCI

ASC 842 sends lessee lease cost to profit or loss and none of its presentation paragraphs routes the lease balances to OCI. A company with only domestic, dollar-denominated leases and no lease-related hedge therefore has nothing from leases in accumulated other comprehensive income.

Lessor net investment

A lessor's net investment in sales-type or direct financing leases is the lease receivable plus the unguaranteed residual asset, net of any deferred selling profit on direct financing leases. It is presented separately from other assets under ASC 842-30-45-1 (see the definition of net investment in the lease in the ASC 842 glossary, as reproduced in KPMG's Handbook: Leases).

ASC 842 does not remeasure the net investment except on a modification that is not accounted for as a separate contract (ASC 842-30-35-2). Credit losses follow ASC 326-20 for instruments measured at amortized cost (ASC 842-30-35-3), so lease accounting does not put it in OCI.

Where Leases and OCI Do Meet

Two routes are real and sourced. One is foreign currency translation. The other is a separate cash flow hedge. Both come from other Codification topics, not from ASC 842.

Foreign subsidiaries: translation adjustments

If a foreign subsidiary's functional currency is not the dollar, its financial statements are translated into the reporting currency to consolidate. ASC 830-30-45-12 says the resulting translation adjustments "shall not be included in determining net income but shall be reported in other comprehensive income" (quoted from Deloitte's Foreign Currency Matters roadmap, 9.3).

The subsidiary's own leases are part of those statements. If the subsidiary leases an office in its functional currency, its right-of-use asset and lease liability are translated along with its other balances. Any translation difference joins the cumulative translation adjustment in OCI. The lease schedule itself does not change.

A lease in a non-functional currency: generally net income, not OCI

This is the case people confuse with translation. When a lease is denominated in a currency other than the entity's functional currency, ASC 842-20-55-10 treats the right-of-use asset as nonmonetary and the lease liability as monetary. The liability is therefore remeasured at the current rate (KPMG, Handbook: Leases, 6.4.3).

The resulting transaction gain or loss generally goes to net income (ASC 830-20-35-1; Deloitte, Foreign Currency Matters roadmap, 4.3).

Our foreign currency conversion guide works through the numbers. Short version: remeasurement of a lease liability generally goes to net income, while translation of a foreign subsidiary goes to OCI. The two can sit in the same company in the same quarter.

Cash flow hedges

In a qualifying cash flow hedge, the derivative's entire gain or loss included in the assessment of effectiveness is recorded in OCI (PwC, Derivatives and hedging guide, 6.3.1). PwC cites ASC 815-30-35-3(b) for reclassifying that amount to earnings in the same period the hedged forecasted transaction affects earnings.

ASC 842 does not make a lease a derivative. ASC 842-10-15-43 refers to ASC 815-10-15-79, which says leases within the scope of Topic 842 are not derivative instruments subject to Subtopic 815-10. A derivative embedded in a lease may still be subject to paragraph 815-15-25-1 (PwC, Derivatives and hedging guide, 3.2.13).

Residual value guarantees within Topic 842 are likewise outside Subtopic 815-10 (ASC 815-10-15-80). KPMG's Handbook: Leases reproduces ASC 842-10-15-43, which summarizes these paragraphs. Whether a lease payment can be a hedged item is an ASC 815 question this page does not answer. If your company hedges a lease-related exposure, the ASC 815 hedge documentation drives the OCI treatment, not the lease schedule.

What to Check at Close

A short checklist keeps lease balances out of OCI by mistake.

  • Confirm lessee lease cost posts to profit or loss, unless the cost is included in the carrying amount of another asset (ASC 842-20-25-5 and 25-6).
  • Identify any leases held by foreign subsidiaries with a non-dollar functional currency, and make sure their balances flow through translation, not the dollar remeasurement.
  • Identify any lease denominated in a non-functional currency, and post the liability remeasurement to net income.
  • Ask treasury whether any ASC 815 hedge relates to lease payments, and obtain the hedge documentation before any OCI entry.
  • Check that the ASC 842-20-50 lease cost table includes operating lease cost in the line that holds it (ASC 842-20-50-4(b)). See quantitative lease disclosures.

Sources and further reading

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