REPORTING

COMPREHENSIVE INCOME

By Gary J. Brauchle and Cheri L. Reither
IN BRIEF

No Longer Buried in Equity

SFAS No. 130, Reporting Comprehensive Income, requires a company to report comprehensive income and its components in a full set of financial statements and is effective for fiscal years beginning after December 15, 1997. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes net income and other comprehensive income such as foreign currency translation adjustments.

SFAS No. 130 applies to all companies that provide a full set of financial statements. It specifies requirements for--

* reporting formats for comprehensive income and its components,

* calculation and display of reclassification adjustments,

* display of the accumulated balance of other comprehensive income in
equity, and

* interim period reporting.

The authors provide examples of the three reporting formats specified in SFAS No. 130.

In June 1997 the FASB issued SFAS No. 130, Reporting Comprehensive Income, which requires a company to report comprehensive income and its components in a full set of financial statements. The subject of comprehensive income was covered in an article by Neel Foster and Natalie Hall entitled "Reporting Comprehensive Income," which appeared in the October 1996 issue of The CPA Journal. That article discusses the history of comprehensive income and explains why the FASB added the comprehensive income project to its agenda. Although the new standard does not change the present reporting requirements for net income, it considers that amount a major component of comprehensive income. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. Restatement of earlier period financial statements presented for comparison to the current period is required.

Comprehensive Income

Comprehensive income is defined in FASB concepts statements as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Comprehensive income can be most easily understood if it is divided into its two major components: net income and other comprehensive income. Net income is the traditional measure of performance reported as the bottom line of a company's income statement. SFAS No. 130 does not change the reporting requirements for net income or any of its major components (income from continuing operations, discontinued operations, extraordinary items, or cumulative effects of changes in accounting principles).

SFAS No. 130 uses the term "other comprehensive income" to refer to all items of comprehensive income except net income. The most common items of other comprehensive income are foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale securities. Those items arise from the application of SFAS No. 52, Foreign Currency Translation, No. 87, Employers' Accounting for Pensions, and No. 115, Accounting for Certain Investments in Debt and Equity Securities. The accumulated balances of those items are required by those respective standards to be reported within a separate component of equity in a company's balance sheet. However, prior to SFAS No. 130, the current-period change in the balances of those items escaped separate reporting in a primary financial statement. SFAS No. 130 focuses on those changes and requires them to be displayed in a more transparent manner.

SFAS No. 130 applies to all companies that provide a full set of financial statements that include a balance sheet, an income statement, and a statement of cash flows. SFAS No. 130 does not apply to companies with no items of other comprehensive income in any period presented or to not-for-profit organizations that follow the provisions of SFAS No. 117, Financial Statements of Not-for-Profit Organizations.

Major Requirements

The major requirements of SFAS No. 130 relate to the reporting format for comprehensive income and its components. SFAS No. 130 also specifies requirements for 1) the calculation and display of reclassification adjustments, 2) display of the accumulated balance of other comprehensive income in equity, and 3) interim-period reporting.

Reporting Formats. Although SFAS No. 130 requires a company to report information about comprehensive income and its components in a primary financial statement, it provides flexibility as to how that information may be displayed. Basically, a company has three approaches to choose from. It can display the components of other comprehensive income in--

* the income statement below the total for net income,

* a separate statement of comprehensive income that begins with net income, or

* a statement of changes in equity, provided that statement is displayed as a primary financial statement and not in the notes.

The first two choices are referred to as income-statement-type formats, while the third choice is referred to as a statement-of-changes-in-equity format.

SFAS No. 130 also requires a
company to report total comprehensive income in the financial statement where the components of other comprehensive income are displayed. Therefore, regardless of the display format chosen, a company must display net income in such a way that it can be added to the components of other comprehensive income to arrive at total comprehensive income. Although SFAS No. 130 uses the term "comprehensive income" to describe the total of net income plus other comprehensive income, it does not require a company to use that term. Total nonowner changes in equity is a suggested synonym for comprehensive income.

The FASB decided that flexibility in the reporting format was needed for several reasons. First, companies with only one item of other comprehensive income may not want to create a separate statement of comprehensive income to display that item. For those companies, it may be more desirable to add that item to net income at the bottom of the already-existing income statement. Second, some companies that report changes in equity in the
notes to the financial statements may
prefer to report comprehensive income in one of the income-statement-type formats so the statement of changes in equity does not have to be brought forward as a primary financial statement. Furthermore, companies with a complicated statement of changes in equity may prefer to report comprehensive income in one of the income-statement-type formats so as not to further complicate the statement of changes in equity. Finally, companies that want to display comprehensive income in its most transparent fashion may opt for display in one of the income-statement-type formats. The three reporting formats are illustrated in Examples 1, 2, and 3.

Reclassification Adjustments. As previously mentioned, SFAS No. 130 preserves the traditional measure of net income. Theoretically, all amounts recognized in other comprehensive income will
eventually be "recycled" into net income. Because net income and other comprehensive income are both components of comprehensive income, that recycling process creates a dilemma that would result in the double-counting of those amounts in comprehensive income over reporting periods. That dilemma created the necessity for what SFAS No. 130 refers to as "reclassification adjustments." For example, if in the current period a company sells for a gain of $200 an available-for-sale security accounted for according to SFAS No. 115, that $200 gain must be recognized in net income. Assuming the $200 gain was recognized in other comprehensive income as an unrealized gain while the security was held for sale, when the gain is included in net income of the current period it also must be deducted from other comprehensive income to avoid double-counting it in total comprehensive income. That $200 deduction from comprehensive income is referred to as a reclassification adjustment.

SFAS No. 130 requires a company to calculate reclassification adjustments for all items of other comprehensive income except minimum pension liability adjustments. Therefore, those adjustments are required for available-for-sale securities and for foreign currency translation adjustments (whenever an investment in a foreign entity is sold or liquidated). SFAS No. 130 permits a company to display reclassification adjustments on the face of the primary financial statement in which
comprehensive income is presented
or in the notes to the financial statements.

Accumulated Balance of Other Comprehensive Income in Equity. SFAS No. 130 uses the term "accumulated other comprehensive income" to refer to the aggregate amount of a company's other comprehensive income components and requires that amount be reported in the equity section of the balance sheet separately from retained earnings, paid-in capital, and other nonincome equity accounts. SFAS No. 130 also requires the individual components comprising accumulated other comprehensive income (for example, gains and losses on available-for-sale securities and foreign currency translation adjustments) to be disclosed either on the face of the balance sheet, in the statement of changes in equity, or in a note to the financial statements.

Interim-Period Reporting. SFAS No. 130 requires a company to report a total for comprehensive income in condensed financial statements of interim periods issued to shareholders. However, it does not require a company to provide information about the individual components of other comprehensive income as part of that interim-period information. However, if there is a significant difference between net income and comprehensive income, a company may want to voluntarily disclose the individual components of other comprehensive income at interim periods.

One Small Step

SFAS No. 130 represents a small but significant step toward the implementation of the concept of comprehensive income. Although SFAS No. 130 requires the reporting and display of comprehensive income and its components, it does so without addressing the more conceptual questions such as when components of comprehensive income should be recognized, how those components should be measured, and what are the distinguishing characteristics between items included in net income versus items included in other comprehensive income. Even so, the requirement for a more transparent display of information about comprehensive income and its components should enable financial statement users
to evaluate that information more
efficiently and effectively and to
consider its relationship to the overall economic and financial performance of a company.

SFAS No. 130 can be obtained by calling the Financial Accounting Standards Board Order Department at (203) 847-0700, extension 10.