Comprehensive Income Components Research Articles

PREDICTIVE VALUE OF OTHER COMPREHENSIVE INCOME: EVIDENCE FROM ASEAN

This paper examines the predictive value of other comprehensive income and its disclosure in ASEAN. Unlike value relevance, the predictive value of other comprehensive income has not been extensively addressed in the literature. We conduct the first study examining the predictive value of other comprehensive income and its disclosure to prove that not only fair value as relevant information, but also other comprehensive income reflecting the changes of fair value. We use hand-collected data taken from the financial reports. This study employs a panel regression model to test the ability of other comprehensive income and its disclosure to predict firms’ future performance. The results confirm that as relevant information, other comprehensive income and its disclosure have predictive value. In addition, other comprehensive income which interacted with disclosure of other comprehensive income resulted predictive value only for one year ahead. Furthermore, other comprehensive income components which belongs to fair value level 1 and 2 have predictive value because it uses market-based input. Meanwhile, other comprehensive components which belong to fair value level 3 only have predictive value for one year ahead because it uses unobservable input that can ­­lead to higher subjectivity.

RISK RELEVANCE OF COMPREHENSIVE INCOME: EVIDENCE FROM NON-FINANCIAL INDONESIA COMPANIES

Purpose of the study: This study aims to examine the effects of net income volatility, other comprehensive income volatility, and comprehensive income volatility on stock return volatility.
 Methodology: This study employed a quantitative method with multiple linear regression. The sample is all non-financial companies listed on the Indonesia Stock Exchange from 2012 to 2017. Data used in this study are panel data sourced from www.idx.co.id and www.finance.yahoo.com. The sample selection in this study used a purposive sampling method with a total sample of 246 observations.
 Results: This study suggests that net income volatility is not associated with stock return volatility. However, other income volatility and comprehensive income volatility are positively associated with stock return volatility.
 Implications: Future studies can employ data from other developing country companies and developed countries to be able to compare the results of this study. Based on the result findings, the existing and potential investors must improve their ability and understanding of IFRS-based financial accounting standards. The Accounting Standard Board, especially in Indonesia, is expected to be able to improve the rules of financial accounting standards as well as the access to the availability of financial accounting standards for financial statements users, primarily related to the disclosure policies.
 Novelty: This study calculates risk-relevant, which is different from the previous studies, namely annual stock return volatility and annual comprehensive income components volatility. Annual stock return volatility is calculated based on the standard deviation of monthly stock return volatility, which is multiplied by √12. Besides, the annual comprehensive income components volatility is generated from the standard deviation of comprehensive income components generated every three months divided by the market value of equity at the beginning of the period, and multiplied by √4.

PENGARUH PENGUNGKAPAN OTHER COMPREHENSIVE INCOME TERHADAP ASIMTERI INFORMASI YANG DIMODERASI OLEH KUALITAS AUDIT PADA PERUSAHAAN SEKTOR KEUANGAN YANG TERDAFTAR DI BEI TAHUN 2012-2016

ABSTRACT The changes in accounting standards in Indonesia that use international-based standards are the focus of important attention for company management, because company management has to report other comprehensive income. Other comprehensive income components contain high assumptions, estimations, and judgments from the management, therefore high audit quality is being able to support a decrease in information asymmetry. This study aims to analyze the effect of disclosure of other comprehensive income on information asymmetry in financial sector companies listed on the Indonesia Stock Exchange in 2012-2016. This type of research is descriptive verification. The dependent variable in this study is information asymmetry. The independent variable in this study uses the OCI ratio, while the audit quality as a moderator variable uses a dummy variable, where the big four KAP is given value of 1 and the non-big four KAP is given a value of 0. The control variable is the size of the company measured by natural asset logarithms. This study uses secondary data, namely financial data sourced from the website. The results of the study through the F test is a significant value of 0.003 (<0.005). Keywords: other comprehensive income, information asymmetry, audit quality, company size.

