Enhanced Disclosure of Other Comprehensive Income and Increased Value Relevance of Net Income: The Impact of Accounting Standards Update 2011–05

• In Event: Financial Accounting and Reporting 1

Abstract

Accounting Standards Update (ASU) 2011-05 eliminates the option to present other comprehensive income (OCI) in the statement of changes in stockholders’ equity and, instead, requires OCI to be presented in either a combined income statement or a separate statement of comprehensive income. We empirically investigate whether this mandatory change of OCI disclosure format achieves FASB’s stated objective of improving the transparency of financial reporting. First, we find that ASU 2011-05 greatly reduces the earnings persistence of OCI and net income, which suggests that the more prominent display of OCI increases monitoring and limits income smoothing. Second, we find that ASU 2011-05 significantly increases the value relevance of net income, which indicates that the more salient presentation of OCI enables investors to better understand earnings. Our findings suggest that enhanced OCI disclosure under ASU 2011-05 improves financial reporting by helping investors disentangle the intertwined relation between OCI and net income.

Authors

• Linna Shi, University of Cincinnati

• Ping Wang, Pace Univesity

• Nan Zhou, SUNY-Binghamton