COMPREHENSIVE INCOME DISCLOSURES:
EVIDENCE FROM ITALY
as forOlga Ferraro, University of Calabria
ABSTRACT
International Accounting Standard No. 1 was relead in 2007. The standard required publicly traded companies to parately report comprehensive income in the financial statements. International Accounting Standard No. 1 prescribed two alternative formats for the prentation without mandating any one specific format. It also provides other options such as the criterion for classification of expens and the prentation of Other Comprehensive Income items at net or gross of tax. The prent study examined the prentation of comprehensive income by a sample of companies listed on the Italian Stock Exchange. The goal is to define the degree of homogeneity of the income statements and to explore current correlation between the direction and size of the Other Comprehensive Income and to identify the prescribed method to prent Comprehensive Income. The results show substantial uniformity across Italian companies, with regard to how company accountants prent Other Comprehensive Income in their financial statement. Also, the results lead us to believe t
hat the choice of two parate statements may be linked to the greater relative size of the Net income.
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JEL: M41
KEY WORDS: IAS 1, reporting format, comprehensive income, consolidated financial statement
INTRODUCTION
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nternational Accounting Standards No.1 (IAS 1), ‘‘Prentation of Financial Statement’’ allows two format choices for reporting comprehensive income (CI): a single statement or two parate statements. Furthermore, for the income statement there are other options such as the criterion for classification of expens and the prentation of other comprehensive income (OCI) items at net or gross of tax.
In this context, the prent study has a dual aim: to define the degree of homogeneity of the financial statements for CI, after the introduction of the revid version of IAS 1, and to explore the current correlation, between the direction and size of the items of OCI and the prentation of CI in one of th
e two prescribed formats. The first objective is bad on the belief that the prence of different options can affect the homogeneity of financial statements. In the past, the directive 78/660/EC (IV directive) and 83/349/EC (VII directive) brought about a partial harmonization that then led to the adoption of IAS/ IFRS in Europe. The cond objective is linked to the strong grounding, for Italian companies, in the criterion of historical cost for the preparation of financial statements. Conquently, it is estimated that in Italy the choice of one statement rather than another depends both on the contribution the components of OCI have on total income and the relative strength of the OCI on the Net Income (NI).
Data were examined for all companies listed on the Italian Stock Exchange in 2009, excluding companies in the financial ctor. This sample of firms provides a unique tting in which to inform Italian policy makers on the value relevance of the additional information included in the new accounting standards. Oour study contributes to the ongoing debate on the format of CI. This study it is the first known empirical rearch to investigate the Italian context after the adoption of the revid version of IAS 1.
The paper is structured as follows. In ction two, the main accounting novelties regarding CI according to the 2007 revid version of IAS 1 are illustrated. Section three develops a review of the
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main existing studies related to CI reporting modes through obrvation of financial statements. The fourth ction illustrates the rearch design, while ction five outlines the methodology ud. Section 6 describes the sample lection process, while ction 7 reports the main results of the reporting format ud, the other options and the influence of the characteristics of OCI and NI for the format of the income statement. The study concludes with discussion of the main results and perspectives for future rearch.
COMPREHENSIVE INCOME DISCLOSURE IN IAS 1 (REVISED 2007)
In September 2007, the International Accounting Standards Board-IASB issued Statement of International Accounting Standard No. 1 (IAS 1), ‘‘Prentation of Financial Statement’’. This standard, effective for fiscal years beginning after December 31 2008, requires that CI and its components be reported in the financial statements in the period in which they are recognized, consistently with what is already ud in the U.S. context (Bragg, 1997; Carlson et al., 1999; Fitzsimmons e Thomson, 1996; Luecke e Meeting, 1998; Stevens, 1997).
As a result, listed Italian companies have been obliged, for the fiscal years beginning after 31 December 2008, to disclo the CI in an ad hoc statement that reports the NI figure, the OCI items a
nd the CI figure. In particular, a company can report its CI in two alternative ad hoc documents: a Separate Statement of Comprehensive Income (hereafter SS) or in a Combined Statement of Net Income and Comprehensive Income (hereafter CS). The IASB leaves it to the company to decide whether to prent all items concerning revenue and costs in a single statement or in two statements. This is a compromi solution that the IASB accepted as transitory until such time as other aspects involved in the prentation of the comprehensive income statement have been resolved (Basis for conclusions-BC51, BC52, BC53, BC54).