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This paper gives an overview of the international fi nancial reporting standards requirements for companies� comprehensive income reporting, examines the existing approaches to the interpretation of the �comprehensive income� term, analyzes possible options of the comprehensive income reporting, as well as gives attention to discussions in relation to the possible reclassifi cation of other comprehensive income components to profi t or loss statement of a company.

Совокупный доход: компоненты и представление в соответствии с требованиями МСФО

This paper gives an overview of the international fi nancial reporting standards requirements for companies’ comprehensive income reporting, examines the existing approaches to the interpretation of the «comprehensive income» term, analyzes possible options of the comprehensive income reporting, as well as gives attention to discussions in relation to the possible reclassifi cation of other comprehensive income components to profi t or loss statement of a company.

The Value Relevance of Components of Other Comprehensive Income When Net Income Is Disaggregated

The purpose of this study is to examine the equity pricing of other comprehensive income when earnings are disaggregated into several components. Our findings indicate that other comprehensive income can better explain variation in stock returns when net income is reported in a disaggregated form. Additionally, we find that disaggregating both net income and other comprehensive income can explain more of the variation in the stock returns than the two summary components of comprehensive income. Our results survive a series of robustness checks.

Information Transparency of the Statement of Comprehensive Income: The Reporting Practice of WIG30 and DAX Companies

This article aims to identify changes in the form of the statement of comprehensive income in companies in the WIG30 and DAX indices. It also aims to identify and grade components of other comprehensive income, in terms of the information transparency of the presentation options. The article demonstrates also the impact of national cultural dimensions on the form of the statement of comprehensive income. The study found that most of the surveyed companies present their statement of comprehensive income in two statements, with the number of accounting notes regarding comprehensive income presented by companies in their financial statements increasing over the period under study. The study identified four options for the presentation of other comprehensive income components used by the surveyed companies in the years 2012-2014, with the particular option chosen reflecting the different information transparency of the statement of comprehensive income. The results show that the practice of reporting in the area of the statement of comprehensive income of the DAX index companies is ahead of that in the WIG30 index. The research results on information transparency of the statement of comprehensive income correspond to one of the national cultural dimensions.

Components of Comprehensive Income and Statement of Changes in Equity: An Analysis of Public Companies’ Reporting Practices in Poland and Germany

Purpose: Identification of methods for presenting the components of other comprehensive income in the statement of changes in equity in the reporting practices of public companies in Poland and Germany. Methodology: A study of domestic and foreign literature was conducted with analysis of annual reports of public companies. The study followed the method of induction and to analyse the results, the structure similarity index was used. Results: The results of the study supported conclusions that the companies under study had not developed a uniform presentation of the components of comprehensive income in their statements of changes in equity. Five options of presenting the components of other comprehensive income in the statement of changes in equity were identified. Companies both from the WIG 30 and DAX indices most frequently presented the statement of changes in equity in option 1, which consisted of presenting the total comprehensive income item in a row and detailed items of equity in columns in which capital gains and losses were recognized. The differentiated forms of presenting the components of comprehensive income made it difficult to compare financial statements. Scope of research: The survey examined the annual reports of the largest Polish and German public companies respectively from the WIG 30 and DAX indices. The components of other comprehensive income presented in the statements of changes in equity were the main subject of the study. Originality: Comparative studies on the presentation of the components of other comprehensive income in the statement of changes in equity by public companies in Poland and Germany have not yet been conducted. This was therefore the research gap addressed in this study.

