Comprehensive income under IFRS:
evidence from a cross-sectional analysis
Bruno De Rosa
Department of Computer
Department of Business
Department of Business
and Management Science
University of Trento
University of Trieste
University of Naples “Federico II”
Via Inama 5, Trento (Italy)
P.le Europa 1, Trieste (Italy)
Via Cinthia 26, Napoli (Italy)
Phone: +39 0481 882129
Phone: +39 040 558 7914
Phone: +39 347 348 9636
This research focuses on the concept of comprehensive income emerging from IFRS.
Comprehensive income is considered an all-inclusive measure. According to the original concept, the profit and
loss for a period should include all revenues, expenses, gains and losses recognized during the period;
consequently, no revenues, expenses, gains and losses should be recognized directly in equity.
The current application of comprehensive income under IFRS differs from the original all-inclusive definition,
since some items may be considered either as components of equity or as elements of other recognized income
and expense, reported separately from net income.
The aim of this research is to verify whether the adoption of IFRS has changed the value relevance of financial
performance and whether other recognized income and expense items have increased or decreased the
variability of reported income.
A cross-sectional analysis of holding gains and losses is applied on a data set built on the consolidated financial
statements, for the year 2005, of a sample of Italian IFRS first-time adopters. We examine whether and how
alternative presentation formats affects the volatility of income.
One of the fundamental policy motivations for the application of the concept of comprehensive income is that its
application could lead to reveal inherent risks that are not exposed by traditional transaction based reporting.
The analysis shows a low level of income variability, suggesting that Italian companies may be applying the
comprehensive income approach in a manner that thwarts the policy objective of a more thorough disclosure of
Key words: comprehensive income, IFRS, total recognised income and expense.
The International Accounting Standards Board (IASB) is reviewing the reporting format of performance. The
main objective is to classify income components in order of improving the usefulness of financial information.
In the 2006 the IASB has issued an exposure draft (ED) of proposed amendments of IAS 1 “Presentation of
financial statements”, which has suggested the introduction of a statement of performance with only non-owner
changes in equity.
Whittington (2005) states that the most important reason to develop a statement of performance comes from the
increasing use of fair value in the accounting standards (Whittington, 2005). IFRS currently prescribe the use of
fair value for the revaluation of property, plant and equipment (IAS 16), the actuarial gains and losses of
employee benefits (IAS 19), the exchange differences on monetary items and on net investment in foreign
operations (IAS 21), the revaluation of intangible assets (IAS 38), the holding gains and losses of financial
instruments (IAS 39), the gains and losses of investment properties (IAS 40), the gains and losses of agriculture
items (IAS 41).
The accounting treatment of fair value changes is not the same in every standard. Some changes in value go
through the income statement and other ones are reported directly in equity. The items recognized in equity are
changes in revaluation surplus, gains and losses arising from translating the financial statement of a foreign
operations, gains and losses on remeasuring available-for-sale financial assets, the effective portion of gains and
losses on hedging instruments in a cash flow hedge and actuarial gains and losses on defined benefit plans.
This reporting and presentation of income components suggests a comprehensive income (CI) concept. The
IASB has classified those items reported in equity as other recognized income and expense, although in
literature they are known as dirty surplus or other comprehensive income category.
The comprehensive income concept is quite controversial and it has often been misinterpreted. Pacter (1985)
explains that comprehensive income is not strictly related to the use of current accounting. Kam (1990)
explicates that comprehensive income is not a prerogative of the capital maintenance approach, nor of the
transaction-based approach. Storey (1990) and Johnson et al. (1995) affirm that the current conception of
comprehensive income is a result of a compromise. The AcSB (2004) believe that there is little conceptual basis
for excluding gains and losses on value changes of financial instruments from net income (NI).
As far as the IASB income reporting and presentation is regarded, Thinggaard et al. (2006) have noted the
inconsistency of framework. The framework’s definition of income (paragraph 70) suggests a clean surplus
concept, while the framework’s explanation of the relation between income and the concepts of capital and
capital maintenance (paragraphs 69 and 81) suggests a dirty surplus concept.
In literature, there are many capital-market researches providing evidence that net income is more relevant than
comprehensive income. The value relevance is determined by measuring the correlation between income
variables and market prices. None of these methodologies demonstrating the marginality income components
outside net income explains why those items are less relevant and if the lower level of relevance is affected by
the measurement option. Therefore, we investigate if companies listed on the Italian Stock Exchange are
applying IFRS in a manner that thwarts the policy objective of a more thorough disclosure of financial risk.
