Other Comprehensive Income Items Research Articles

Can the Reclassification of Other Comprehensive Income Narrow the Opportunities for Creative Accounting: Earnings Management and Income Smoothing?

So far, research in Indonesia examines that the factors that influence creative accounting are the application of Good Corporate Governance, leverage, company size, and political connections, while research on the effect of other comprehensive income (OCI) as a result of the application of fair value accounting has not been widely carried out. This study finds evidence that aggregate OCI accumulation does not affect earnings management and income smoothing. However, testing on group OCI items that will be reclassified to net income has a negative effect. Asset realization commitment increases the negative effect of OCI on earnings management and income smoothing. Creative accounting through OCI can be done through a policy of delaying the realization time and or reducing the real amount of assets realized to get the net profit value according to the interests of management and the subjectivity of deter­mining the fair value of assets and liabilities.

Naknadno merenje stalne imovine - uticaj izbora koncepta fer vrednosti na ukupan sveobuhvatni rezultat listiranih kompanija u Republici Srbiji

In response to investor demands, with the introduction of the fair value (FV) concept, other comprehensive income (OCI) has become a significant indicator of changes in the current values of certain financial statement items in successive periods. Although it deviates from the traditional concept of historical cost (HC) and its prudence principle, on which reliability rests, the use of fair value contributes to the relevance of the presented information. The total comprehensive income (TCI), as a summary of realized and unrealized gains and losses recognized in the income statement, i.e. OCI, represents a valuable base of relevant information for investors and other users of financial statements. The paper focuses on a sample of listed entities on the Regulated Capital Market of Serbia for the period 2016-2020 and finds that the FV concept is predominantly used for the subsequent measurement of property, plant and equipment (PP&E). In addition, we analyze the impact of changes in the fair value of certain non-current assets' items (i.e.: PP&E, intangible assets and long-term investments) on TCI. Our research shows that some OCI items have a divergent impact on TCI, and, thus, different information power, which can increase uncertainty, i.e. make it harder for analysts to predict net income.

Value Relevance of IFRS Adoption in ASEAN-5 Countries: Does Presentation Matters?

Research aims: This study discusses a recent development in the adoption of International Financial Reporting Standard (IFRS) in ASEAN. The objective of this study is to examine the value relevance of the Other Comprehensive Income (OCI) after the revision of the International Accounting Standard (IAS 1) about the presentation of financial statements. Primarily, this study will examine whether the relocation of the OCI from the Statement of Changes in Owners' Equity to the Statement of Comprehensive Income will increase the value relevance. Design/Methodology/Approach: This study compares the value relevance of other comprehensive income (OCI) one year before and after the adoption of IAS 1 in each country. The study focuses on ASEAN 5 countries, namely Indonesia, Malaysia, Philippine, Singapore, and Thailand. Research findings: The result of the study found that the OCI has higher value relevance after the adoption of IAS 1. Theoretical contribution/ Originality: . This study extends previous studies around IFRS adoption, which mostly focused on European countries. The study about IFRS adoption in ASEAN countries is limited. This study presents a unique setting since most of the Countries in ASEAN adopted IAS 1 not in the same year as the year enacted by the IASB. This study will contribute to the recent development in accounting standard, which shows the adoption of IAS No. 1 as part of the IFRS adoption in ASEAN will increase the value relevance of the financial statement. Practitioner/Policy implication: This study will imply for the Practitioner and Policymakers that the benefits of IFRS adoption aimed to improve the quality of financial reports, so users can more easily and readily process that information about company performance. Research limitation/Implication: This study only focuses on total OCI. This study does not analyze the impact of the adoption of revised IAS 1 for each items of OCI, such as available for sale component, revaluation surplus or translation component. The result is consistent with the proponent of the IFRS adoption that the revision of IAS 1 will increase the usefulness of the financial statement.

The predictive power of comprehensive income in Polish companies listed on the Warsaw Stock Exchange

Poland is historically classified within the Continental European model of accounting. The aim of the paper is to find the answer to the question of whether the Anglo-Saxon measure of financial results, which is comprehensive income, introduced into Polish reporting practice by the implementation of IFRS, has better predictive power than net income. The consequences of reporting comprehensive income are still a research gap in Poland. This article fills the gap regarding the predictive value of comprehensive income on the Polish market, and at the same time, it constitutes a contribution to global research in this area. The content presented in this article was developed using studies of the domestic and foreign literature. The methodology adopted in our study refers to the commonly used methodology of quantitative research on value relevance and the predictive value of comprehensive income. Our results indicate that net income and comprehensive income have the same predictive value for future performance. The research showed that neither other comprehensive income as a single indicator nor separate items of other comprehensive income has significant predictive power for future performance. The results of our research may help legislative bodies to make decisions on whether to extend the financial statement by requiring the statement of comprehensive income. In addition, our study presents, in a very broad way, the results of the latest research on NI and CI.

