Understanding OCI under IND AS/IFRS: Items and Recycling Logic

Understanding Other Comprehensive Income (OCI) under IND AS/IFRS: Covered Items and the Logic Behind Recycling

Summary: Other Comprehensive Income (OCI) under IND AS/IFRS encompasses items that affect a company’s equity but are not immediately recognized in profit and loss (P&L). OCI includes unrealized gains or losses such as the revaluation of property, plant, and equipment (PPE), and changes in fair value of financial assets, among others. The goal of OCI is to separate these gains from the core earnings to avoid overstating a company’s operational performance. For instance, if a company revalues its PPE, the change in value is considered an unrealized gain and reported in OCI rather than P&L. The logic behind this is that the company intends to use the asset rather than sell it. However, when the asset is sold, the gain is not recycled into P&L because it was never communicated as an intent to sell. Conversely, when a company holds financial assets for sale (e.g., bonds), any unrealized gain is reported in OCI until the asset is sold, at which point the gain is transferred to P&L—this is called recycling. Understanding OCI allows stakeholders to differentiate between business earnings and gains or losses that have yet to be realized, offering a clearer view of a company’s financial health. The rationale behind OCI and its items is a key aspect of transparent financial reporting under IND AS/IFRS standards.

Lets divide this explanation of OCI into some steps, so that you guys wont be some other page while reading it.

Step 1: Understanding what profit and loss account is and what is tells

Consider a company having following balance sheet at year 1 and at year 2

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If you look closely you find out the change in net assets is change in other equity (which we earlier called as reserve). It can be said that 5 lakh represents profit earned, is it really true, what if i told you that 5lkah represents only increase in fair value of PPE and the company earned nothing this year.

so we need a performance report which we called “Statement of profit and loss”. Now think about it, profit and loss depict the performance of the entity therefor it must tell the reader of financial statements (known as stakeholder) what company earned. Now that earning is a more wider term, the gain from revaluation of PPE is also kind of a earning to the entity. Then we need to classify earnings or it can be said that we need wo bifurcate the total change in net assets, how does it change  (factors governing it).

The first classification to earning is ” what company have told to stakeholder (through its accounting policy) and the other classification is Revenue from operation….

Step 2: Digging the classifications of earning 

The profit and loss should represent what is the earning from business, any item which falls under this classification is part of Profit and loss.

Through accounting policies a company tells many things to the stakeholders such as “we value our industrial building as per INDAS 16/IAS 16 on revaluation basis” or “We have invested so much of the amount in a subsidiary and value such investment as per INDAS 109/IFRS9.”

For example 1: If Altd value its bond at FVTOCI (As per INDAS109/IFRS9, a bond is valued at FVTOCI only when it has a business model of hold and Sell) if read italic lines carefully you must get the idea of Altd want to tell its shareholder that We invested your money in some bond for which we intend to sell (Accounting policy). The fair value changes are not realized yet hence become part of OCI. Any earning earned with sale of bond is part of intent to sale. When the actual realization happen, when Altd sell the bond this gain`s intentions are already communicated to shareholders. hence transferred to Profit and loss (called Recycling).

For example 2: If Altd value its PPE at revaluation model then it tells its shareholder that we invested your money in PPE not with the intent to sell, with the intent to use in business (read definition of PPE as per INDAS 16/IAS 16).The revaluation changes are not realized yet hence become part of OCI. Any earning you earned from sale is neither told to shareholders or was actually intent. When sale of PPE occur the realization of such gain is neither indented nor communicated to shareholder hence not recycled to PL.

This is rationale of OCI and its item, I hope am able to communicate the intent through article. Please apply this rationale to all other item of OCI (you can find them in INDAS 101) and comment if you able to get it or have any doubts.