Why is comprehensive income important

An example of items recognised in OCI that may be reclassified to profit or loss are foreign currency gains on the disposal of a foreign operation and realised gains or losses on cash flow hedges. However, there is a general lack of agreement about which items should be presented in profit or loss and in OCI.

The interaction between profit or loss and OCI is unclear, especially the notion of reclassification and when or which OCI items should be reclassified.

A common misunderstanding is that the distinction is based upon realised versus unrealised gains. It may be difficult to deal with OCI on a conceptual level since the International Accounting Standards Board the Board are finding it difficult to find a sound conceptual basis. However, there is urgent need for some guidance around this issue. Many users are thought to ignore OCI as the changes reported are not caused by the operating flows used for predictive purposes.

Examples would be the statement of cash flows and disclosures relating to operating segments. There are several arguments for and against reclassification. If reclassification ceased, then there would be no need to define profit or loss, or any other total or subtotal in profit or loss, and any presentation decisions can be left to specific IFRS standards.

It is argued that reclassification protects the integrity of profit or loss and provides users with relevant information about a transaction that occurred in the period. Those against reclassification argue that the recycled amounts add to the complexity of financial reporting, may lead to earnings management and the reclassification adjustments may not meet the definitions of income or expense in the period as the change in the asset or liability may have occurred in a previous period.

Note: Table 4 reports the descriptive statistics. See Table 1 for detailed variable definitions. In this section, we report the regression results that investigate the relation between OCI and future performance. Note: Table 5 reports the regression estimation results for Model 1 and 2 analyzing the predictability of OCI and its components for 1- and 2-quarter-ahead-earnings.

See Table 1 for variable definitions. All specifications include year-quarter fixed effects. These results suggest that OCI does contain incremental information that can be used in predicting future performance. Next, in the last two columns, we categorize OCI into its components and investigate which component primarily drives the positive association between OCI and future performance. The results present that unrealized gains and losses of AFS securities are positively associated with both 1- and 2-quarter ahead pre-tax earnings i.

Overall, our evidence suggests OCI predicts future earnings both 1 and 2 quarters ahead after controlling for contemporaneous earnings, consistent with the first hypothesis. In addition, regarding the second hypothesis on the prediction ability of OCI components, we find that the components of OCI have different impacts in predicting future profitability, suggesting that not all gains and losses included in OCI have predictive power.

In this section, we investigate whether the reliability in OCI related estimates enhances its ability in predicting future earnings.

As discussed in the research design section, we measure the extent of reliability using the quality of external auditors. In particular, Big 4 auditors are known to provide higher quality audit services than non-Big4 auditors because they have incentives to maintain their reputation and also have the ability and resources for better quality audits e.

Prior empirical studies have demonstrated that firms audited by quality external auditors i. In other words, the firms audited by the Big 4 tend to generate more reliable financial information and have higher earnings quality.

In Table 6, we distinguish the sample into firms with Big 4 external auditor and non-Big4 auditor and estimate regression model 1 and 2 separately for each subsample. About For firms with Big 4 auditors, the results suggest that the coefficient on PtOCI is not significant but still has higher t-value compared to the coefficient for firms with non-Big 4 auditors.

In summary, our results suggest that for firms with the quality external audits, the ability of OCI, especially the net unrealized gains and losses on available on AFS securities, for predicting future earnings enhances as the reliable measurement becomes more likely. Note: Table 6 reports the regression estimation results for model 1 and 2 analyzing the predictability of OCI and its components for 1-quarter-ahead-earnings for firms audited by Big 4 vs.

The model specifications include year-quarter fixed effects. This study investigates whether OCI contains information that helps in the prediction of future performance. Given these opposing arguments, our study examines whether OCI has predictive value for future earnings. Our findings are consistent with Evans et al.

After the mandatory adoption of IFRS in the Korean capital market in , the statement of other comprehensive income became one of the main financial statements. Accordingly, OCI information, which was previously reported in a note, is disclosed in the body of the statement of comprehensive income and thus became more accessible to its users.

Our study contributes to both literature and practice by suggesting that the disclosure of OCI in the statement of comprehensive income after the implementation of K-IFRS does contain information content that is useful in the prediction of future profitability.

Click here to choose a searching target image or drag and drop a searching target image. Article Info. Abstract This study investigates whether other comprehensive income OCI reported in the statement of comprehensive income one of the main financial statements after the adoption of K-IFRS predicts a firm's future performance.

Literature Review 2. Hypotheses Development There have been conflicting perspectives on the financial reporting of accounting income, which summarizes the performance of a firm for a specific period: one arguing that income should incorporate all changes in equity, except those from any transactions with shareholders i. We state our hypotheses as follows: H1: OCI is positively associated with future earnings. H2: Each component in OCI is positively associated with future earnings.

Figure 1: Research Model 3. Research Design and Sample 3. Research Methodology To test our hypotheses, we estimate the following models 1 and 2 by employing the regression models in Bratten et al.

Sample Selection Table 2 presents the sample selection process. Empirical Results 4. Descriptive Statistics Table 4 is the descriptive statistics. Table 4: Descriptive Statistics Note: Table 4 reports the descriptive statistics. Conclusion 5. Summary This study investigates whether OCI contains information that helps in the prediction of future performance. Discussion After the mandatory adoption of IFRS in the Korean capital market in , the statement of other comprehensive income became one of the main financial statements.

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Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. The Basics of OCI. Important Categories of OCI. The Bottom Line. Key Takeaways Other comprehensive income OCI is an accounting item for firms that includes revenues, expenses, gains, and losses that have yet to be realized. A firm's pension obligations or a bond portfolio is one example of an asset that may be considered OCI, as long as the business does not classify the underlying bonds as held-to-maturity.

Accumulated other comprehensive income is displayed on the balance sheet in some instances to alert financial statement users to a potential for a realized gain or loss on the income statement down the road. OCI is an important measure of generally larger corporations' value. Article Sources. It pays back the face amount plus a predetermined interest rate. This is valuable information for businesses with a large amount of investments.

If the company is not doing well, but the investments are, then the realization of some assets may help keep the company afloat during periods of less profit. No, they are not. Some months later his accountant issues an income statement. Without that information, Richard cannot do a proper financial analysis. Richard needs a comprehensive income statement to get the complete picture, and requests one.