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Comprehensive Income

      “Comprehensive Income is the change  in  equity  (net  assets)  of  an
      entity  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.  It includes net income and  other
      revenues, expenses, gains, and losses that  under  generally  accepted
      accounting  principles  are  included  in  comprehensive  income   but
      excluded  from  net  income.   Some  parts  of  comprehensive   income
      presently bypass the income statement and are reported in  a  separate
      equity section of the balance sheet."  Comprehensive  income  consists
      of two main categories of net income and other comprehensive income.
      "Net income is an  enterprise  performance  measure  favored  by  many
      financial statement users.  However,  several  income  items  are  not
      shown on the income statement.  Numerous groups of financial statement
      users have called for revision of the  number  of  income  items  that
      bypass the income statement.  The accumulated balances of these  items
      are currently reported in permanent equity  accounts  in  the  balance
      sheet, not on  the  income  statement.   Although  discussed  in  U.S.
      accounting  literature  for  over  twenty  years,  the  concept  of  a
      comprehensive income that captures these  income  items  first  became
      popular outside the United  States.   The  first  accounting  standard
      addressing the issue was enacted  in  Europe.   In  1992,  the  United
      Kingdom Accounting Standards Board issued Financial Reporting Standard
      3 that introduced a statement of total recognized gains and losses  as
      a Accounting Standards Committee issued an exposure  draft  of  a  new
      income standard and modified it in 1997.  It is  conceptually  similar
      to recent U.S. comprehensive income efforts."[i]

      In December 1980, the Financial Accounting  Standards  Board  formally
defined comprehensive income in Concepts Statement No.6, as "the  change  in
equity of a business enterprise during a period from transactions and  other
events  and  circumstances   from   non-owner   sources.”   Description   of
comprehensive concept in Statement #130 covers wider  rage  of  things  than
Statement #6.  At the same time, FASB identified in  Statement  No.  5  that
comprehensive income and its components should be  reported  as  part  of  a
full set of financial statements for a period.  This project  was  added  to
the Board's agenda in September 1995, at the urging of  financial  statement
users.   In  particular,  the  Association  for  Investment  Management  and
Research wanted FASB to expand the  reporting  for  items  of  comprehensive
      In June 1997,  Financial  Accounting  Standards  Board  issued  a  new
Statement of Financial Accounting Standards  #130  “Reporting  Comprehensive
Income.”  This act was partially triggered by the  AIMR's  (Association  for
Investment Management and Research) call  for  more  explicit  Comprehensive
Income.  “The new figure will shine a bright, embarrassing  light  on  items
that are now buried in shareholders’ equity, as  well  as  items  executives
can use to even out bumpy earnings growth,”  says  Bear  Stearns  accounting
expert Pat McConnell.  However even the new statement  did  not  cover  what
probably it  should  have  covered.   The  new  statement  coped  only  with
reporting and presentation of the components of  comprehensive  income,  but
it did not explain when they should be recognized and  how  they  should  be
      Nowadays, the market is very volatile and fair market  values  of  the
assets might change instantly.  In turn, change in fair market  value  leads
to losses or gains in general value of a company.   If  these  effects  find
their reflections on the income statement, it will  mean  very  sudden  high
and low income reported by the company.  The reason  why  FASB  adopted  the
concept of comprehensive income is to give investors a full picture  of  the
financial position of the company.  Traditional income  statement  does  not
include some of the items,  but  included  in  the  equity  section  of  the
balance sheet.  These items are:
      . Unrealized gains (losses) on available-for-sale securities
      . Change in foreign currency exchange rates
      . Adjustments to minimum pension liability
      . Hedging gains or losses.
      Unrealized gains or losses on available-for-sale securities take place
when the fair market value of the securities is different than  the  one  of
the balance sheet.   To  be  consistent  with  accounting  regulations,  the
company has to correct its assets’ value on the balance sheet.  These  gains
or losses do not appear on the income statement because their  effect  might
mislead the investors, in terms of temporary income of the company.  On  the
other hand, the investors should be aware of  these  gains  or  losses,  and
this is the reason for comprehensive income to exist.   The  owner's  equity
section of the balance sheet accumulates these changes in the value  of  the
      There are many multinational companies right now on the market.  These
companies are subject to gains or losses, the origin of which is  change  in
exchange rates of the currencies.  These gains or losses do not  happen  due
to routine operation of the company and  that  is  why  they  might  mislead
investors' opinion of the company.  The effect of these changes is  included
in the comprehensive income.
      Underfunded pension  obligation  necessitates  an  adjustment  to  the
minimum liability in order to be  consistent  with  accounting  regulations.
It is not an obligation for the company, but certainly influence future  net
incomes, and that is why it should be included in comprehensive income.
      The hedging gains or losses arise due to futures contracts.  A  change
is the market value of a futures contract that qualifies as a  hedge  of  an
asset reported at fair value, unless earlier recognition of a gain  or  loss
in income is required  because  high  correlation  has  not  occurred  (SFAS
There are three ways to present comprehensive income:
 . A separate income statement is prepared
 . A comprehensive income is combined with income statement
 . A comprehensive income is represented as  a  part  of  the  statement  of
   stockholder’s equity
   For some of  the  companies  implementation  of  reporting  comprehensive
income had "negative" or  positive  effect  on  "bottom-line  income."   For
instance, General Motor's had
negative impact (-64.1%) and Citibank  had  positive  (18.3%).   Out  of  24
major corporations, 15 reported a lower comprehensive income than their  net
income, and only nine of them displayed an increase in comprehensive  income
in comparison with net income.

