Comprehensive Income

Reporting
Team Members:
Rawytee Ramroop ID # 814004390
Keiswanna Pierre ID# 816007851
Introduction: Issue Being Addressed
Comprehensive income reporting has been at
the forefront of constant debate in the field of
accounting for many years.
Some researchers as well as various
accounting bodies believe that it is best
reported in an income statement type location
(this is the most recent view) whereas others
believe that location does not matter.
Issue: Does location really matter as it
relates to comprehensive income
reporting?
IAS 1-Brief Overview
IAS 1 sets out the overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for
their content. It requires an entity to present a complete set of financial
statements at least annually.
This standard sets out what disclosures have to be made in the:
1. Statement of financial position,

2. Statement of comprehensive income,

3. Statement of changes in equity and

4. Notes to the accounts.

NB. The guidelines for the preparation and presentation of the

statement of cashflows are outlined in a separate standard- IAS 7.
IAS 1- As It Relates To Comprehensive Income
Information to be presented in the statement of comprehensive income
As a minimum, (if applicable) the statement of comprehensive income shall
include:

1. Revenue

2. Finance costs

3. Share of the profit or loss of associates and joint ventures accounted for using the
equity method

4. Tax expense

5. A single amount comprising the total of: the post-tax profit or loss of discontinued
operations and the post-tax gain or loss recognized on the measurement to fair value
less costs to sell or on the disposal of the assets or disposal group(s);

6. Profit or loss
What Is Comprehensive Income?
Comprehensive income/loss represents the change in a reporting
entity’s equity from all sources other than investments by, or
distributions to, owners. It includes all components of net
income/loss and other comprehensive income/loss (OCI). (PWC,
2019)
Items Popularly Categorized As Other Comprehensive
Income
 Unrealized gains/losses on
hedging derivatives
 Foreign currency translation
adjustments
 Unrealized gains/losses on
postretirement benefit plans
 Unrealized gains or losses from
debt securities
How Does Comprehensive Income Become A
Useful Measure For Decision Making?
Based on the all-inclusive concept, the statement of
comprehensive income, which consists of two parts: profit or
loss for the year and OCI, gives additional information for
investors to consider with respect to investment decisions.
This is because it enables investors to see changes in the owners’
equity - not only in terms of profits or losses in each period but
in every dimension.
Choice In Presentation and Basic
Requirements
An entity has a choice of presenting:
 A single statement of profit or loss and other comprehensive income, with
profit or loss and other comprehensive income presented in two sections

OR
Two statements:
 a separate statement of profit or loss
 a statement of comprehensive income, immediately following the
statement of profit or loss and beginning with profit or loss (IAS 1.10A)
The Progression of IAS 1: Why Was There A
Need To Update The Standard?
The objective of the update according to the FASB:

 To improve comparability,

 To facilitate consistency,

 To provide greater transparency of financial reporting

 To increase the prominence of items reported in other comprehensive income and

 To facilitate the convergence of U.S. generally accepted accounting principles (GAAP)

and International Financial Reporting Standards (IFRS)

Location Matters!
Presentation of Comprehensive Income:

On June 16, 2011, FASB issued an Accounting Standards Update on the

Presentation of Comprehensive Income. This new accounting standard requires
that all companies report comprehensive income in an income statement–type
location.
Location Matters!

 Prior to this, companies had the option of reporting comprehensive income in

the statement of changes in equity.
 Since most public companies reported their comprehensive income in the
statement of changes in equity, they would have been gravely affected by this
change in policy.
Reporting Requirements Under New Standard
 The single continuous statement should be displayed in two parts: net income

and other comprehensive income, with totals for each part.

 Alternatively, if two consecutive statements are used, the first statement would

be the traditional income statement and the second statement would be a

statement of comprehensive income that begins with net income.

 Under both alternatives, companies must now report total comprehensive

income in an income statement-type location.

Prior Reporting Requirements
FASB had allowed companies to report comprehensive income in a variety of
formats and locations.

