Performance Reporting of Comprehensive Income and Earnings Manipulations: Based on the Bank Holding Companies

• In Event: Monitoring Effects: Standard Setters, Regulators and Activists

Abstract

In 2011, the FASB issued ASU 2011-05, which mandated that Comprehensive Income (CI) and Other Comprehensive Income items (OCI) be reported in the performance statements (i.e. the income statement or a separate statement of comprehensive income following the income statement) rather than the equity statement. Using ASU 2011-05 as an exogenous event, I explore whether the presentation of accounting information in different statements affects managers’ engagements in accounting manipulation. In particular, I investigate how presenting CI and OCI in the performance statements affects earnings manipulations through selective sales of available-for-sale (AFS) securities in the banking industry. I demonstrate that before the enactment of ASU 2011-05, banks that present CI and OCI in the equity statements engaged in more manipulations of the realized gains and losses on AFS securities than the banks that present CI and OCI in the performance statements. Employing a difference-in-differences design, I also show a larger reduction in manipulations in banks that are mandated to switch the reporting position of OCI, relative to a control group of banks that voluntarily used performance statements before the mandatory adoption. In summary, I find that reporting CI and OCI in the performance statements can help reduce banks’ earnings smoothing behaviors using selective sales of AFS securities.

Author

• Yiting Cao, Boston University