Comprehensive Income reporting - The attitude of producers and users of financial statements

Abstract

Background: On 1 January 2009 amendments to IAS 1 concerning the presentation of comprehensive income came into force. The amendments were one outcome of the IASB’s performance reporting project with the purpose of enhancing the usefulness of information presented in the income statement. It is now required to present certain items, referred to as other comprehensive income, in a statement of comprehensive income which can be either a single statement or two statements where net income and other comprehensive income are presented separately. Research objectives: We examine whether the presentation of other comprehensive income provides useful information. Additionally, we examine whether the one or two statement approach to comprehensive income reporting is more appropriate in providing investors with information. These issues will be examined from the perspective of producers and users of financial statements respectively. Research design: The attitude of producers to comprehensive income reporting is examined by means of an annual report study, a study of comment letters and an interview with one producer whereas the attitude of users is examined by means of a statistical association study. Limitations: The annual report study examines the time period 2008–2009 and is restricted to the Swedish market whereas the statistical study examines the time period 2006–2010 and focuses on European markets. Throughout the paper, ‘users’ refers to investors. Empirical findings: Our results suggest that producers do not consider other comprehensive income relevant in evaluating firm performance but that users take it into account, although they regard net income as more value relevant. Accordingly, the IASB’s requirements regarding comprehensive income reporting can be considered legitimate in terms of enhancing the usefulness of information available to investors. Our results indicate that other comprehensive income contains useful information for evaluating firm performance, but that net income is much more value relevant. Hence, the two statement approach to comprehensive income reporting may seem appropriate. Further research: Further research could clarify differences in attitudes to other comprehensive income between producers and users. Additionally, it could examine whether the importance of other comprehensive income has increased over time after the amendments to IAS 1 came into force. It could also control for parameters not taken into account in this paper that might impact the perceived relevance of other comprehensive income.