The effects of audit quality on the value relevance of other comprehensive incomes

Stockholders claim deals with handling crucial role to investors while another ac-counting measurement has not yet been paid attention by the investors and analysts. Beside, another comprehensive income despite of its equal role to net income also re-quires a deep concern. This research uses financial industry data in Indonesia Capital Market for 2011-2012 under panel method and also cross-section method as the addi-tional analysis. This research assesses the effect of audit quality on value relevance of other comprehensive income regarding subjectivity embedded in other comprehensive income components. These components are determined through fair value aspects, which eventually lead to management discretion in measuring other comprehensive income components. Subjective components of other comprehensive incomes consist of foreign exchange translation (forex), revaluation in fixed assets (rev), minimum pension liability adjustment (pen), and available-for-sale securities adjustment (sec). The audit quality is believed as a mechanism which can increase the value relevance of subjective of other comprehensive income components. On the other hand, when as-sessing the value relevance of other comprehensive income components both indivi-dually and in aggregate, it is encouraged by inconsistency of previous research results.

Components of Comprehensive Income and Statement of Changes in Equity: An Analysis of Public Companiess Reporting Practices in Poland and Germany

Components of Comprehensive Income and Statement of Changes in Equity: An Analysis of Public Companiess Reporting Practices in Poland and Germany

An Intertemporal Model of Earnings Components in Fixed Income Portfolios: Implications for Risk Assessment and Financial Statement Presentation

This paper develops a novel, intertemporal approach to assessing income risk exposures. The model illustrates how factors such as risk horizon, trading frequency and portfolio composition affect risk exposures stemming from different components of Comprehensive Income. Applied to patterns of unrealized Fair Value changes in US bank Available-for-Sale portfolios, the model significantly improves on the most widely accepted convention for multiperiod risk aggregation (the so called square root of t or ‘sqrt(t)’ rule). The model’s findings have direct application to Value-at-Risk and stress test methods used to assess financial institution risk. From a financial reporting standpoint, the proposed framework affirms the utility of the ‘mixed measurement’ accounting model, and supports multifaceted or ‘dual presentation’ approaches to financial statements.

Quality of Net Income vs. Total Comprehensive Income in the Context of IAS/IFRS Regulation

Research in accounting has thus far attempted to provide fair and useful financial performance measures for a wide range of users. Academics and professionals have also established income as the key performance measures in making economic decisions. The purpose of this study is to investigate the quality of total comprehensive income (TCI) relative to net income (NI), prepared in accordance with International Financial Reporting Standards (IAS/IFRS). Using a data set covering 2,273 firms from 22 countries in Europe, Asia and Australia between 2006 and 2010, we provided evidence that net income always dominates comprehensive income as a valuation metric. The findings indicated that NI is more value relevant than TCI in predicting the future operating cash flows and income. In addition, NI is more persistent and timely, and explains the actual operating cash flows more precise than TCI. Accruals linked to NI have also better quality than those related to TCI. However, we found that TCI is less smoothing and more conservative than NI. These results do not support the claim that income measured on a comprehensive basis is a better measure of firm performance than NI. These results raise the questions about the usefulness of mandating TCI in IAS/IFRS regulation. Our findings, therefore, should be of interest to IASB, as they provide evidence of fewer quality of the TCI. Perhaps it is time for the IASB to reconsider other comprehensive income components and focus on items included in other comprehensive income to improve the quality of the TCI metric. These results also provide evidence of net income as a primary decision-relevant metric.

Preserving amortized costs within a fair-value-accounting framework: reclassification of gains and losses on available-for-sale securities upon realization

SFAS No. 115 requires firms to recognize available-for-sale (AFS) securities at fair value with accumulated unrealized gains and losses (AUGL) recorded in accumulated other comprehensive income. Firms reclassify AUGL to net income when they realize gains and losses. We refer to the amount reclassified each period by “RECLASS.” As of 1998, SFAS No. 130 requires firms to present RECLASS prominently in their financial statements. We investigate the incremental explanatory power of RECLASS for banks’ market values and market-adjusted returns. In the market value analysis, we control for AUGL, other components of book value of equity, net income before extraordinary items and RECLASS (NIBEXother), and other components of comprehensive income. In the returns analysis, we control for ΔAUGL, ΔNIBEXother, and extraordinary items. We find high positive coefficients on RECLASS in both analyses, consistent with investors pricing RECLASS as a relatively permanent component of net income. Exploring possible explanations for these pricing implications, we find no evidence that they are attributable to RECLASS remedying unreliable fair value measurement of AUGL. We provide three distinct analyses indicating that RECLASS’s pricing implications are explained in significant part by it helping investors predict banks’ future performance. Our results illustrate that an important type of amortized cost accounting information, realized gains and losses, remains highly useful to investors despite the overall fair-value-accounting framework for AFS securities.

