Reporting comprehensive income

Secured Lender, The, Mar/Apr 1998 by Schreiber, Eran

The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 130 (FASB 130), "Reporting Comprehensive Income." This Statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. Prior to this statement, certain components of comprehensive income were not recorded in the income statement of an entity. Rather, an entity was required to accumulate the effect of those items and present the results as a component of equity.

Background

In the past, the broad character of income reporting was a contrast between the current operating performance and allinclusive income concepts. The current operating performance concept presents income without the effect of extraordinary and nonrecurring items of income or loss. The focus was on the current operating income of the entity. The all-inclusive income concept includes all revenues, expenses, gains and losses recognized during the period for which a financial statement is being presented. The allinclusive income concept was adopted December, 1966. by the Accounting Principles Board in APB No. 9, "Reporting the Results of Operations."

Over time, the FASB allowed departures from the allinclusive income concept for specific exceptions. Certain assets and liability changes were not included in a statement of operations for the period in which they were being recognized as is the case with conventional operating transactions. The cumulative effects from these transactions were included in balances within a separate component of equity in a statement of financial position. Examples of such allowable departures are FASB Statements No. 12, "Accounting for Certain Marketable Securities (superseded)", No. 52, "Foreign Currency Translation"; No. 87; "Employers' Accounting for Pensions," and No. 115, "Accounting for Certain Investments in Debt and Equity Securities."

FASB 130 was issued to address the concerns of financial statement users over the growing number of comprehensive income items that are not reported in a Generally Accepted Accounting Principles (GAAP) income statement. The reporting requirements for such transactions of presenting the accumulated balances in equity did not satisfy many financial statement readers. In addition, the diversity in financial statement reporting of these accumulated balances and changes thereon caused readers to urge the FASB to implement the concept of comprehensive income. This concept was first introduced in FASB Concepts Statement No. 3, "Elements of Financial Statements of Business Enterprises." (December, 1985.)

Application

FASB No. 130 applies to all entities that issue a full set of financial statements which report financial position, results of operations, and cash flows. Certain specialized entities, such as investment companies, defined benefit pension plans and other employee benefit plans, are not required to issue a statement of cash flows under FASB No. 102, "Statement of Cash Flows - Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale." These entities are subject to FASB No. 130 if they engage in transactions which create items of comprehensive income. Not-for-profit organizations that are required to follow FASB No. 117, "Financial Statement of Not-for-Profit Organizations", are not affected by this statement. In addition, entities with no items of other comprehensive income in any period presented are not affected by this statement.

Comprehensive income

FASB Concepts Statements No. 6 defines comprehensive income as "the change in equity 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." The term "comprehensive income" includes all of its components, including net income. The term "other comprehensive income" refers to revenues, expenses, gains and losses that under GAAP are included in comprehensive income but excluded from net income.

Comprehensive income reports all changes in equity of an entity that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. This would specifically exclude contributions from and distributions to owners of an enterprise from comprehensive income. Other transactions with owners, such as related party transactions, would be included in the calculation of comprehensive income. When financial statements are read in conjunction with the footnote disclosures, the new comprehensive reporting is intended to help investors, creditors and other users in assessing the total picture of a company's business results and the anticipated future results.

Reporting requirements

The statement requires the presentation and disclosure of all the components that make up comprehensive income during the period being reported on. "A total amount for comprehensive income shall be displayed in the financial statement where the components of other comprehensive income are reported. The major component of and starting point for comprehensive income is net income as reported in the traditional income statement." An enterprise shall continue to display an amount for net income. If no other components of comprehensive income exist, then there is no requirement to report comprehensive income.