Enhanced Disclosure of Other Comprehensive Income and Increased Value Relevance of Net Income: The Impact of Accounting Standards Update 2011-05

Abstract

Accounting Standards Update (ASU) 2011-05 eliminates the option to present other comprehensive income (OCI) in the statement of changes in stockholders’ equity. This study empirically investigates whether this mandatory change of OCI presentation format achieves FASB’s stated objective of improving the transparency of financial reporting. First, ASU 2011-05 is found to greatly reduce the continuity of OCI from one period to the next. As OCI items are transitory in nature, the increased OCI volatility makes firms’ inherent risk more transparent to investors. Second, ASU 2011-05 is found to significantly increase the ability of net income to influence stock prices. As OCI and net income are intertwined, the more salient presentation of OCI enables investors to better interpret earnings. Supporting FASB’s position that OCI items need to be more prominently displayed, these findings suggest that the new standard improves transparency and usefulness of the reported OCI information.