INFORMING THE IASB/FASB STANDARD SETTING PROCESS
Shahwali Khan
School of Accountancy, College of Business,
Massey University, Auckland, New Zealand
Prof. Dr. Michael E. Bradbury
School of Accountancy, College of Business,
Massey University, Auckland, New Zealand
ABSTRACT
Despite analysts’ demands for (and standard setters’ preferences for) a single statement of
comprehensive income (CI), neither the IASB nor the FASB has been able to achieve this
objective. Estimation of income is important for valuation and stewardship and the issue of
misinterpretation of CI most likely relates to the perceived volatility and value relevance of CI.
Proponents of single statement argue that CI brings discipline to managers and analysts as it
requires them to consider all factors affecting the owners’ wealth. Opponents believe that the
inclusion of other comprehensive income (OCI) along with core business results lead to
significant misinterpretations of an entity’s performance since these items are transitory.
Therefore, in this paper we observe the relationship of market measures of risk and valuation
with net income (NI) and OCI using a sample of New Zealand firms. We hypothesize standard
deviations of beta, volume of trade and share price have a relationship with standard deviation of
NI and OCI and that companies reporting OCI are different from companies not reporting OCI.
Results show relationship of beta, volume of trade and share price with NI and OCI. However,
companies reporting OCI are not different from companies not reporting OCI. These results
again support the view that OCI is redundant to valuation. Thus reporting OCI in a single
statement or a separate statement might only result in increasing the preparation cost and
significant misinterpretation of financial statements.
Keywords: Comprehensive Income, Other Comprehensive Income, Net Income, Volatility
INTRODUCTION
Traditionally, managers (investors) have lobbied for less (more) comprehensive definitions of
income (Biddle and Choi, 2006). Managers prefer the narrower and controllable definition of net
income on the basis of contracting arrangements. Whereas, investors demand a more
comprehensive definition (clean surplus) believing that such a figure is less subject to
manipulation and is more in accordance with valuation theory. Despite having a preference for
‘all inclusive’ income and a single statement of comprehensive income (CI), both the
International Accounting Standards Board (IASB) and the Financial Accounting Standard Board
(FASB) have not been able to achieve this objective. The FASB’s Exposure Draft: Reporting
Comprehensive Income requires a clear display of CI and its components in a statement of
performance. However, the final standard (SFAS 130 Reporting Comprehensive Income) does
not specify the statement in which CI must be displayed. Similarly, the IASB allows a one or two
statement option in IAS 1 Presentation of Financial Statements.
The efficient market hypothesis suggests the ‘geography’ of reporting other comprehensive
income (OCI) should not matter. As there are no new recognition or measurement rules
incorporated into IAS 1, analysts can simply reformat existing statements to achieve a single
statement of comprehensive income. On the other hand, several studies have shown that analysts
make better judgement using a single statement of CI (e.g., Hirst and Hopkins, 1998; Maines and
McDaniel, 2000; Tarca et al., 2008).
In response to a Discussion Paper: Preliminary Views on Financial Statement Presentation,
issued by IASB/FASB joint project (which proposes net income and OCI to be reported in a
single statement), respondents that disagree with a single statement presentation argue that OCI
items are volatile, transitory in nature and not value relevant. Therefore, their inclusion along
with core business results will confuse users of financial statements and lead to significant
misinterpretations of an entity’s performance. However, there is little empirical evidence on the
volatility of CI and its consequences. There is also mixed opinion in the literature whether
reporting OCI is value relevant or not. Studies like Hirst and Hopkins (1998), Biddle & Choi
(2006) and Chambers et al. (2007) show that OCI is value relevant whereas others like Dhaliwal
et al. (1999), Dehning and Ratliff (2004) and Lin et al. (2007) have proved it to be less or not
value relevant.
In light of the above the current study is motivated where we observe the relationship of three
stock market-based risk and valuation proxies, i.e, company beta, company volume of trade and
company share price with net income (NI) and OCI (NI and OCI collectively known as CI) using
a sample of 46 New Zealand firms. Most prior research that describes CI and its components has
been undertaken in the US and in the context of the introduction of SFAS 130 (e.g.; Bhamornsiri
and Wiggins, 2001; Jordan and Clark, 2002; Pandit and Phillips, 2004; Kreuze and Newell,
1999). New Zealand is a different setting in which to examine this issue because the nature of
OCI is different. First, the revaluation of non-current assets is common. Second, New Zealand
firms employ more financial instruments relative to the US (Berkman et al., 1997). This latter
reason is important because the move to International Financial Reporting Standards (IFRS)
requires all derivatives to be on-balance-sheet but allows gains and losses to flow directly
through equity for some items (e.g., available-for-sale investments and cash flow hedge
reserves). In the presence of the said differences we develop and test two hypotheses, one that
standard deviations of beta, volume of trade and share price have a relationship with standard
deviation of net income and OCI and second that companies reporting OCI are different from
companies not reporting OCI.