This study contributes by analysing: (i) whether the exclusion of other recognized income and expense from net
income involves a substantial modification of the value relevance of reported income; (ii) the reported income at
equity depends on a mandatory standard application or on an option measurement.
This paper is structured as follows. In the next section the main theoretical literature on comprehensive income
is reviewed, to enlighten the origins of this concept and to explain the most important capital-market researches
on the informative usefulness of comprehensive income. The following section develops the main hypothesis
that clean surplus measure of performance is no more value relevant than dirty surplus measure. The paper
concludes with the results of an empirical analysis. We examine the consolidated financial statements related to
the 2005 fiscal year of a sample of 93 companies listed on the Italian Stock Exchange.
2. Theoretical background
Along with the primary conception of all-inclusive income, «the income statement for any given period should
reflect all revenues properly given accounting recognition and all costs written off during the period, regardless
of whether or not they are the results of operations in that period». (A.A.A., 1936). Accordingly, no revenues,
expenses, gains and losses should be recognized directly in earned surplus – retained earnings or undistributed
profits – (Paton, Littleton, 1940).
The all-inclusive income is a clean surplus measure: the book value of equity at the end of a period is equal to
the book value of equity at the beginning of the period plus net income and minus dividend, net of contributions
by owners. The total recognized income and expense all changes in equity, including information about
accounting adjustments and all nonowner changes in equity.
The all-inclusive income has the peculiarity of having an attitude to express information on the survival and
expansion opportunities of the firm (Bedford, 1965). It has also the advantage of avoiding discretionary
omissions of losses or gains in the income statement, thereby presenting a more or less favourable final result
(FASB, 1984). Nevertheless, the total recognized income and expense may be split into subtotals. It is possible
to distinguish ordinary and extraordinary items, recurring and non recurring items, realised and unrealised items
and so on. Barker (2004) has proposed the separation of earning in non-operating, non-recurring or non-
controllable by management items.
The IASB has adopted a comprehensive income approach. Comprehensive income may be defined in the
following manner: «Comprehensive income is the change in equity (net assets) of an entity during a period from
transactions and other events and circumstances from nonowner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions to owners» (FASB, 1980).
Comprehensive income captures every variations of equity deriving from two mains sources: in one hand, this
measure is affected by transactions, resulting from management decisions; in the other hand, the comprehensive
income amount is also conditioned by non-voluntary events as the changes of value deriving from holding
activities and liabilities.
The current concept of comprehensive income is rather different from the original application of all-inclusive.
Along with the comprehensive income concept, some items are not included in net income; those items may be
considered either as components of equity, rather than revenues and expenses, or as elements of comprehensive
income outside net income.
The representation of some items at equity also depends by the concept of capital and capital maintenance.
Hendriksen (1970) clarifies that under the concept of capital maintenance, the measurement of income derives
by the comparison of net asset values at the end of the period with those at the beginning of the period and net
income is the result of normal operations, abnormal transactions and capital gains and losses resulting from
unexpected value changes. If the main estimation criteria is based in terms of historical cost, only realized
capital gains and losses are included. If the estimation criteria is based in terms of current values, net income
also includes capital gains and losses arising from price changes, whether these capital gains and losses have not
been realized through sale or exchange.
There is none agreement on the best way of accounting the changes in value of financial statement items. The
framework states that according with the financial capital maintenance approach, changes in value of assets and
liabilities are holding gains or losses. Along with the physical capital approach, the increase in the price of
items, that a firm must have if it is to continue in business, are not elements of net income, but a capital
maintenance to be placed directly in owner’s equity.
In literature, under current value accounting, Edwards and Bell (1961) include both realized gains and losses
and unrealized holding gain and losses. Under basic current purchasing power, Mathews and Grant (1958)
include only the increment and decrement of non-monetary items going directly to equity instead of income.
Under comprehensive current purchasing power, Gynther (1966) and Barton (1977) include the increment and
decrement of both monetary and non-monetary items at equity.
In the last decade, the main researches on comprehensive income were related on the reporting of those items to
include at equity, despite on the capital maintenance approach. Specially, some studies are addressed to examine
the relevance of the CI disclosure and the usefulness of CI in respect to other income measures. Other researches
analyse whether financial statement users are affected by the reporting format, specially comparing the one
single income statement to the two income statement.