|                   |Increased (decreased) |
|                   |by                    |
|General Motors     |-64.10%               |
|Wal-mart           |-15.00%               |
|Coca-Cola          |-14.90%               |
|Procter & Gamble   |-11.70%               |
|Chase-Manhatan     |-11.50%               |
|Ford Motor         |-10.80%               |
|IBM                |-9.70%                |
|Johnson & Johnson  |-9.40%                |
|Texaco             |-7.70%                |
|Eli Lilly          |-6.30%                |
|Phillip Moris      |-3.90%                |
|Exxon              |-2.80%                |
|Mobil              |-1.60%                |
|Dupont             |-0.60%                |
|Merck              |-0.30%                |
|Chrysler           |0                     |
|Hewlett Packard    |0                     |
|Disney             |0.10%                 |
|BankAmerica        |0.60%                 |
|Microsoft          |0.70%                 |
|AT&T               |0.80%                 |
|Intel              |1.40%                 |
|NationsBank        |2.90%                 |
|Pepsico            |3.50%                 |
|General Electric   |7.60%                 |
|Citibank           |18.30%                |

   Such new standards are often  a  source  of  frustration,  especially  to
smaller, nonpublic entities and their CPAs.  This frustration, often  called
standards-overload, arises both from the frequent issuance of new and  often
complicated standards and from the lack of perceived information benefit  in
financial statements.  The overload and implementation costs  stemming  form
SFAS #130 can be substantially eliminated through  reclassification  of  the
available-for-sale securities as trading securities, and this is what  small
private corporations usually do.
   Regarding reporting financial performance,  international  standards  say
the following:
    . IAS 1 requires presentation of a statement showing changes in  equity.
      Various formats are allowed:
       1) The statement shows (a) each item of income and expense,  gain  or
          loss, which, as required by other IASC  Standards,  is  recognized
          directly in equity, and the total of these items, certain  foreign
          currency translation gains and losses  (IAS  21,  The  Effects  of
          Changes in Foreign Exchange Rates), and changes in fair values  of
          financial instruments (IAS 39, Financial Instruments:  Recognition
          and Measurement)) and (b) net profit or loss for the  period,  but
          no total of (a) and (b).  Owners’ investments and  withdrawals  of
          capital and  other  movements  in  retained  earnings  and  equity
          capital are shown in the notes.
       2) Same as above, but with a total of (a) and (b)  (sometimes  called
          “comprehensive   income”).    Again,   owners’   investments   and
          withdrawals of capital and other movements  in  retained  earnings
          and equity capital.  An example of this would be  the  traditional
          multicolumn statement of changes in shareholders’ equity.


      [i] The impact of reporting comprehensive income, Ohio CPA Journal;
Columbus; Jan-Mar 1999; Richard J Schmidt.
      Comprehensive income reporting and analysts’ valuation judgements,
Journal of Accounting Research; Chicago; D Eric Hirst; Patrick E Hopkins.
      How companies are complying with the comprehensive income disclosure
requirements; Ohio CPA Journal; Columbus; Jan-Mar 1999;  Linda Campbell;
Dean Crawford; Diana R Ranz.
      Reporting Comprehensive Income;  The Secured Lender; New York;
Mar/Apr 1998;  Eran Echreiber.
      Discussion if comprehensive income reporting and analysts’ valuation
judgements;  Journal of Accounting Research;  Chicago;  1998;  Marlys
Gascho Lipe;
      Avoiding the implementation costs of SFAS #130;  The CPA Journal;
New York;  Jun 1999;  Norman H Godwin;  C Wayne Alderman;
      Disclosure of comprehensive income may be confusing;  Texas Banking;
Austin;  Oct 1996;  Harrison, John S;  Lynch, Chris;
      The call for reporting comprehensive income;  Financial Analysts;
Charlottesville;  Mar/Apr 1996;  Cope, Anthony T;  Johnson, L Todd;
      Comprehensive income;  Management Accounting;  New York;  Dec 1995;
Bisgay, Louis.


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