The Comprehensive Income Issue in Europe
46 Pages Posted: 10 Dec 2008 Last revised: 31 Aug 2009
Date Written: December 8, 2008
The recent financial crisis and the lobbying of European politicians and banks have led to a vigorous debate about ‘fair value’ gains and losses and highlights plans by current standard setters. The IASB Discussion Paper (2008), Preliminary Views on Financial Statement Presentation promises to extend the ‘fair value’ concept into an aggregated comprehensive income statement. We augment the debate by providing empirical findings on information, measurement, prediction and conservatism issues. Aggregated comprehensive income is found to be inferior to GAAP net income as a general valuation and prediction metric, and switches the conservative attributes of income towards a more timely recognition of good news over bad news. Results are robust to country specific regressions, controls for non-linearities, the impact of reporting incentives, and the underlying accounting framework (local GAAP, US GAAP, IFRS). Disaggregated components are incrementally more value relevant for analysts. For regulators the choice about income measurement boils down to a dilemma whether to ignore the volatile and complex price signals of unrealised gains and losses, to service the narrower demands from the analyst community, or to reduce the conservative role that accounting plays in agency contracting. Our research supports a disaggregated approach without mixing the function and nature attributes of income.
Keywords: comprehensive income, value relevance, IFRS, accounting conservatism
JEL Classification: M41, G12
Suggested Citation: Suggested Citation