Some empirical researches have analysed the value relevance of both income as a whole and its components, by
examining the association between returns and different measures of income.
Ohlson (1995) explains that clean surplus measure is useful in explaining the relation between book value and
financial market. Dhaliwal et al. (1999) show that there is no evidence that comprehensive income is better then
net income at explaining returns. The individual examination of the main comprehensive income components
required by SFAS 130 has determined that only marketable securities adjustment improves the explanatory
power of the model, while foreign currency translation and minimum pension liability adjustments are not
decision relevant. Biddle and Choi (2002) have extended this research in order of explaining the relative value
of income and it has been verified that there is a strong association between returns and income as defined under
O’Hanlon and Pope (1999) have not found any evidence supporting the value relevance of asset revaluations
and foreign currency adjustments. Dee (2000) makes evident that the items of comprehensive income outside of
net income are not good predictor of future value, because they are transitory and explains that the factors that
make up some items of comprehensive income are unrelated to the firm value and they are not useful in the
management performance evaluation. Dehning and Ratliff (2004) provide an examination of the usefulness of
comprehensive income disclosure as required by SFAS 130 and they show there is no difference in the market’s
valuation of comprehensive income adjustments before and after implementation of the accounting standard.
Pope and Wang (2005) have found that the focus on some earning components (dirty surplus configuration)
captures relevant information about the future cash flow prediction.
3. Hypothesis development
We investigate the year 2005 consolidated financial statements of 93 Italian companies, the second to be
prepared in Italy according to IFRS. The sampled companies were randomly selected among those listed on the
Milan Stock Exchange and it also includes banks and insurance companies. We originally selected 100
companies, representing more than 35% of the number of listed companies on the Milan Stock Exchange.
Subsequently, 7 companies were dropped from the sample for inconsistencies in the reported data or because
they missed to file a consolidated financial statement. The break up of the sample by industry is reported in the
Table 1 – Sample used in the analysis
The following items were extrapolated from the sample companies’ financial statements, by analysing the
relevant statements (income statement, balance sheet, statement of changes in shareholders’ equity) and by
consulting the notes to the financial statements.
IAS 16, Revaluation of property, plant, and equipment (REV_PROP);
IAS 19, Actuarial gains and losses on defined benefit post-employment plans (ACTUARIAL);
IAS 21, Foreign exchange differences on monetary items and on net investments in foreign
IAS 38, Revaluation of intangible assets (REV_INTAN);
IAS 39, Gains and losses on available for sale financial instruments (ASF);
IAS 39, Effective portion of gains and losses on derivatives used as hedging instruments in a
cash flow hedge (CF_HEDGE).
All the above-mentioned items constitute, according to the clean surplus view, and consistently with the IASB’s
framework, income and expense. Under IFRS, their inclusion in shareholders’ equity, instead of being reported
in the income statement, is the consequence of the application of specific dispositions of the international
standards cited in the previous list. All these items would be labelled as “other recognised income and expense”
under the reformed IAS 1, and reported within the “Statement of total recognised income and expense”, either in
a single statement format, or as a separate statement from the income statement.
We calculated an all-inclusive measure of performance, adding all income and expense currently reported as
changes in shareholders’ equity, to net income, as reported in the income statement. We aim to obtain what
could labelled as comprehensive income, to be reported in the new income statement, as envisaged by the
proposed amendment of IAS 1. The all-inclusive measure of performance we calculate is derived as follows:
CI = NET INCOMEIFRS + REV_PROP + ACTUARIAL + FOREX + REV_INTAN + AFS + CF_HEDGE
Please note that no information is provided in the sample companies’ financial statements about “comprehensive
income”; the data used for our analysis derive from a reconstruction of a clean surplus measure of performance
by isolating all items that could be regarded as “other recognised income and expense” by the latest issue of IAS 1.
