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ABSTRACT
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.
Keywords: Comprehensive income, continuing income, derivatives, economic income, FASB, format presentation, pension liability adjustments, realized cash flow, SFAS 130, sustainable income, translation exposure
INTRODUCTION
Comprehensive income, according to SFAS 130, is calculated by altering net income for dirty surplus items, which are called "other comprehensive income". Comprehensive income possesses four components: unrealized holding gains and/or losses that are created from changes in the fair market value of available-for-sale securities, foreign currency translation gains and losses, increase or decrease in additional minimum pension liability, and unrealized holding gains or losses from derivative instruments (Wild, Subramanyam and Halsey 2004). A quick reference example would start with net income and then systematically record the other comprehensive income items as shown below:
Usually, income statements report three alternative measures of accounting income: net income, comprehensive income, and continuing income. Although the bottom line is called net income, GAAP does allow many direct adjustments to equity to pass by the income statement - called "dirty surplus items". SFAS 130 allows comprehensive income in order to solve this problem. The implication is that comprehensive income is a proxy for economic income - usually measured as cash flow plus the change in the...