The Predictive Power of Comprehensive Income and its Individual Components Under IFRS

Problems and Perspectives in Management (PPM), Forthcoming 2011

51 Pages Posted: 27 Mar 2010 Last revised: 16 Nov 2012

See all articles by Paul Pronobis

Paul Pronobis

ESCP Europe - Department Financial Reporting and Audit (FRA)

Henning Zülch

HHL Leipzig Graduate School of Management

Date Written: August 24, 2010

Abstract

This study examines the predictive power of comprehensive income and its individual components within the homogenous institutional setting of German IFRS firms. The results could be relevant for the standard setters IASB and FASB and their joint project “Financial Statement Presentation”. We find no evidence that comprehensive income has a superior predictive power for future firm operating performance than net income. Further, we fail to find significant incremental predictive power of aggregated or individual components of other comprehensive income for subsequent period’s firm operating performance. The actuarial gains and losses on defined benefit pension obligations even seem to merely add noise for the prediction of subsequent period’s net income and of subsequent period’s comprehensive income. In contrast, our analyses indicate that other comprehensive income components seem to have incremental predictive power beyond one period. Finally, we find that the predictive power of net income and comprehensive for future firm operating performance has deteriorated as a consequence of the IASB’s recent initiatives and actions.

Keywords: earnings quality, operating cash flows, other comprehensive income, Germany, predictability

JEL Classification: M41, M43, M47, G12

Suggested Citation

Pronobis, Paul and Zülch, Henning, The Predictive Power of Comprehensive Income and its Individual Components Under IFRS (August 24, 2010). Problems and Perspectives in Management (PPM), Forthcoming 2011. Available at SSRN: https://ssrn.com/abstract=1576384 or http://dx.doi.org/10.2139/ssrn.1576384

Paul Pronobis

ESCP Europe - Department Financial Reporting and Audit (FRA) ( email )

79, avenue de la République
Paris, 75011
France

Henning Zülch (Contact Author)

HHL Leipzig Graduate School of Management ( email )

Jahnallee 59
Leipzig, Saxony D-04109
Germany
+49(341)9851701 (Phone)
+49(341)9851702 (Fax)

HOME PAGE: http://www.hhl.de/faculty-research/faculty/accounting-auditing/

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