Last week, I busted one of my own accounting myths.
For the longest time, I believed that Other Comprehensive Income (OCI) mainly existed to record unrealised gains and losses on securities classified as Available for Sale.
The logic seemed simple.
If a company owns investments that aren’t being actively traded and haven’t been sold yet, their gains or losses aren’t really “earned”. So instead of running them through Profit & Loss, accounting standards park them in OCI.
Fair enough.
Or so I thought.
Then while reading the annual report of United Spirits, I stumbled upon something interesting.
The company had no FVOCI investments.
Yet OCI still existed.
So what exactly was flowing through OCI?
Turns out, quite a lot.
One item related to foreign currency translation adjustments.
Another related to employee gratuity and pension obligations.
And that’s where things got interesting.
Every year, companies estimate how much they may have to pay employees in the future as gratuity and pension benefits. These estimates depend on assumptions such as salary growth, employee turnover, retirement age and discount rates.
Now imagine a company estimated last year that it would need ₹100 crore to meet these obligations.
A year later, the assumptions change.
Maybe employees are leaving faster than expected.
Maybe expected salary growth is lower.
Maybe the discount rate has moved.
Suddenly the liability is no longer ₹100 crore. It could be ₹97 crore or ₹103 crore.
Nothing actually happened.
No cash entered the business.
No cash left the business.
No additional products were sold.
No new customer was acquired.
The only thing that changed was an estimate.
And that’s exactly why these gains and losses don’t go through Profit & Loss.
Instead, they flow through OCI.
In the case of United Spirits, changes in actuarial assumptions and actual employee experience created a gain that was recorded in OCI rather than PAT.
This completely changed the way I look at OCI.
Because OCI isn’t just a parking lot for unrealised investment gains.
It’s a window into how accounting estimates, pension obligations, foreign operations and other non-operating factors are affecting shareholder equity.
Profit tells you how the business performed.
OCI often tells you how management’s assumptions and economic conditions changed.
And sometimes, that’s a story worth reading too.