The methodology of the statement of comprehensive income and its impact on profitability: the case of Latvia

The financial statements of a company are used by external users as the main source of information in order to take financially informed decisions. The author of the article has summarized the study on one of the financial statements-a statement of comprehensive income (CI statement) that enables creditors and investors to assess the process of the formation of company's profit and profitability. Purpose: on the basis of the study of the specificity of the preparation of the statement of comprehensive income to analyze and evaluate the influence of CI statement items on the profitability of Latvian companies. In order to achieve the purpose, the author has structured the research in two parts. In the first part of the article the author describes the theoretical framework of the core, type and content of CI statement and describes the components of other comprehensive income. In the second part of the article the author has analyzed the methodology for the preparation of CI statement at Latvian companies and impact of other comprehensive income on profitability. The subject of research was a sample of 26 financial statements of Latvian companies. The author applied quantitative and qualitative research methods generally accepted in economics: classification, comparative analysis and synthesis, statistical methods. The essence of research findings is that the core of items of CI statement and the division into the reclassified and not reclassified items of other comprehensive income (OCI) are important for the company`s financial result-evaluation of profit. Research showed that most of Latvian companies under research were influenced by reclassified items; besides, positively influenced-profitability ratios of ROE and ROA. The author believes that, when evaluating the profitability of assets and the equity of the company, the financial analysts shall take into account the reclassified items of OCI, and the calculations shall be performed using the modifications of ROE and ROA formulas.

Corporate Reporting of Other Comprehensive Income

In this study, we examine the annual report filings of S&P 100 companies that report other comprehensive income/(loss) over the three-year period of 2013-2015. We seek to gain a deeper understanding of the components of other comprehensive income and to determine if there is a systematic tendency for companies to include more gains or losses in other comprehensive income. Further, we seek to determine which components of other comprehensive income show more unexpected losses than gains and what impact other comprehensive income gains and losses may have on future earnings.We find a systematic tendency for firms to report more losses than gains in other comprehensive income, both in frequency and amount. This result is especially true for investment-related gains and losses, where managements have more discretion in the timing of gain and loss recognition.In terms of their impact on future earnings, we find that 43 companies in the S&P 100 reclassified some component of accumulated other comprehensive income gains and losses to net income over the period 2013- 2015, highlighting the observation that other comprehensive income gains and losses are, in effect, future elements of net income. These results remind analysts and investors that net income does not tell the entire story of a firm’s financial performance. Beyond users of financial statements, regulators, such as the FASB and SEC, may want to reconsider whether items of other comprehensive income should be included in net income.

Does the Reporting Location of Other Comprehensive Income Matter? The Investor's Perspective

AbstractIn the context of changes mandated by the Chinese Ministry of Finance in January 2009 regarding the location in which other comprehensive income (OCI) is reported, this paper finds that reporting OCI on the performance statement significantly improves its value relevance. The improvement is driven by two OCI items: unrealised holding gains/losses on available‐for‐sale securities and the share of other comprehensive income of investees under the equity method. Our results show that the OCI reporting location matters, which supports the psychological perspective that investors pay more attention to salient information. Our findings lend strong support to the approach of standard setters in reporting OCI on the performance statement.

Enhanced disclosure of other comprehensive income and increased usefulness of net income: The implications of Accounting Standards Update 2011–05

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.

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

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.

Poder Preditivo e Value Relevance da Demonstração do Resultado Abrangente: uma análise das companhias brasileiras listadas na BM&FBovespa