What is the Best Measure of Financial Performance? Comprehensive Income versus Net Income: Evidence from Turkey

Based on the claim that comprehensive income is a better measure of financial performance than net income, International Accounting Standard No. 1 (IAS 1) requires that companies report comprehensive income in a primary financial statement. In this paper, we test the ability of comprehensive income and net income in terms of Performance measurement by comparing their association with stock returns, operating cash flows and market value of equity. Our results provide evidence on superiority of comprehensive income to net income in terms of performance measurement. This study finds that the claim of IAS 1 is supported in practice. We also examine which components improve comprehensive income’s ability to summarize firm performance. Our results indicate that only “changes in revaluation surplus adjustment” improves the association between comprehensive income and stock returns. This implies that there is no benefit in reporting the separate components of comprehensive income.

AN ANALYSIS OF COMPREHENSIVE INCOME AS A MEASURE OF COMPANY FINANCIAL PERFORMANCE

Recent changes in accounting regulatory framework have resulted in the introduction of comprehensive income as a primary performance measure. The association between comprehensive income and company financial performance are analyzed and explored in the paper. It is concluded that the superiority of comprehensive income and its components over net income for the prediction of performance is still an issue in question. The mandating uniform disclosures of comprehensive income components for all industries are challenged as they are irrelevant to investors’ decisions.

Risk reporting quality: implications of academic research for financial reporting policy

In this paper, I survey empirical research on the relevance of firms’ financial report information for the evaluation of their risk. I recommend that financial reporting policymakers require or encourage firms to enhance their risk reporting quality in four ways. First, firms should report comprehensive income statements that: (1) use fair value or a similarly information-rich accounting measurement attribute and (2) separate the components of comprehensive income that are primarily driven by variation in cash flows from those that are primarily driven by variation in costs of capital. Such comprehensive income statements would provide users of financial reports with the flexibility to calculate alternative summary accounting numbers and to perform different types of risk assessment analyses. Second, firms should conduct and disclose the results of back-tests of prior significant accrual estimates, indicating any identified trends in and drivers of revisions to those estimates, and describing the effects of those revisions on current or future summary accounting numbers. Third, firms should aggregate and present risk disclosures in tabular or other well-structured formats that promote the usability of the information. Identifying existing best disclosure practices and encouraging new best practices are the most natural way to do this. Fourth, for model-dependent risk disclosures, firms should disclose the primary historical and forward-looking attributes of the models and their implementation in practice, sensitivity of the model outputs, and benchmarking of the models to standard portfolios of exposures.

Risk Reporting Quality: Implications of Academic Research for Financial Reporting Policy