Results show evidence to indicate that there is a relationship of standard deviations of beta,
volume of trade and share price with standard deviation of net income and OCI. However,
Hotelling’s T2 test results show that companies reporting OCI are not different from companies
not reporting OCI. These results are similar in a way to other empirical studies such as Dhaliwal
et al. (1999) and Cahan et al. (2000), where they do not find any strong evidence to conclude that
OCI is value relevant. However, they do find evidence that net income is value relevant and we
assume it is the same for the current study. Net income might be driving the results to be
significant. These results again support the view that OCI is redundant to valuation. Thus
reporting OCI in a single statement or a separate statement might only result in increasing the
preparation cost of financial statements.
Section 2 describes the background, the literature and the development of hypotheses.
Section 3 describes the sample, data and results while the last section gives the conclusion.
BACKGROUND, LITERATURE REVIEW AND HYPOTHESES
DEVELOPMENT
Background
Income is normally referred to as changes in equity except those resulting from owners’
investment activities and distribution to owners. There are two approaches used to calculate
income:
1. Income as a measure of performance of an enterprise and its management.
2. Income as enhancement of investor wealth.
The first approach considers that income is generated only because of purposeful activities, in
particular, due to the recurring consumption of fixed assets (cited in Newberry, 2003, p-328),
whereas, other gains and losses that seem irrelevant to purposeful activities are excluded and
such changes in the value of capital are not treated as a part of income. This approach is also
referred to as current operating performance.
In contrast, the concept of income as an enhancement of investor wealth captures income
from the investor’s angle and it is considered to be the difference between the amount invested
and the amount either distributed or available for distribution (Newberry, 2003). The approach is
also called an all-inclusive concept of income.
The FASB has adopted the enhancement of wealth approach or the asset-liability view as
quoted sometimes in literature for the conceptual framework (Robinson, 1991, Newberry, 2003).
FASB Concept Statement No 3 “Elements of Financial Statements of Business Enterprises
(1980)” replaced the term “earnings” (used in FASB Statement No 1) with “Comprehensive
Income”. Concept Statement No. 3 was replaced by Concept Statement No. 6, “Elements of
Financial Statements (1985a)”, which also extended its scope to not-for-profit organizations
(Johnson et al., 1995 p-129). Johnson et al. (1995) state that the board concluded earnings is a
narrower term as compared to comprehensive income and decided to make it a component of
comprehensive income but did not give any definition of the term earnings in any of its
subsequent statements. FASB even after issuing SFAS No. 130 left with preparers of financial
reports the liberty to determine sub-components within net income. This gave a chance to
preparers to promote their own sub-components of income (commonly referred to as pro-forma
figures or street measures, such as EBIT & EBITDA), in order to divert users’ attention away
from net income and comprehensive income figures (Newberry, 2003). These pro-forma figures
gradually excluded many items such as restructuring costs and even marketing cost and argued
that these are non-recurring. FASB’s adoption of the enhancement of wealth concept had issues
like failure to identify valuation models for assets and liabilities and retention of historical cost,
e.g, FASB required continuous application of the realization principle and at the same time
required asset impairments, which was in line with the enhancement of wealth concept
(Newberry, 2003).
The concept of all- inclusive income led to the creation of the term “comprehensive income”,
which resulted due to the desire of financial statement users of having one figure for all non-
owner changes in equity for a particular period (Robinson, 1991). Many items bypassing the
income statement and going directly to owners’ equity led to many controversial issues, which
formed the basis for having a figure that would include all components of income leading to
changes in the overall financial position of organizations. Facts like increasingly complex
business transactions, increasing diversity of business transactions, and the increasing
sophistication of user groups called for comprehensive income and at the same time for the asset-
liability approach for measuring earnings (Robinson, 1991).
2.1.1 Comprehensive Income
Comprehensive income is defined in Concepts Statements No 3 & 6 as “Comprehensive
Income is the change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and distributions to
owners” (Johnson et al., 1995, p-129).
