In September 2007, the International Accounting Standards Board (IASB) issued Statement of International Accounting Standard No. 1 (IAS 1), ‘‘Presentation of Financial Statement’’. This standard, effective for fiscal years beginning after December 31 2008, requires that comprehensive income (CI) and its components be reported in the financial statements in the period in which they are recognized, consistently with what happened in the U.S. contest, where the notion of CI refers to an all inclusive figure of income expressive of the overall firm’s performance, given by the sum of net income (NI) and other comprehensive income (OCI) components. Previous empirical studies in other countries document mixed evidence on the usefulness of other comprehensive income information to investors, but the majority of the published archival research has not found consistent support for the value relevance of OCI. This paper adds to research on the CI value relevance overcoming two of the most important limits of the previous research, the measurement errors in calculating CI numbers and the lack of information transparency. The main aim of the study is therefore to investigate, through a multivariate analysis approach, if the all inclusive measure of firm’s performance under IAS 1 revised 2007 is for Italian investors more value relevant than the standard accounting measure of firm’s performance. In this study, we provide evidence of the incremental value relevance of the OCI numbers. Unlike the majority of the prior research, our study provides evidence that in the post-IAS 1 revised period, OCI numbers are priced by investors, as is predicted by economic theory for transitory income items. We attribute these findings to the use of post-IAS 1 revised period OCI numbers (as reported OCI), to the use of an incremental information content method to test the value relevance of OCI, to the use of a panel econometric model, which include, as explicative variables, control variables to overcame the omitted variable bias of the regression’s coefficients and dummy variables to control for the well-known differential of negative earnings. Furthermore, we document that two components of OCI, foreign exchange differences (IAS 21) and cash flow hedge (IAS 39b) are priced by investors. Our evidence suggest that Italian investors pay attention to OCI information reported in the statement of comprehensive income (as reported OCI), not to the OCI numbers (as if Oci), that can be found in the statements of changes in equity, probably due to the increased transparency of CI disclosure under IAS 1 2007 revised. The value of the paper is the empirical investigation of a comprehensive measure of firm’s performance in the context of Italian economy, scarcely surveyed under this profile, and the enrichment of the literature with another paper that follows the value relevance methodology.
"Examining the superiority of comprehensive income to net income as measure of firm’s performance in the Italian stock exchange" - Financial Reporting and busines Communication conference, Bristol, UK, 7/8 luglio
FERRARO, Olga
2011-01-01
Abstract
In September 2007, the International Accounting Standards Board (IASB) issued Statement of International Accounting Standard No. 1 (IAS 1), ‘‘Presentation of Financial Statement’’. This standard, effective for fiscal years beginning after December 31 2008, requires that comprehensive income (CI) and its components be reported in the financial statements in the period in which they are recognized, consistently with what happened in the U.S. contest, where the notion of CI refers to an all inclusive figure of income expressive of the overall firm’s performance, given by the sum of net income (NI) and other comprehensive income (OCI) components. Previous empirical studies in other countries document mixed evidence on the usefulness of other comprehensive income information to investors, but the majority of the published archival research has not found consistent support for the value relevance of OCI. This paper adds to research on the CI value relevance overcoming two of the most important limits of the previous research, the measurement errors in calculating CI numbers and the lack of information transparency. The main aim of the study is therefore to investigate, through a multivariate analysis approach, if the all inclusive measure of firm’s performance under IAS 1 revised 2007 is for Italian investors more value relevant than the standard accounting measure of firm’s performance. In this study, we provide evidence of the incremental value relevance of the OCI numbers. Unlike the majority of the prior research, our study provides evidence that in the post-IAS 1 revised period, OCI numbers are priced by investors, as is predicted by economic theory for transitory income items. We attribute these findings to the use of post-IAS 1 revised period OCI numbers (as reported OCI), to the use of an incremental information content method to test the value relevance of OCI, to the use of a panel econometric model, which include, as explicative variables, control variables to overcame the omitted variable bias of the regression’s coefficients and dummy variables to control for the well-known differential of negative earnings. Furthermore, we document that two components of OCI, foreign exchange differences (IAS 21) and cash flow hedge (IAS 39b) are priced by investors. Our evidence suggest that Italian investors pay attention to OCI information reported in the statement of comprehensive income (as reported OCI), not to the OCI numbers (as if Oci), that can be found in the statements of changes in equity, probably due to the increased transparency of CI disclosure under IAS 1 2007 revised. The value of the paper is the empirical investigation of a comprehensive measure of firm’s performance in the context of Italian economy, scarcely surveyed under this profile, and the enrichment of the literature with another paper that follows the value relevance methodology.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