As mentioned in the previous section, most previous capital-market research in this field provides evidence that
net income is more value relevant than comprehensive income. Given the limited data set available, having
IFRS been applied in Italy only since 2005, investigating about the value relevance of comprehensive income
employing capital market research methods is not possible in this context, yet. Our aim is to consider whether
application of IFRS by companies listed on the Italian Stock Exchange leads to a more thorough disclosure of
financial risk. In our framework, this translates into investigating whether the sampled companies report
significant differences between their net income (determined under IFRS) and comprehensive income, as
recalculated in this study. Previous research in this field (Maffei, 2006) has suggested that the impact of
comprehensive income item in Italian companies could not be material. Our goal is testing the hypothesis that
clean surplus measures of performance have no more value relevance than dirty surplus measures. Not having a
complete time series of data at our disposal, necessary in order to perform market based research, we focus on a
methodology based on the cross-sectional analysis of net income and the clean surplus measure of performance
we calculated by adding to net income the item directly reported in shareholders’ equity. Given the data
availability, we can only infer partial conclusions from our analysis: the value relevance of financial information
should be empirically tested in terms of a statistical association between accounting values and market values
(Watts and Zimmerman, 1986). If the distributions of net income and comprehensive income of the sample
companies are not statistically different, we can conclude that the former is no more value relevant than the
latter (however, both measures could lack value relevance in the capital market). In this sense, lacking any
statistically significative difference between net income and comprehensive income, we cannot assume that
comprehensive income is more value relevant than net income.
If, however, net income and comprehensive income do differ, and if this difference is statistically significant,
then we cannot make any inferences on the relative value relevance of the two measures of performance, unless
an adequate time series of market data is used. In a word, we cannot test, in our cross-sectional analysis, whether
net income is more value relevant than comprehensive income (or vice-versa). We can only assess whether
comprehensive income is as value relevant as net income.
Our hypothesis can be therefore expressed as follows:
H0: clean surplus measure of performance is no more value relevant than dirty surplus measure.
Given the data set available and the methodology we employed, the research hypothesis can be reformulated as
H1: the comprehensive income of sampled Italian companies, determined under IFRS, is no more value relevant
than net income.
H2: There are no statistically significative differences between the distributions of net income and
comprehensive income in our sample.
H2 needs more clarification: we do not expect that, taken singularly, each of the “other recognised income and
expense” items mentioned above to be irrelevant: there may be the case in which some of those items generate a
significative difference between net income and comprehensive income. We do expect, however, that all the
items, considered together, would not produce a significative effect. Our sample also includes banks and
insurance companies. Given the important role played by financial instruments in these companies, especially
derivatives employed for hedging, it is important to test our hypotheses on a sub-set of our sample, comprising
only banks and insurance companies, in order to isolate the effect the fair value of financial instruments have on
the determination of comprehensive income.
4. Data description and results
The sample consists of 93 companies quoted at the Italian Stock Exchange. This figure represents the 33% of all
listed companies in Italy. The selection was made according the following criteria: the sample has to be
representative both of the Blue Chips and Stars segments and of the service, industrial and finance sectors;
corporations have not to be in bankruptcy; the financial statements have to be written off according with IFRS;
companies are not IFRS first-time adopters.
We have retrieved net income and other recognized income and expense. The sum of net income and other
recognized income and expense is comprehensive income. Table 2 shows the percentage variation passing from
net income to comprehensive income.
Table 2 – Other recognized income and expense incidence
% variation between CI and NI
Number of companies
Percentages of companies
- 100% – -50%
-50% – 0%
0% – + 50%
+50% – +100%
The category other recognized income and expense has been distinguished in revaluation surplus, actuarial gains
and losses on defined benefit plans, gains and losses arising from translating the financial statement of a foreign
operations, gains and losses on remeasuring available-for-sale financial assets, the effective portion of gains and
losses on hedging instruments in a cash flow hedge. The items other includes “undefined” and “unclear” other
recognised income and expense items. Table 3 shows the weight of each analysed item, contributing to the
difference comprehensive income minus net income.
Table 3 – Contributions of each other recognized income and expense item
1 3 0 1 1 0
-50% – -0,1%
0 5 0 0 8 0
90 48 93 58 51 88
+0,1% – +50%
1 6 0 5 19 2
1 31 0 29 14 3
93 93 93 93 93 93
Table 3 shows that a few companies adopt the options that allow the application of the revaluation surplus and
of the actuarial gains and losses on defined benefit post-employment plans directly at equity. On the other hand,
about half of the sampled companies apply the IAS 21 and IAS 39.
Table 4 provides descriptive statistics, in relation to minimum, maximum, mean, standard deviation and median.