2.1.2 Components of Comprehensive Income
FASB identify the following as components of comprehensive income:
? Foreign currency translation adjustments, FASB Statement No. 52, Foreign Currency Translation
(1981b), paragraph 13;
? Gains and losses on foreign currency transactions that are designated as, and are effective as,
economic hedges of a net investment in a foreign entity, commencing as of the designation date,
statement 52, paragraph 20a;
? Gains and losses on intercompany foreign currency transactions that are of a long-term investment
nature (that is, settlement is not planned or anticipated in the foreseeable future), when the
entities to the transaction are consolidated, combined or accounted for by the equity method in
the reporting enterprise’s financial statements, Statement 52, Paragraph 20b;
? A change in the market value of a future contract that qualifies as a hedge of an asset reported at fair
value unless paragraph 11 requires earlier recognition of a gain or loss in income because high
correlation has not occurred, FASB Statement No. 80, Accounting for Future Contracts (1984a),
paragraph 5;
? Unrealized holding gains and losses on available-for-sale securities, FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities (1993), paragraph 13;
? Unrealized holding gains and losses that result from a debt security being transferred into the
available-for-sale category from the held-to-maturity category, Statement 115, paragraph 15c;
? Subsequent increases in the fair value of available-for-sale securities previously written down as
impaired, Statement 115, paragraph 16;
? Subsequent decrease in the fair value of available-for-sale securities, if not an other-than-temporary
impairment, previously written down as impaired, Statement 115, paragraph 16;
? The excess of the additional pension liability over unrecognized prior service cost (that is, net loss
not yet recognized as net periodic pension cost), FASB Statement No. 87, Employers’
Accounting for Pensions (1985b), paragraph 37.
2.1.3 In Context of Theory
By closely observing the issue of comprehensive income, it may be inferred that here exists an
agency problem between managers and investors. From the theory stand point managers are
interested in reporting net income in order to have better contracts such as compensation
contracts, bonus contracts, debt contracts etc (contracting theory). In contrast, investors are more
interested in the figure of comprehensive income which is subject to less manipulation and is
more in accordance with the valuation theory.
LITERATURE REVIEW
Whether to account through net income or comprehensive income is not a new issue and is
related to the choice between the income statement approach and the balance sheet approach
(York, 1941). In attempting to make the income statement representative of the normal
operations for the period, advocates recommend that some items be accounted through “surplus
adjustments” (e.g., Sanders et al., 1938). Others prefer a wider definition of income where all
Contracting
Vs
Firm
Investors
Managers
Net Income
Comprehensive
Income
gains and losses are reported in income for the period (e.g., Paton and Littleton, 1940). The
American Accounting Association (1936) made comprehensive income a central feature of its
tentative statement of underlying accounting principles.
Pressure for the reporting of CI has come from both internal and external motivations (Johnson
et al., 1995). The internal motivations arise from the accounting boards’ financial instruments
projects. To ease tension over the concerns that fair value increases the volatility of income, both
the IASB and FASB have allowed price changes of certain financial instruments (e.g., available-
for-sale and cash flow hedges) to bypass income. However, there is concern that dirty surplus
items are important to the assessment of financial performance and financial position and that the
complexity of reporting financial instruments can be reduced by a single statement of
performance. External motivations arise because major financial analys t associations support the
reporting of comprehensive income in a single statement (AIMR, 1993; CFA, 2007).
Theoretical support for CI comes from excess earnings approaches to valuation, including
traditional residual income formulae (Preinrich, 1938; Peasnell, 1982; Ohlson 1995; Feltham and
Ohlson, 1995). While valuations rely on the forecasting of future payoffs, current income is the
realisation of future forecasts. Hence, for measuring forecast errors comprehensive income is the
most useful for equity valuation (AAA, 1997). The important tasks of analysts is to decide which
components of CI are not predictable (i.e., have mean-zero forecast errors).
Despite analysts’ demand for a single statement of CI, financial statement preparers make, at
least, four types of complaints (Hirst and Hopkins, 1998). First, they argue that comprehensive
income will be looked at to the detriment of other performance measures. However, the AAA
(1997) argues that CI brings discipline to managers and analysts as it requires them to consider
all factors affecting the owners’ wealth. Second, preparers also argued that the information in CI
is redundant because it can be found elsewhere in the financial statements. Hirst and Hopkins
(1998) provide evidence that display matters. They show that CI in a single statement is more
effective in communicating value relevant information than reporting CI in a statement of change
in equity. Maines and McDaniel (2000) show that display of CI is also important for
nonprofessional investors. Third, they argue that multiple performance measures will be
confusing. However, Tarca et al. (2008) show that financial statement users can understand a
single statement of comprehensive income, including a matrix format of comprehensive income
proposed by Barker (2004).
