The Financial Accounting Standards Board (FASB) has issued new guidance for how public and private companies must present other comprehensive income (OCI) and its components in their financial statements. The guidance applies to all companies that report items of OCI but perhaps is most relevant for companies that have historically presented components of OCI as part of their statement of changes in stockholders’ equity – an option that’s no longer available under this guidance.
The new guidance – found in Accounting Standards Update (ASU) 2011-05, Presentation of Comprehensive Income – is intended to increase the prominence of items that are recorded in OCI and improve comparability and transparency in financial statements. The guidance should make it easier for users of financial statements to evaluate the effect of OCI on a company’s overall performance. Be forewarned, though: The guidance could also result in more questions from financial statement users.
The new guidance described in ASU 2011-05 will supersede the presentation options in Topic 220 (previously known as Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income). The guidance, however, affects only the presentation of OCI, not the components that must be reported in OCI. The guidance also doesn’t change how earnings per share are calculated or presented – they’ll continue to be based on net income.
Comprehensive income presentation standards
Both generally accepted accounting principles in the United States of America (US GAAP) and International Financial Reporting Standards (IFRS) require financial statements to present comprehensive income (CI) in two parts:
- Net income and its components, such as income from continuing operations, discontinued operations and extraordinary items, and
- OCI and its components.
CI measures all of a company’s changes in equity that result from “non-owner changes." That means it captures all recognized transactions and other economic events that affect equity in a period, except transactions with the company’s owners, like investments by owners or distributions to owners. According to FASB, even though CI is a “useful measure," information about the components of CI can reveal significantly more than the total amount of CI does.
OCI includes all of the components of CI that aren’t recorded directly on the income statement as a component of net income. Examples include:
- Foreign currency translation adjustments,
- Unrealized holding gains and losses on available-for-sale securities,
- 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,
- Gains and losses relating to pensions and other postretirement benefits, and
- Prior service costs or credits associated with pension or other postretirement benefits.
Even companies that don’t have any of the above items need to be aware of the new guidance. FASB has indicated that other potential upcoming accounting standard changes likely will mean more items must be presented as OCI in the future.
New alternatives for presenting OCI
Until now, US GAAP gave companies three alternatives for presenting their OCI:
- As part of the income statement, below net income and added with it to reach CI,
- In its own statement (“statement of comprehensive income"), which begins with net income and then lists the various OCI components, to arrive at CI, or
- As part of the statement of stockholders’ equity, in a column titled “accumulated OCI," which totals all OCI amounts recorded.
FASB’s new guidance requires companies to present OCI in one of two ways. The first option is to present OCI in a single continuous statement of comprehensive income that lists the components of net income and total net income, the components of OCI and total OCI, and the total of CI.
Alternatively, a company can take a two-statement approach. An income statement must present the components of net income and total net income, and a statement of OCI – immediately following the income statement – must present the components of OCI, a total for OCI and a total for CI. The second statement may begin with net income.
Regardless of the option selected, companies no longer can present adjustments for items reclassified from OCI to net income in their footnotes. They must present the adjustments on the face of the financial statements where the components of net income and OCI are presented, and corresponding adjustments must appear in both net income and OCI.
The idea is to avoid the double counting of items in both net income and OCI. For example, a company might realize gains from investment securities and include them in net income in the current period. An adjustment is necessary because the gains were already included in OCI as unrealized holding gains in that period or earlier periods. The company must deduct the gains through OCI for the period in which they’re included as net income so that they’re accounted for only once.
As in the past, companies are free to present OCI components either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total OCI. The tax effect for each component must be disclosed in the financial statement notes or presented in the statement that presents OCI.
What about IFRS?
Like other recent changes to FASB’s accounting standards, the new guidance is designed to facilitate the convergence of US GAAP with IFRS. But the changes don’t completely converge the requirements for presenting OCI under the two sets of standards.
For example, differences remain over whether an item of income is initially reported in net income or OCI. Nonetheless, users of financial statements will now find it easier to compare statements of CI prepared under US GAAP with those prepared under IFRS.
The guidance in ASU 2011-05 takes effect for public companies during the interim and annual periods beginning after Dec. 15, 2011. It’s effective for private companies for fiscal years ending after Dec. 15, 2012, and interim and annual periods thereafter. Early adoption is permitted.
Public or private companies affected by the guidance must apply it retrospectively for all periods presented in the financial statements.