In June, the FASB issued Accounting Standards Update No. 2011-05, which will change the financial statement presentation of other comprehensive income. Rather than including it in the statement of changes in equity, items classified as other comprehensive income will be moved to the same page in the financial statements as the income statement.
Entities will have the option to present items of net income and other comprehensive income either in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income.
Components of Comprehensive Income
The new rules do not change the components of comprehensive income, or when an item of other comprehensive income must be reclassified to net income. Furthermore, the new requirements do not change the computation of earnings-per-share, which will continue to be based on net income. However, reclassification adjustments between net income and other comprehensive income must be shown on the face of the income statement, rather than in the footnotes.
The changes are intended to enhance comparability between entities that report under US GAAP and those that report under IFRS. The standards are also intended to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity and increase the prominence of items reported in other comprehensive income. In addition, the Board felt that these presentation changes were needed because of the potential for more or different items to be reflected in other comprehensive income under other proposals.
The new rules are effective from the beginning of 2012 for calendar year-end public entities. Nonpublic entities are required to apply the new requirements in their 2012 year-end financial statements and their interim and annual periods thereafter. The new rules will be applied retrospectively. Early adoption is permitted.
These changes will cause financial statement users to place greater emphasis on other comprehensive income and/or comprehensive income. In addition, it is likely that the increased prominence of other comprehensive income and comprehensive income will also result in more questions from financial statement users. Consequently, we urge companies to consider which presentation (single, continuous statement or separate, consecutive statements) will make most sense for them. We will be happy to help you with your consideration of those options.