8.4   Comprehensive Income

How do we measure I_t in the equation a_t = I_t + (B_t – B_t-1)?

Under clean surplus accounting a_t = CI_t – (BV_t – BV_t-1), where CI_t is “comprehensive income”.  Under clean surplus accounting, all changes in shareholder equity not involving shareholders (such as dividends, Treasury stock or new issues) must pass through the income statement. 

The accounting concept of “Comprehensive Income” measures the change in Shareholders’ Equity not involving the shareholders.  It is different from traditional accounting income because in practice not all items pass through the accounting income statement.   For example, foreign currency translation adjustments, derivative accounting and certain pension liability adjustments.  Dividends, Treasury stock acquisitions and any new stock issues are not included because these involve the shareholders.  Comprehensive income is reported in the Consolidated Statement of Stockholders’ Equity in a standard 10-K form.  The book value per share (BV) is the Shareholders’ Equity divided by shares outstanding.   This can change for several reasons, including the payment of dividends, issuance of new shares.