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

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Abstract

I examine the effect of reporting positions of comprehensive income on the banks’ earnings manipulations through selective sales of available-for-sale (AFS) securities. In 2011, FASB issued Accounting Standard Updates (ASU) No. 2011-05 (Update-2011), which requires a more transparent reporting of comprehensive income in the performance statements, rather than in the equity statements. Employing the hand-collected reporting position data of public bank holding companies, I compare two types of banks: the banks that report comprehensive income in the equity statements and are forced to switch to the performance statements in 2012, and the banks that always report comprehensive income in the performance statements and are not affected by Update-2011. Using a difference-in-differences research design, I find that, relative to reporting comprehensive income in the equity statements, reporting comprehensive income in the performance statements reduces banks’ earnings manipulations through selective sales of AFS securities. My results indicate that the reporting position of comprehensive income is important in affecting firms’ manipulations of realized and unrealized fair value changes.

Author

• Yiting Cao, Boston University