Fourth, opponents of CI state that the volatility inherent in components of CI will cause an
increased perception of the firm’s risk. Trueman and Titman (1988) argue that income smoothing
allows firms to reduce perceived earnings volatility to obtain cheaper debt financing. Ronen and
Saden (1981) argue that income smoothing is potentially useful as it allows managers to signal
private information about the level and persistence of future earnings, without having to reveal
proprietary information. Barth et al. (1995) find that, for a sample of 137 banks over the period
1971 and 1990, fair value based earnings are more volatile than historical based cost earnings.
However, they find that share prices do not reflect the incremental volatility. Hodder et al. (2006)
examine the risk relevance of the standard deviation of three performance measures (net income,
comprehensive income and a constructed fair value income measure) for 202 US commercial
banks from 1996 to 2004. They find the constructed measure reflects elements of risk not
captured by volatility in net income or comprehensive income. Hence, the volatility of CI is an
important issue in resolving the decision of whether to report a single statement on
comprehensive income.
An important study is done by Dhaliwal et al. (1999), they do not find any evidence that
comprehensive income is more strongly associated with returns/market value nor is it a better
indicator of future cash flows/income than net income. Rather net income has strong association
with the market value of equity and predicts future cash flows and income in a better manner.
However, the only component of comprehensive income, which improves association between
income and returns, is marketable securit ies adjustment and the rest of the components of other
comprehensive income are considered as factors adding noise to comprehensive income.
Cahan et al. (2000) examine the value relevance of mandated comprehensive income
disclosures. The study is aimed at providing market-based evidence on the usefulness of
accounting standards (such as SFAS No. 130, NZ FRS 2, UK FRS 3), which require the
disclosure of comprehensive income. Market-based tests are conducted to look for evidence to
prove that other comprehensive income items provide information that is incremental to the
aggregated figure of comprehensive income and secondly, whether the incremental value
relevance of other comprehensive income items relative to net income increase after the
introduction of standards mandating their reporting. For the test, fixed assets revaluation and
foreign currency translation adjustments are considered and no such evidence is discovered. The
results conclude that individual disclosure of OCI items have no additional value to investors.
Dehning & Ratliff (2004) examine data for firms in periods immediately before and after the
issuance of SFAS No. 130 and observe that there is no difference in the market response to
comprehensive income adjustments between the periods and this is in accordance with the
efficient market hypothesis, which suggests that solely because of the placement of information,
there is no change in the way the market values information.
HYPOTHESES DEVELOPMENT
There are well accepted theories in finance that establish a relationship between earnings,
common stock value and market beta such as Miller and Modigliani (1958), Graham, Dodd and
Cottle (1962). One of the pioneers in the study of earnings in relation with price and volume is
Beaver (1968) who proved that earnings announcements have informational content and lead to
volume and price reactions. Amongst the others are Ball & Brown (1968) and Bamber (1968)
who used the same measures to prove the utility of income number announced in earnings
reports.
A few studies have provided descriptive evidence of the impact of CI when SFAS 130 was
introduced (e.g.; Bhamornsiri and Wiggins, 2001; Jordan and Clark, 2002; Pandit and Phillips,
2004; Kreuze and Newell, 1999). However, none of these studies provide evidence of CI in a
regime where asset revaluations are common. Conducting the study in New Zealand setting is
interesting as asset revaluation (an item of OCI) is common and New Zealand firms employ
more financial instruments relative to the US. Therefore, we expect to see a significant
relationship of our market-based risk and valuation proxies with net income and OCI. This gives
rise to the first null hypothesis:
H0: There is no relationship of standard deviations of beta, volume of trade and share price with
standard deviation of net income and OCI.
H1: There is a relationship of standard deviations of beta, volume of trade and share price with
standard deviation of net income and OCI.
Many studies in the literature support the fact that net income is more strongly associated with
market value/returns than is OCI. Therefore, we anticipate that we might find different results as
the OCI figure may differ for New Zealand companies compared to studies conducted in other
countries, due to differences in regulations. Hence our second null hypothesis about the centroids
of the multivariate data clouds, based on the above three variables is:
H0: There is no difference between companies reporting OCI and companies not reporting OCI.