With regard to definitions of the new types of income, IAS 1 revid 2007 defines CI as the change in equity during a period resulting from transactions and other events, other than tho changes resulting from transactions with owners. OCI consists of revenues, expens, gains and loss that are excluded from net income and are consistent with one of five classifications: (1) changes in revaluation surplus (IAS 16 and IAS 38); (2) actuarial gains and loss on defined benefit plans (IAS 19); (3) gains and loss arising from translating the financial statements of a foreign operation (IAS 21); (4) gains and loss on available-for-sale financial asts (hereafter IAS 39a); (5) the effective portion of gains and loss on hedging instruments in a cash flow hedge (hereafter IAS 39b). According to the revid IAS 1, the OCI items can be prented either before tax or at net
of tax. Also, expens recognized as regarding profit or loss should be analyzed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, lling, administrative, etc). If an entity categorizes by function, additional information on the nature of expens – at a minimum depreciation, amortization and employee benefits expens must be disclod.
To reiterate, we note that options in the revid version of IAS 1 regarding the income statement are the following: the format for CI, the criteria for classification of expens and the prentation of OCI items at net or gross of tax.
LITERATURE REVIEW
This paragraph prents a review of the main existing studies addressing the question of CI mode of reporting through obrvation of financial statement. We considered only tho studies that have verified the existence of a relationship between method of reporting OCI and CI and some of their characteristics.
The review starts with studies conducted in the United States following the introduction of SFAS 130 (Table 1) and, subquently, tho conducted in the Italian context with the introduction of the revid version of IAS 1 (Table 2).
Table 1: Main USA Existing Studies on Format Selected for CI
= Separate Statement of Comprehensive Income; CS = Combined Statement of NI and CI. This table shows the main studies on comprehensive income (CI) reporting format and direction of OCI and N in the USA post SFAS 130. For each study we report the sample, the format chon for the reprentation of the CI, the rearch hypothesis and the main findings.
mectThe first empirical evidence on comprehensive income came from a study by Campbell et al. (1999) on tho American companies that applied the SFAS N.130 a year early, that is, in 1997 rather than in 1998. They found that 39 of early adopters examined reported CI in a Statement of changes in Stockholders’equity (hereafter SCSE); 22 reported CI in a Separate Statement of Comprehensive Income (SS), and the remaining 12 in a “Combined Statement of Net Income and Comprehensive Income (CS). Their results also indicated that firms that choo the CS or the SS format tend to have items of OCI that are material and positive. In contrast, firms opting for the SCSE format generally have items of OCI that are material and negative.表彰大会领导发言稿
The results obtained by Campbell et al., however, are not confirmed by later rearch carried out by Bhamornsiri and Wiggins (2001) on the financial statement of S&P 100 companies for fiscal years 1997 through 1999. With regards the comprehensive income prentation format, the authors show that, although companies show a preference for reprenting CI in a SCSE, this does not depend on
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the income results and, above all, it does not depend on their direction. Thus, Bhamornsiri and Wiggins (2001) found no evidence of a relationship between the positive or negative direction of CI and its ultimate prentation the financial statements.
Jordan and Clark (2002) aimed to verify the results of the study by Campbell et al. (1999) through an examination of the financial statements for the year 1998 on a sample of 100 financial rvice firms. In particular, the authors wanted to ascertain whether there was any correlation between the direction and the size of the OCI components, the size of the company and the chon format for prenting the comprehensive income. The authors show that firms with negative or relatively small amounts of total OCI tend to choo a SCSE, probably becau this format does relate the OCI items to financial performance of the firm.
Pandit and Phillips (2004; 2006) find that 89 of 100 companies ud the third format, which included OCI and total comprehensive income in the Statement of changes in stockholders’ equity. Only nine sample companies cho the cond format and prented a Separate Statement of Comprehensive Income. The remaining two companies cho the first format and prented comprehensive income as a component of their income statement. This finding is largely consistent with that of Campbell et al. (1999) in that a significant percentage (65%) of the companies in the curr
ent sample that cho the third reporting format had negative OCI.强调的意思
To sum up, empirical investigations conducted at the international level on the arch for correlation between the direction of OCI and the format for prenting OCI in financial statements have been inconclusive. The work of Campbell et al. (1999) and Jordon and Clark (2002) find that when, as is the ca for most of their sample, the components of OCI are prented in the statement of net equity, the OCI has a negative influence on company performance; Bhamornsiri and Wiggins (2001) and Pandit and Phillips (2004), on the other hand, have been unable to find any correlation between direction and accounting format.
