Reporting comprehensive income: Does it really affect stock prices?
✍ Scribed by Pamela A. Smith; Senyo Tse
- Book ID
- 102874646
- Publisher
- John Wiley and Sons
- Year
- 1998
- Tongue
- English
- Weight
- 849 KB
- Volume
- 9
- Category
- Article
- ISSN
- 1044-8136
No coin nor oath required. For personal study only.
✦ Synopsis
Financial statement preparers have resisted reporting comprehensive income. They argue that it could adversely affect company stock price. But are they correct?
wo independent studies indicate that security market value is not generally T associated with comprehensive income items. Financial statement users have demanded an all-inclusive measure of financial performance that includes information regarding comprehensive income items. In response, the FASB now requires the reporting of comprehensive income in a statement of performance.
Financial statement preparers have resisted reporting comprehensive income, maintaining that comprehensive income items have no cash flow implications, and are therefore not value-relevant. In addition, preparers argue that comprehensive income items would increase earnings volatility even though the firm's riskiness is unchanged. Preparers argue that if comprehensive income is given heightened visibility, investors would erroneously infer cash flow implications from the resulting income, and this could penalize the stock price.
This article presents the arguments concerning the reporting of comprehensive income from a user and preparer perspective, the cash flow implications of the comprehensive income items, and summarizes two studies that assess the value-relevance of comprehensive income items.
REPORTING COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, requiring that comprehensive income and its components be clearly reported in a statement of performance that has the same prominence as other financial statements. Comprehensive income reporting is effective for fiscal years beginning after December 15,1997; therefore, years ending December 3 1,1998 and beyond are required to report comprehensive income.
The comprehensive income components arise from the application of FASB Statements No.