Other comprehensive income: a review and directions for future research

Abstract

Accounting standard setters continue to grapple with conceptual distinctions between components of net income and other comprehensive income (OCI). Bank regulators are dealing with the recommendations of Basel III for Tier 1 Capital, which includes more components of accumulated other comprehensive income (AOCI). Motivated by these standard setting and regulatory debates and changes, I review the literature on the investor and contracting usefulness of comprehensive income, OCI, OCI components and AOCI. I present ideas for future research, including opportunities arising from Basel III changes to bank regulatory capital.Accounting and Finance 56 (2016) 9-45 © 2016 AFAANZ Other comprehensive income component (ASC 220-10-45-10A) ReferenceUnrealised holdings gains and losses on available-for-sale securities. ASC 320-10-45-1 Unrealised holdings gains and losses that result from a debt security being transferred into the available-for-sale category from the held-to-maturity category.ASC 830-30-45-12Amounts recognised in other comprehensive income for debt securities classified as available-for-sale and held-to-maturity related to an otherthan-temporary impairment recognised in accordance with ASC 320-10-35 if a portion of the impairment was not recognised in earnings.ASC 320-10-35Subsequent decreases (if not an other-than-temporary impairment) or increases in the fair value of available-for-sale securities previously written down as impaired.

Value Relevance of Comprehensive Income

“…Useful summaries of the research on comprehensive income can be found in Hodgson and Russell () and Black ().…”

Value Relevance Of Other Comprehensive Income

“…Proponents of comprehensive income approach argue that the financial statements prepared under the all-inclusive approach provide investors and other users with clear insights into the future prospects of the firm and improve the predictive ability of future earnings and cash flows (Black 2016;Kanagaretnam et al 2009;Rees & Shane 2012). However, studies conducted on value relevance of comprehensive income in recent years have not found conclusive support for this argument.…”

Does the Variability of Other Comprehensive Income (OCI) Play a Role in the Determination of Cost of Debt, Capital Structure and Credit Ratings?

“…Past researchers (i.e., Dhaliwal, Subramanyam, Trezevant 1999) and practitioners 1 (see Yen, Hirst and Hopkins 2007 for a summary of practitioner comments) support the view that the accounting adjustments contained in OCI have caused the volatility of OCI to be viewed as "noise" rather than decision-useful for investors. Other research (Chambers, Linsmeier, Shakespeare, Sougiannis 2007;Black, 2016, Jones and Smith, 2011and Holthausen and Watts, 2001) provides theoretical support for OCI's decision-usefulness. 2 However, the empirical support contained in this stream of research focuses on equity investors (Chambers, Linsmeier, Shakespeare, Sougiannis 2007 andBlack, 2016) but not on creditors.…”

“…Other research (Chambers, Linsmeier, Shakespeare, Sougiannis 2007;Black, 2016, Jones and Smith, 2011and Holthausen and Watts, 2001) provides theoretical support for OCI's decision-usefulness. 2 However, the empirical support contained in this stream of research focuses on equity investors (Chambers, Linsmeier, Shakespeare, Sougiannis 2007 andBlack, 2016) but not on creditors.…”