O objetivo do estudo foi analisar se as informações sobre o resultado abrangente consolidado (RAC), os outros resultados abrangentes (ORA) e os seus componentes individuais têm poder preditivo para determinar o Fluxo de Caixa Operacional do período subsequente (FCOt+1) de empresas do mercado de capitais brasileiro. A metodologia de pesquisa utilizou dados financeiros coletados na base Economatica e na CVM. A seleção da amostra foi realizada considerando a disponibilidade das variáveis: FCOt+1 e Preço das Ações. O período analisado compreendeu os anos de 2012 a 2014. Foram utilizadas técnicas de avaliação quantitativas, estabelecendo-se dois momentos de estudo: o primeiro testando a hipótese de que o RAC possui maior poder preditivo que o Lucro Líquido (LL) para a previsão do FCOt+1 (528 observações); e o segundo testando a hipótese de que o RAC, os ORA e seus componentes possuem value relevance para o mercado de capitais brasileiro (605 observações). Os resultados sugerem que a apreciação do RAC, individualmente, não seria incremental para previsão do FCOt+1. Todavia, verificou-se um acréscimo na capacidade preditiva para o FCOt+1, com a inclusão dos Outros Resultados Abrangentes . Não foi possível verificar, com a desagregação dos itens individuais dos ORA, capacidade incremental para determinação do FCOt+1. Foi verificado que o PL e o LL possuem value relevance, porém isso não se confirma para o RAC. Soma-se que, apenas o hedge de fluxo de caixa apresentou-se significativo para explicar o valor de mercado da empresa, indicando existir benefício informacional aos stakeholders que empregarem as informações da DRA em suas análises

The Definitions of Net Income and Comprehensive Income and Their Implications for Measurement

SYNOPSIS: Historically, accounting standard-setters have not been successful in defining net income. Nor have they been successful in justifying the use of other comprehensive income (OCI) and recycling. This paper proposes the definitions of net income and comprehensive income and an approach to measurement based on the proposed definitions. Net income and comprehensive income should be defined as two separate elements of financial statements, with OCI being the linkage factor that reconciles the two elements. Recycling of all OCI items is required for both elements to have the characteristic of all-inclusiveness. Net income should represent the irreversible outcomes of an entity's business activities, and it follows that the measurement basis of current value should be used from the perspective of reporting an entity's financial performance only when an asset (or a liability) is readily converted to cash (or settled) and the entity's business activity does not legally, contractually, or economically restrict the entity's opportunity to convert the asset to cash (or settle the liability).

Some Capital Ideas

This paper provides an overview for understanding the concept of capital maintenance and its relation to measurement. While there is extensive prior literature on this issue the focus of this literature is to provide a taxonomy of various methods of inflation accounting. This paper summarises the issue of capital maintenance in a contemporary context (i.e., the International Accounting Standards Board’s Framework project). The conclusions are (1) that capital maintenance is a necessary (but not sufficient) adjustment for income to be determined, (2) that measurement and capital maintenance are independent concepts, (3) lifetime income is the same under various measurement methods but differs across concepts capital maintenance, (4) that items of other comprehensive income can be justified on the basis they represent the maintenance of operating capital and the recycling of these items should not be allowed, and (5) that current practice is mostly nominal dollar capital maintenance, but has other elements.

Presentation of Other Comprehensive Income: Is There a Relationship with the Total Amount, the Sign and the Volatility of Such Accounting Items?

The paper analyzes the ways of reporting other comprehensive income (OCI) and their relationships with three different variables, i.e. the volatility, the sign and the total amount of such accounting items. In order to investigate the reasons of such relationships, the study considers the final annual financial statements approved for the accounting periods from 2009 (i.e. the first year in which the 2007 revision of IAS 1 was applied) to 2012 by Italian companies which are required to apply the International Financial Reporting Standards and to follow their updates since 2005. The choice of this specific sample is due to the willingness of verifying the ways of departing from a strong Italian accounting traditional culture which does not consider other comprehensive income (OCI items have never been mentioned by Italian civil code and have not been included in Italian financial reporting). Some preliminary results emphasize the relevance of OCI items. In each accounting period, the majority of the analyzed financial statements show a significant impact of OCI on net income (each amount in absolute value) over a materiality threshold of 10%. In some years also the difference between ROE measured with net income (NI) and ROE measured with comprehensive income (CI) is statistically significant. It demonstrates that the prominence of OCI in evaluating firms’ performance potentially should not be ignored. Moreover, the median of changes in OCI is greater than the one of changes in net income, showing that OCI is more volatile than NI. After such preliminary analysis, a logistic analysis has been implemented by considering the above-mentioned variables. Such study brings some important results confirming the significance of the relations between the ways of reporting other comprehensive income and both the sign and the total amount of such accounting items. The analysis has been implemented by using also different versions of the dependent variable in order to investigate the impact of the OCI presentation in two statements which are positioned in two different (i.e. following) pages. So, while the predominance in the use of two statements for OCI presentation shows the willingness to emphasize the traditional profit or loss section and may be related to the influence of a strong Italian accounting traditional culture, the reasons of the use of two different pages for such presentation may represent the signal of “accounts management”.