In Italy, with the introduction of IAS 1, some authors have examined choices made by companies on the various options contained in the international standard. In one study, the authors tested the possible correlation between the choice of CI size and direction of the OCI, with particular attention paid to CI. However, the lected sample is compod of only of a few companies and intermediate data.
Fellagara and D'Este (2009) study the impacts of disclosure of the first application of the 2007 revid version of IAS 1 on interim financial statements (at June and September) of 110 listed group
s at the Italian Stock Exchange for fiscal year 2009. The study analys format choice lected for CI and other CI aspects. The study finds the majority (95%) of companies cho to disclo CI in a Separate Statement of Comprehensive Income, while only a small grop opted for a Combined Statement of NI and CI.
Table 2: Main Italy Existing Studies on Format Selected for CI Study Sample Format Selected for CI
Rearch questions Findings D’Este and Fellagara (2009) Interim Financial statements of 110 company groups that listed on the Italian Stock Exchange for 2009. Financial Statements at June 2009: 97 companies choo SS 7 companies choo CS 6 not reported
Financial Statements at September 2009: 61 companies choo SS 3 companies choo CS 46 not reported. Format lected for CI. Identification of the items of OCI. Effect on the tax. Reclassification of OCI items. Quantitative impacts. On the first rearch question the study find that the majority (95%) of companies cho to disclo CI in a Separate Statement of Comprehensive Income, while only a small part of the company has opted for a Combined Statement of NI and CI.
De Cristofaro and Falzago (2010) Interim Financial statements of 15 power companies listed on the
Italian Stock Exchange for 2009. Financial Statements at September 2009: 14 companies choo SS 1 companies choo CS Analysis the choices of format lected for CI; Explore the correlation between the sign and size of the items of OCI and the prentation of CI. All companies cho to disclo CI in SS. The study find that a weak association exists between the direction and size of the items of OCI and the reporting format chon. CI = Comprehensive Income; NI = Net Income; OCI= Other Comprehensive Income, SCSE= Statement of Changes in Stockholder’s Equity; SS = Separate Statement of Comprehensive Income; CS = Combined Statement of NI and CI. This table shows the main studies on the CI reporting format and direction of OCI and NI in Italy post IAS 1. For each study we report the sample, the format chon for the reprentation of the CI, the rearch hypothesis and the main findings. The study by De Cristofaro and Falzago (2010) is bad on interim mi-annual financial statements of 15 power companies listed on the Italian Stock Exchange. The authors explore current eventual correlation between sign and size of the OCI items and the prentation of CI in one of the two prescribed formats. All companies (14) cho to disclo CI in Separate Statement of Comprehensive Income. The study finds that a weak association exists between the direction and size of the OCI items and the reporting format chon. The reasons behind the choice of the prospectus can be attributed to a cultural attitude of the traditional type. In other words, companies appear to have chon the option clost to traditional national accounting
procedures. Bad on the literature review prented, this study intends to focus on choices carried out during preparation of the 2009 income statement with the revid version of IAS 1. We test the joint contribution of OCI and NI on format choice bad on typical characteristics of the national accounting system. RESEARCH HYPOTHESES This study forms part of investigations aimed at identifying the behaviors effectively put into practice by companies in the application of IAS/IFRS on the CI. We analyze choices made by Italian companies on the various options contained in the revid version of IAS 1 with regard to the statement of CI, as well as the role played by the OCI in the newly introduced figure of income (CI). Conquently, the prent study has a dual aim: to define the degree of homogeneity of the financial statements on CI, after the introduction of the revid version of IAS 1 and explore the current eventual correlation between the direction and size of the items of OCI and the prentation of CI in one of the two prescribed formats (a single statement or two statements). The first objective is bad on the belief that the prence of different options can affect the homogeneity of the financial statements. In the past, the directive 78/660/EC (IV directive) and 83/349/EC (VII directive) brought about a partial harmonization that then led to the adoption of IAS / IFRS in Europe. The cond objective is linked to the strong roots in historical cost for the preparation of financial statements of Italian companies. Conquently, it is estimated that in Italy the choice of one statementdeepimpact
