Magazine article The CPA Journal

Comprehensive Income: Reporting Preferences of Public Companies

Magazine article The CPA Journal

Comprehensive Income: Reporting Preferences of Public Companies

Article excerpt

In June 1997, FASB released SFAS 130, Reporting of Comprehensive Income, effective for fiscal years beginning after December 15, 1997. This statement established certain standards for reporting and presenting comprehensive income in the general-purpose financial statements. SFAS 130 was issued in response to users' concerns that certain changes in assets and liabilities were bypassing the income statement and appealing in the statement of changes in stockholders' equity. The purpose of SFAS 130 was to report all items that met the definition of "comprehensive income" in a prominent financial statement for the same period in which they were recognized. In accordance with the definition provided by Statement of Financial Accounting Concepts No. 6, comprehensive income was to include all changes in owners' equity that resulted from transactions of the business entity with nonowners.

According to SFAS 130, "other comprehensive income" (OCI) is part of total comprehensive income but generally excluded from net income. Prior to SFAS 130, these three items-foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains or losses on available-for-sale investments-were disclosed as separate components of stockholders' equity on the balance sheet. Under SFAS 130, they are to be reported as OCI. Furthermore, they must be reported separately, as FASB decided that information about each component is more important than information about the aggregate. Later, net unrealized losses on SFAS 133 derivatives were also included in the definition of OCl. The intent of SFAS 130 was that "if used with related disclosures and other information in financial statements, the information provided by reporting comprehensive income would assist investors, creditors, and other financial statement users in assessing an enterprise's economic activities and its timing and magnitude of future cash flows."

While FASB required that "an enterprise shall display total comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements that constitute a full set of financial statements" (FASB 1997, para 22), it did not specify which format was required, except that net income should be shown as a component of comprehensive income in that financial statement. According to SFAS 130, three alternative formats are allowed for presenting OCI and total comprehensive income:

* Below the line for net income in a traditional income statement (as a combined statement of net income and comprehensive income);

* In a separate statement of comprehensive income that begins with the amount of net income for the year; or

* In a statement of changes in stockholders' equity.

Under SFAS 130, FASB encourages reporting entities to display the components of OCI and total comprehensive income using the first or second format above. Cumulative total OCI for the period should be presented on the balance sheet as a component of stockholders' equity, separate from additional paid-in capital and retained earnings.

Presentation of Comprehensive Income

Since the release of SFAS 130, several studies have examined the presentation of comprehensive income. Campbell et al. (Ohio CPA Journal, January-March 1999) studied a sample of 73 early adopters of SFAS 130 and found that the majority of companies chose to report comprehensive income in the statement of stockholders' equity. The same researchers found that "the firms that chose the statement of stockholders' equity format had a materially negative amount of OCI" (page 18). Bhamornsiri and Wiggins (The CPA Journal, October 2001 ) found that a significant number of firms in the S&P 100 reported comprehensive income in the statement of changes in stockholders' equity, regardless of whether the OCI was negative or positive. They also found that foreign currency translation adjustments represented the largest component of OCI. …

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