Recognition of comprehensive income in Slovak companies

Financial statements are the key resource for assessing a company´s performance. The form and content of financial statements reflect a country`s accounting regulations. If financial statements can be drawn up under a range of different principles and procedures, this may cause problems for external users. 
 The purpose of this paper is to evaluate comprehensive income recognition in the financial statements of Slovak companies that are prepared according to IFRS, with an emphasis on items of other comprehensive income. 
 Our research showed that Slovak companies preparing financial statements in accordance with IFRS use a range of options allowed by national standards. Therefore the form of their comprehensive income recognition varies. Other comprehensive income was recognized in the statement of profit or loss and other comprehensive income, in the majority of researched entities. Our research shows that reporting of other comprehensive income divided into reclassified and not reclassified items is relevant for the assessment of company performance, because of their impact on reported profit or loss, and on selected indicators of profitability, particularly for our sample of financial institutions. This is due to the nature of their activity, for in most cases the gains and losses on financial assets available for sale are recognized in other comprehensive income, which will be reclassified to profit or loss in subsequent periods.

Comprehensive Income Options: A Detriment To Transparency

The Financial Accounting Standards Board (FASB) in 1997 compromised its belief that comprehensive income (CI) should be listed either in a combined statement of net income and CI or in a separate statement of CI and allowed corporations to choose using the statement of changes in stockholders’ equity (SCSE). Of course, the latter option implies just as Jordan and Clark (2002) suggest, that CI is not a measure of financial performance. Studies incorporating professional analysts by Hirst and Hopkins (1998) and a study of nonprofessional investors by Maines and McDaniel (2000) both conclude that format presentation matters and behaviors can be affected. We believe that FASB should revisit the format structure of CI and eliminate the SCSE option, which was their initial intent before they compromised with corporate managers in 1997. In addition, we believe that all items of other comprehensive income (OCI) – foreign currency translation adjustment, pension value adjustments and adjustment to securities-for-sale should be presented on an after-tax basis only in order to prevent investors from being forced to comb through the footnotes.

An evaluation of SFAS No. 130 comprehensive income disclosures

In this study, we provide evidence on the pricing of other comprehensive income (OCI) that differs from most evidence in prior research. Prior archival research has largely concluded that OCI is not priced by investors. In contrast, we provide evidence in the post-SFAS 130 period that OCI is priced on a dollar-for-dollar basis as is predicted by economic theory for transitory income items. We attribute this finding to our use of post-SFAS 130 as-reported measures of OCI rather than pre-SFAS 130 as-if estimates of OCI measures. Furthermore, we document that two components of OCI, foreign currency translation adjustment and unrealized gains/losses on available-for-sale securities, are priced by investors. In the post-SFAS 130 period, we also find that the type of financial statement in which firms report OCI and its components affects pricing, consistent with the conclusions of prior experimental research. However, our evidence suggests that investors pay greater attention to OCI information reported in the statement of changes in equity, rather than in a statement of financial performance. This could be attributed to investors becoming more familiar in the post-SFAS 130 period with the predominant reporting of OCI and its components in the statement of changes in equity. These findings may be relevant to both the Financial Accounting Standards Board and the International Accounting Standards Board, which jointly are undertaking a new project that, in part, is addressing financial statement presentation of OCI items.

An Evaluation of Sfas No. 130 Comprehensive Income Disclosures

In this study, we provide evidence on the pricing of other comprehensive income (OCI) that differs from most evidence in prior research. Prior archival research has largely concluded that OCI is not priced by investors. In contrast, we provide evidence in the post-SFAS 130 period that OCI is priced on a dollar-for-dollar basis as is predicted by economic theory for transitory income items. We attribute this finding to our use of post-SFAS 130 as-reported measures of OCI rather than pre-SFAS 130 as-if estimates of OCI measures. Furthermore, we document that two components of OCI, foreign currency translation adjustment and unrealized gains/losses on available-for-sale securities, are priced by investors. In the post-SFAS 130 period, we also find that the type of financial statement in which firms report OCI and its components affects pricing, consistent with the conclusions of prior experimental research. However, our evidence suggests that investors pay greater attention to OCI information reported in the statement of changes in equity, rather than in a statement of financial performance. This could be attributed to investors becoming more familiar in the post-SFAS 130 period with the predominant reporting of OCI and its components in the statement of changes in equity. These findings may be relevant to both the Financial Accounting Standards Board and the International Accounting Standards Board, which jointly are undertaking a new project that, in part, is addressing financial statement presentation of OCI items.