Three location options:

■ In a single statement of financial performance including the components of
net income and other comprehensive income,
■ In a separate statement of comprehensive income starting with net income,
and
■ In the statement of changes in equity.
Researcher’s Perspectives on IAS 1
× Although the prior standard did not require a particular reporting location,
FASB stated a preference for reporting comprehensive income in an income
statement–type format.
× Studies show that the income statement–type format is superior to displaying
it in a statement of changes in equity.
× Contrary to this preference, other studies have found that the vast majority of
public companies (approximately 80%) Report comprehensive income in a
statement of changes in equity.
Income Statement Location Statement of Equity Location
Is Income Statement-Type Reporting Really
Better?

FASB has long argued that other comprehensive income is best reported as part
of total comprehensive income in an income statement–type format, rather than
as part of the statement of changes in equity.

FASB claims that this preferred reporting location provides greater

transparency, comparability, and consistency.
Research
 One such study was conducted by D. Eric Hirst and
Apart from the FASB’s Patrick Hopkins.
perspective, other researchers
have conducted studies to  Based on research in psychology, they argued that
decipher whether or not location the availability and clarity of reported financial
really mattered with respect to accounting information affects the ability of
comprehensive income reporting. financial statement users to process that
information.
 Contrarily, finance theory argues the opposite,
which is, that the location and format of financial
information is irrelevant in a world of efficient
markets.
Research Evidence
Hirst and Hopkins
hypothesized in their study,
that participants given the
income statement–type
format, would be better able
to detect the use of earnings
management and would
appropriately devalue those
earnings.
Consistent with their
hypothesis, they found that
participants more easily
detected the earnings
management when viewing
comprehensive income in the
income statement–type
format, as compared to when
viewing it in the statement of
changes in equity.
Opposing Views: Location Does Not Matter!
Contrarily, Chambers et al. conducted a study which
demonstrated that the predominant reporting location
in the statement of changes in equity has not prevented
investors from finding and using the information.
Their results also imply that investors will adapt to
whatever location becomes the predominant one,
including the income statement–type format mandated
by Accounting Standards Update [ASU 2011-05.]
Our Opinion
 Location matters!

 Users of financial statements, particularly investors usually possess

limited knowledge on financial statement analysis.
 As such, providing users with straightforward reports will improve the
value that they get from it.
 Additional general benefits: greater transparency, consistency and
comparability.
Earnings Management
What is Earnings Management?

Earnings management may be defined as “reasonable and legal

management decision making and reporting intended to achieve
stable and predictable financial results.”
“Bad” earnings ­management is undertaken to hide true operating
performance and mislead financial statement users.
Example: Toshiba Inflated Earnings by $1.2 Billion as top
executives pushed subordinates to meet unachievable financial
targets
The Relationship Between Comprehensive
Income Reporting & Earnings Management

Reporting comprehensive income in the statement of equity provides more

loopholes for misrepresentation of account balances according to
researchers.

A study which was conducted by Kasetsart University in Thailand discovered

a significant negative relationship between OCI and EM.

It was found that a firm which reports a high OCI sees a decrease in EM
conducted by the firm’s executives.
According to Wang & Men (2011) the lack of quality in
accounting information may implicitly indicate that the
executives may be taking unscrupulous actions or manipulating
the financial statements.
Key Points Noted Throughout Research
 An income statement that includes all income charges and credits
recognized during the year is said to be easier to prepare and more easily
understood by the readers
Comprehensive Income should be more noticeable so that there is better
performance measurement than if it was less noticeable.
Follow policymaker’s preference for performance reporting so that it can
help managers earn a reputation for transparency.
 With adequate disclosure of items influencing the comprehensive income,
the financial statements users is assumed to be more capable of making
appropriate classification to arrive at an appropriate measurement of
income.
References
https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pw
c-financial-statement-presentation-guide.pdf
https://digitalcommons.kennesaw.edu/cgi/viewcontent.cgi?referer=&https
redir=1&article=3585&context=facpubs
https://www.jstor.org/stable/2491306?seq=1#metadata_info_tab_contents
https://www.iasplus.com/en/standards/ias/ias1
https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentatio
n-of-financial-statements/
https://sfmagazine.com/post-entry/november-2018-the-ethicality-of-
earnings-management/
THANK YOU