The FASB just issued an accounting standards update concerning the presentation of comprehensive income.  Under prior guidance, companies can report comprehensive income in three ways.  The update eliminates one option – reporting the details of other comprehensive income in the statement of changes in stockholders’ equity.  The update continues to allow reporting in either a single statement of comprehensive income or in two consecutive statements.

According to the basis of conclusions, the Boards wanted “to increase the prominence of other comprehensive income. The Boards were concerned about the current volume and significance of items reported in other comprehensive income.” (para BC7).  Initially, the Boards were learning toward mandating a single statement of comprehensive income.  However, constituents commented that requiring net income to be subtotal in the single statement would “inappropriately deemphasize net income, causing confusion in the capital markets.” (BC8)

For any accounting researcher who assumes the stock market is close to efficient, the debate over prominence is a bit hard to understand.  All of the formats (the two allowed and one disallowed) provide the same information, and under market efficiency, the public information will be quickly and appropriately impounded into stock price.  However, when one allows for information processing costs/biases, then financial statement geography might matter (see Maines and McDaniel TAR 2000 or Hirst and Hopkins, JAR 1998).

But geography aside, why are some economic transactions and events worthy of being recognized as changes in assets or liabilities in the balance sheet but are unworthy of being included in this period’s net income?  I am not the only one wondering this, as the basis for conclusions in the ASU states “Many respondents, including both supporters and opponents of the proposed Update, strongly encouraged the Boards to develop a conceptual framework for determining what items of income and expense to report in other comprehensive income.”  (BC9)

I believe distinguishing items of net income versus other comprehensive income will become a huge deal in future standard setting efforts.  At present, I do not think preparers, users, auditors, or standard setters have a good grasp on the distinction, or if they do, they have not been able to articulate the conceptual distinction very well.  Can academics help resolve this issue?

I am not sure. Academics have significant experience in researching and teaching topics related to valuation, contracting, etc., and these experiences often force us to think about big picture issues in ways that practitioners in the trenches might not have considered or have not yet been able to articulate.  On the other hand, if OCI arises as a practical expedient in the face of diffuse preferences across constituents, perhaps developing a conceptual basis is an impossibility.  Until someone proves to me that academics cannot contribute to the issue, you can expect to see periodic blog posts from me on the subject.

To get the ball rolling, this blog post surveys our followers.  Please take as given that the change in net recognized assets in the period (other than from transactions with owners as owners) equals comprehensive income.  What subset of these changes do you want to see included in a subtotal, net income?  Or at a more basic level, do we even need a net income subtotal?  What purposes does such a subtotal serve?  The standard setters seriously contemplated giving comprehensive income more prominence than net income, but their constituents challenged that move.  How would economic decisions change by putting prominence on one versus the other?  I look forward to seeing your comments.