Table 4 – Descriptive statistics (€/k)
Service/Blue Chips NI
Service/Blue Chips CI
44.122,00 9.720,00 13.668,37 4.748,00
44.122,00 9.983,03 13.586,94 6.368,50
Industrial/Blue Chips NI
-366.346 1.420.000 228.969,64 406.579,32 96.598,00
Industrial/Blue Chips CI
-323.938 2.345.000 320.314,21 640.181,21 105.671,00
115.744,0 17.470,00 30.831,40 6.077,00
115.744,0 18.872,17 30.976,91 8.064,00
Financial/Blue Chips NI
-699.879 3.132.000 714.031,50 938.592,48 310.894,50
Financial/Blue Chips CI
7.677.500 1.053.480,37 1.719.301,88 373.231,00
81.666,00 30.681,60 38.943,82 29.282,00
81.275,60 39.249,06 25.716,80 28.000,00
One of the main difficulty of this analysis is the impossibility of using time series techniques due to shortage of
data. At the moment, listed companies have not issued more than 2 financial statements according to IFRS.
Notwithstanding, the first IFRS financial statement is not comparable to the second one due to IFRS 1
simplifications (e.g. the prospective application of IAS 39). Thus, the observations for a firm are restricted to
one economic period. That is the reason why we use cross-section techniques, although it means losing the time
In order to evaluate whether the exclusion of other recognized income and expense from net income involves a
substantial modification of the value relevance of reported income, we provide a significance test between net
income (NI) and comprehensive income (CI), with the aim of verifying if the difference is statically relevance. It
is used the t-test for paired sample. The confidence level ? is fixed at 0,05 (? = 5%).
Test 1 – µ1 is the mean of NI distribution and µ2 is the mean of CI distribution. We verify if µ1 = µ2.
Table 5 – t-test
Service/Blue Chips NI – CI -36.287,30
Service/Stars NI – CI -263,03 >0,05
Industrial/Blue Chips NI – CI -91.344,60
Industrial/Stars NI – CI -1.402,17 <0,05
Financial/Blue Chips NI – CI -339.449,00
Financial/Stars NI – CI -8.567,00 >0,05
The difference between NI and CI is not statistically relevant – the differences between µ1 and µ2 is casual – for
the following categories (p-value is higher then the confidence level ? = 0,05):
We can conclude that CI is no more value relevant than NI.
The difference between NI and CI is statistically relevant – the differences between µ1 and µ2 is not casual – for
the Industrial/Star category (p-value is smaller then the confidence level ? = 0,05). We can conclude that CI may
be more value relevant than NI.
6. Final remarks
The exposure draft (ED) of proposed amendments of IAS 1 “Presentation of financial statements” requires firms
to clearly disclose, at certain conditions, unrealised gains and losses on revaluation of property, plant, and
equipment, actuarial gains and losses on defined benefit post-employment plans, foreign exchange differences
on monetary items and on net investments in foreign entities, revaluation of intangible assets, gains and losses
on available for sale financial instruments, effective portion of gains and losses on derivatives used as hedging
instruments in a cash flow hedge. This approach is related to the comprehensive income concept.
In this paper, we examine data for companies listed on the Italian Stock Exchange in periods immediately after
the IFRS first-time adoption, in order to avoid distortions. We verify if clean surplus measure of performance is
no more value relevant than dirty surplus measure and, specially, if the comprehensive income of sampled
Italian companies, determined under IFRS, is no more value relevant than net income. The idea is that there are
no statistically significative differences between the distributions of net income and comprehensive income in
Not having a complete time series of data at our disposal, necessary to perform market based research, we focus
on a methodology based on the cross-sectional analysis of net income and clean surplus measures of
performance, calculated by adding to net income the item directly reported in shareholders’ equity.
We find that the distributions of net income and comprehensive income of the sample companies are not
statistically different but the category Industrial/Stars.
The lack of value relevance difference between NI and CI may be explained in consideration that many
companies are reluctant to apply the revaluation surplus approach to property, plant, and equipment and
intangible assets and to input the actuarial gains and losses on defined benefit post-employment plans directly at
equity. Moreover, apart from IAS 21, which provides that foreign exchange differences on monetary items and
on net investments in foreign entities must be showed at equity, companies have the opportunity to not apply the
cash flow hedge rules and, at certain conditions, they may not classify financial instruments in the available-for-
sale category, reporting the value variation at profit and loss.
The analysis shows a low level of income variability passing from a dirty surplus to clean surplus, suggesting
that Italian companies may be applying the comprehensive income approach in a manner that thwarts the policy
objective of a more thorough disclosure of financial risk.
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