In this paper, I survey empirical research in accounting and finance over the past 15 years (since my prior survey, Ryan 1997) on the relevance of firms’ financial report information for the evaluation of their risk. I assume higher risk-relevance indicates enhanced risk reporting quality. Based on these research findings and assumption, I make four primary recommendations for how financial reporting policymakers can improve risk reporting quality. These recommendations pertain to both summary accounting numbers (which may be recognized bottom-line amounts or analogous amounts calculated from required disclosures) and other financial report disclosures. First, policymakers should require firms to report comprehensive income statements that: (1) measure comprehensive income based on fair value or a similarly information-rich accounting measurement attribute; and (2) present the components of comprehensive income that are primarily driven by variation in cash flows from those that are primarily driven by variation in costs of capital. Such comprehensive income statements would provide users of financial reports with the flexibility to calculate alternative income numbers and thereby to perform different types of risk assessment analyses that research has shown to be useful. This recommendation reflects a central theme of this paper: alternative income numbers play different but fundamental roles in risk assessment. Second, policymakers should attempt to maximize the ties of other financial report disclosures to summary accounting numbers. My primary specific recommendation in this vein is to require firms to conduct and disclose the results of back-tests of prior significant accrual estimates, indicating any identified trends in and drivers of revisions to those estimates, and describing the effects of those revisions on current and if possible future summary accounting numbers. Third, policymakers should encourage and to the extent feasible require firms to aggregate and present risk disclosures in tabular or other well-structured formats that promote the usability of the information. Identifying and propagating the use of existing best disclosure practices and encouraging new best practices is the most natural way to do this. Fourth, for model-dependent risk disclosures, policymakers should encourage and if feasible require firms to disclose the primary historical and forward-looking attributes of the models and their implementation in practice, sensitivity of the model outputs to common variants of those attributes, and benchmarking of the models to standard portfolios of exposures.

Measuring and Reporting Income in Europe

ABSTRACT: The IASB discussion paper, Preliminary Views on Financial Statement Presentation (IASB 2008), asks whether income should be aggregated and reported as a single comprehensive income figure, and how comprehensive income components should be reallocated. We extend prior empirical evidence by researching 16 European countries and by an extensive examination of impact metrics that include information, measurement, prediction, and conditional conservatism issues. A European setting that comprises substantial variation in markets, accounting rules, and business culture would, ceteris paribus, support differential reporting of comprehensive income. Results, however, consistently support the retention of operating net income as a general decision-relevant metric, with other comprehensive income reported individually and delineated by its unrealized nature. We found no compelling evidence that it should be reallocated into net income by function. Further, reported aggregated comprehensive income reverses the conservative attributes of income and has policy implications for providers of debt capital in a European setting. Results are robust to several firm-specific controls, nonlinearities, the impact of reporting incentives, and for early IFRS adopters.

The Predictive Power of Comprehensive Income and its Individual Components Under IFRS

This study examines the predictive power of comprehensive income and its individual components within the homogenous institutional setting of German IFRS firms. The results could be relevant for the standard setters IASB and FASB and their joint project “Financial Statement Presentation”. We find no evidence that comprehensive income has a superior predictive power for future firm operating performance than net income. Further, we fail to find significant incremental predictive power of aggregated or individual components of other comprehensive income for subsequent period’s firm operating performance. The actuarial gains and losses on defined benefit pension obligations even seem to merely add noise for the prediction of subsequent period’s net income and of subsequent period’s comprehensive income. In contrast, our analyses indicate that other comprehensive income components seem to have incremental predictive power beyond one period. Finally, we find that the predictive power of net income and comprehensive for future firm operating performance has deteriorated as a consequence of the IASB’s recent initiatives and actions.

Value-relevance of pension transition adjustments and other comprehensive income components in the adoption year of SFAS No. 158

In the present study, we examine the value-relevance of pension transition adjustments and other comprehensive income (OCI) components in the initial adoption year of Statement of Financial Accounting Standard (SFAS) 158—Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. Using a sample of 697 Standard and Poor (S&P) firms with the fiscal year ending on December 31, 2006, we perform several cross-sectional regression analyses to test the value-relevance of transition adjustments and OCI components in presence of various earnings measures. The results indicate that there is a negative relationship between both the level and change in stock returns and the magnitude of pension transition adjustments. We also find earnings measures and some OCI components are significantly associated with stock returns. When analyzed separately, we find our main results are mostly confined to the sample large S&P 500 firms. We do not find any result for the S&P mid-cap and small-cap firms. The overall results suggest the stock market negatively reacts to the adverse impact of SFAS #158 pension transition adjustments on net worth and future cash flows when the impact is substantial in its magnitude in dollar terms. The study further provides useful insight into the information processing by documenting that the market evaluates accounting information more effectively when such information is recognized in the financial statements rather than disclosed only in the financial footnotes.