The Decision Usefulness of Comprehensive Income Reporting in Canada

Abstract

In this study, we empirically investigate the decision usefulness of mandatory reporting of comprehensive income in Canada. Drawing upon Ohlson’s (1999) discussion of the attributes of transitory earnings, we used a sample of 324 firms listed on the Toronto Stock Exchange for the study period to test whether OCI and its individual components (namely, unrealized gains and losses on cash flow hedges, unrealized gains and losses on available for sale investments, and foreign currency translation adjustment on foreign subsidiaries) possess forecasting relevance, predictability and value relevance. We found that aggregate OCI and some of its individual components are relevant in forecasting future abnormal earnings. We also found that OCI is predictable, and incrementally value relevant to net income. The results of our study suggest that Ohlson’s description of transitory earnings might not apply to OCI, and that the reporting of comprehensive income in Canada did enhance the decision usefulness of accounting numbers.