H1: There is a difference between companies reporting OCI and companies not reporting OCI.
SAMPLE, DATA ANALYSIS WITH RESULTS AND ROBUSTNESS TEST
3.1 Sample
To test the hypotheses, information about the following variables is collected for companies
listed on New Zealand stock exchange:
1. Net Income.
2. Other Comprehensive Income.
3. Beta.
4. Volume of trade.
5. Share Price.
The data is collected using NZX Deep Archive and DataStream International. Firms that do
not report in New Zealand dollars are not included in the sample. Also firms are required to have
data from 2004 to 2008 for all the five variables to be included in the sample. The final sample
comprises of 46 firms.
Annual data for net income and OCI are hand-collected from the annual financial statements,
statement of total recognised revenues and expenses and the statement of movements in equity.
Since it is generally recommended in finance research to use monthly or weekly data, therefore,
monthly data for beta, volume of trade and share price is downloaded from DataStream
International.
Since the volatility of OCI and the risk associated with it are important issues in resolving the
decision of whether to report a single statement on comprehensive income. We observe the
relationship of beta, volume of trade and share price with net income and OCI using standard
deviations of beta (StDev.Beta), trading volume (StDev.Volume), share price (StDev.Price) and
net income (StDev.NI). Standard deviation for OCI is not calculated since there are companies in
the data with no figure to report for OCI, thus calculating the standard deviation for OCI would
be misleading. Therefore, an ordinal approach is used for OCI starting from 0 to 5 with 0
meaning no OCI to report in any of the five years, 1 meaning OCI reported for one year and so
on up to 5 years. An indicator variable is also used to see whether companies reporting OCI are
different from companies not reporting OCI where ‘Y’ is used for companies reporting OCI and
‘N’ is used for companies with no OCI.
New Zealand stock exchange classifies all the listed companies in six different sectors, which
are:
1. Primary.
2. Energy.
3. Goods.
4. Property.
5. Services.
6. Investment.
The sample consists of companies from all the different sectors and does not focus on any
particular one. The companies have been categorized as “Large” and “Small” on the basis of
assets median calculated from the five-year average assets, with those above the median treated
as large companies and those below the median treated as small companies. However, this
classification is not used in any of the computations rather it is used as a helping tool in
interpreting the statistical analysis.
DATA ANALYSIS WITH RESULTS The following methods of data analysis are used:
1. Principal Component Analysis.
2. Redundancy Analysis.
3. Hotelling’s T-Square.
PRINCIPAL COMPONENT ANALYSIS The central idea of principal component analysis (PCA) is to reduce the dimensionality of a
data set consisting of a large number of interrelated variables, while retaining as much as
possible of the variation present in the data set. This is achieved by transforming to a new set of
variables, the principal components (PCs), which are uncorrelated, and which are ordered so that
the first few retain most of the variation present in all of the original variables.
We conduct the PCA to test for any variations in the data in terms of the original variables
and try to identify any particular patterns that are obvious to the naked eye. We use the means for
beta, volume of trade and share price pooled over the period 2004-2008.
Figure 1
In figure 1, PC1 and PC2 explain 41.36% and 32.41% of the total variation, respectively, in
the original variables. PC1 is highly negatively related to volume of trade and share price and
moderately negatively related to beta. Whereas PC2 is highly positively related to beta,
moderately negatively related to volume of trade and highly negatively related to share price.
Looking at the PCA in figure 1, it can be observed that the companies can be categorized into
two groups on the basis of the given three variables. Companies that have low beta form one
group and companies with high beta tend to form another group. Companies with low beta have
high share price and high volume whereas companies with high beta have lower share price and
low volume of trade. This result is consistent with prior literature that companies with low betas
(lesser risk) should have higher share prices and trading volumes while companies with high
betas (greater risk) should have lower share prices and lower trading volumes. An interesting fact
is that companies within the groups are similar on the basis of assets classification as well.
