Reporting location and the value relevance of accounting information: The case of other comprehensive income
ABSTRACT
This paper examines the influence of reporting location on the value relevance of other comprehensive income (OCI). Accounting Standards Update (ASU) 2011-05 “Presentation of Comprehensive Income” requires firms to report OCI in a performance statement (i.e., either below net income in a single statement of comprehensive income or in a second statement of comprehensive income that begins with net income). ASU 2011-05 eliminated the option of reporting OCI in the statement of equity, based on the argument that performance reporting would improve the transparency of OCI in the financial statements. We find mixed evidence that the value relevance of OCI differs across management#39;s choices of OCI reporting location prior to the implementation of ASU 2011-05. However, we do find a decline in the value relevance of OCI for firms that were required to change the reporting location of OCI from the statement of equity to a performance statement in response to ASU 2011-05. This result holds after we include a control group consisting of firms that did not change the reporting location of OCI. Overall, our findings suggest that the value relevance of OCI is determined by whether its reporting location is consistent with the firm#39;s reporting history.
Keywords
value-relevance
other comprehensive income
performance reporting
reporting location
1. Introduction
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05 “Presentation of Comprehensive Income”. The objective of this Update is to “[hellip;] improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income [hellip;]” (ASU 2011-05, p. 1). Under Statement of Financial Reporting Standard (SFAS) 130 “Reporting Comprehensive Income”, firms could choose to report the components of other comprehensive income (OCI) in the statement of equity or in a performance statement. ASU 2011-05 eliminated the option of reporting OCI only in the statement of equity in lieu of requiring OCI to be reported in a performance statement. A performance statement can take one of the following two formats: a single statement of comprehensive income with the components of OCI below the components of net income (single-statement option); or a second separate statement of comprehensive income (two-statement format) that begins with total net income.
Based on the initial 1996 FASB exposure draft regarding performance reporting for other comprehensive income (FASB, 1996), Yen, Hirst, and Hopkins (2007) conducted a content analysis of the comment letters which indicated that the overall tenor of comment letters was in opposition to the proposed change. This finding suggests that respondents (i.e., reporting firms, major public accounting firms and professional organizations) also believe that reporting location matters despite the fact that ASU 2011-05 (as implemented) does not change what items have to be included in OCI. This Update only affects firms#39; options for OCI reporting location. That is, the values of comprehensive income, net income, and OCI are not affected, and as a result there is no impact on items such as debt covenant compliance and management compensation. Nevertheless, current research provides convincing evidence that standard setters, investors, and managers believe that the reporting location of OCI influences its usefulness to investors (Black, 2014).
Further, many comment letters indicated that respondents had a preference for the two-statement option over the one statement option due to the concern that reporting net income and OCI as two subtotals in a single statement of comprehensive income would “inappropriately deemphasize net income, causing confusion in the capital markets” (ASU 2011-05, BC8). Several respondents indicated a belief that the proposed change would impact investors#39; perceptions of their firm#39;s operating results and risk level. On the other hand, a recent study conducted by the Certified Financial Analysts (CFA) Institute argues that OCI information is underutilized by investors and suggests that investors should increase their use of this information when making valuation decisions. As a result, the CFA proposes to enhance the presentation of OCI items by financial statement preparers and standard setters (Papa, Peters, Schacht, amp; Lu, 2015).3
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