The value relevance of comprehensive income under alternative presentation formats permitted by ASU 2011-05

Abstract

Under Accounting Standards Update 2011-05, firms can present comprehensive income (CI), defined as the sum of net income (NI) and other comprehensive income (OCI), in a single continuous statement or two separate, consecutive statements. We identify whether firms use the one- or two-statement approach for the years 2012–2015 and assess the value relevance of CI, NI, and OCI under the alternative approaches. We find that NI is less value relevant under the one-statement approach relative to the two-statement approach, while the value relevance OCI is marginally enhanced. We also find that the decrease (increase) in value relevance of NI (OCI) under the one-statement approach is driven by a decrease (an increase) in the value relevance of operating income (unrealized gains/losses on securitized assets). Additional analyses demonstrate that the reduced value relevance of NI under the one-statement approach persists only in subsamples that report positive OCI. Our findings suggest that, consistent with arguments put forth in comment letters in support of the one-statement approach, increasing the prominence of OCI may result in investors incorporating this information to a greater extent in their valuation decisions. However, consistent with comment letters in opposition to the one-statement approach, we also present evidence that suggests presenting OCI in the same statement as NI may also draw attention away from the portion of NI that reflects the core operations of the firm.