-4 -2 0 2 4
-4-2
02
4
PCA of MktProxies data
PC1, 41.36%
PC
2, 3
2.41
% ANL
AFLAMPNAIAL
BLISBri
Cavo
CDL
Char
Cont
Cyno
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Fle
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Nup
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WDT
WPL
-1.0 -0.5 0.0 0.5 1.0
-0.5
0.0
0.5
Beta
Vol
Price
Companies in one group such as Auckland International Airport Limited (AIAL), SKYCITY
Entertainment Group Limited (SEG) and Fletcher Building Limited (Fle) are all large companies
with billions worth of assets and one may expect high share price and high volume of trade for
companies of their size. On the other hand is the group containing companies with smaller
amount of assets such as TRS Investments Limited (TRS) and Cynotech Holdings Limited
(Cyno). However, the companies are all a mix of different industries or sectors and cannot be
clearly segmented on the basis of their operating activities.
REDUNDANCY ANALYSIS
Redundancy analysis is a method of multivariate analysis for analyzing the relationship
between two sets of variables. Redundancy analysis maximizes predictability of one set of
variables from the other. It is necessary in redundancy analysis that most, if not all, of the
criterion variables are sufficiently predictable from the predictor set to obtain a large value of
redundancy index.
We perform redundancy analysis to test the null hypothesis of no significant relationship of
standard deviations of beta, volume of trade and share price with standard deviation of net
income and OCI. The results show an F-value of 61.33 and a p-value of 0.01.
Figure 2
On the basis of the large small p-value (0.01), we reject the null hypothesis of no relationship of
standard deviations of beta, volume of trade and share price with standard deviation of net
income and OCI. Since net income and OCI explain statistically significant percentage of the
variation in beta, volume and share price.
HOTELLING’S T2
Hotelling's T2 is a test to assess the statistical significance of the difference on the means of
two or more variables between two groups. It is a special case of MANOVA used with two
Histogram of pF.perm
pF.perm
Fre
quen
cy
30 40 50 60 70 80 90
0e+0
02e
+05
4e+0
56e
+05
groups or levels of a treatment variable. The null hypothesis is that centroids do not differ
between two groups.
To test the second null hypothesis we conduct the Hotelling’s T2 test and the results show that
the p-value is greater than 0.05. Thus we retain the null hypothesis of no difference between
companies reporting OCI and companies not reporting OCI with respect to the standard
deviations of these variables.
ROBUSTNESS TEST To examine the robustness of our results, we test the same hypotheses using means of all the
five variables pooled over 2004-2008. With respect to our first hypothesis, we observe the
relationship of means instead of standard deviations. Thus we test the null hypothesis of no
relationship of means of beta, volume of trade and share price with mean of net income and OCI.
We conduct the redundancy analysis and get the same results with a p-value of 0.01. Therefore,
we reject the null hypothesis and retain the alternate hypothesis. With respect to our second
hypothesis that the centroids do not differ between two groups and that there is no difference
between companies reporting OCI and companies not reporting OCI, we perform the Hotelling’s
T2 test. Once again we get similar results with a p-value of 0.11, which is greater than 0.05
significance level. Hence we retain the null hypothesis of no difference between companies
reporting OCI and companies not reporting OCI.
CONCLUSION
Proponents of OCI argue that it provides value relevant information; therefore, it should be
reported in financial statements, preferably in income statement. Thus an income statement
should report net income and OCI. Opponents on the other hand believe OCI items are transitory
in nature, therefore, not value relevant and should not be included with core earnings of a
business. Therefore, an objective of this study is to provide the IASB/FASB project Financial
Statement Presentation empirical evidence of the relation of stock market-based risk and
valuation measures such as beta, volume of trade and share price of a company with NI and OCI.
We collect data for a sample of 46 New Zealand firms over the period 2004 to 2008. We
choose New Zealand firms since the revaluation of non-current assets is common and firms here
employ more financial instruments relative to the US (Berkman et al., 1997). The mentioned
items are an integral part of OCI, therefore, we speculate the OCI figure to have a significant role
in companies’ performance and valuation. Thus two hypotheses are developed and tested, one
that the standard deviations of beta, volume of trade and share price have a relationship with
standard deviation of net income and OCI and second that companies reporting OCI are different
from companies not reporting OCI.
Results provide evidence to conclude that there is a relationship of standard deviation of beta,
volume of trade and share price with standard deviation of net income and OCI. Further,
companies reporting OCI are not different from companies not reporting OCI with respect to the
standard deviations of these variables. These results again support the view that OCI is redundant
to valuation. Thus reporting OCI in a single statement or a separate statement might only result
in increasing the preparation cost of financial statements.
Although the evidence provided in this project can only be regarded as preliminary, yet the
results may give a clue to standard setters to decide whether or not to move to a single statement
of comprehensive income.
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