Alternative Methologies To Present Comprehensive Income Accounting Essay

Category: Accounting

What is comprehensive income

Comprehensive income is the change in net assets of a business entity during the operating cycle. It includes all changes in equity except those resulting from investments by owners and distributions to owners (FASB ASC 220-10-20). In other words, comprehensive income provides investors detailed information to assess the company's operational activities and future earning ability.

Comprehensive income is composed of net income, gains and losses from foreign currency exchange, unrealized gains and losses from marketable securities and pension plans. The latter three elements are also the components of "Other Comprehensive Income".

One statement approach

This approach allows companies to report comprehensive income items at the bottom of the traditional income statement after net income (see appendix 1)

Advantages:

Since companies only need to prepare one income statement, this approach reduces the cost of preparing financial statement.

Investors can clearly identify the other comprehensive income from this income statement, so they are more likely to take this element into consideration when evaluating the performance of one company.

Disadvantages

Investors may tend to use total comprehensive income as the new bottom line to evaluate the companies. The importance of net income will be reduced.

More volatility will be added to the income statement under this situation. If other comprehensive income is materially positive, it may turn operating loss into a profit.

The second disadvantage is obvious from the comprehensive income statement of Lihir Gold Ltd. In 2007, this company had a net loss, but the large other comprehensive income made the total comprehensive income a net profit.

Net income is still considered the predominant measure of future cash flow. Therefore, very few companies use this method to report their comprehensive income.

Two-statement approach

Under this approach, companies will report a separate statement of comprehensive income other than the income statement.

Advantages:

This approach reduces distracting disclosures from the other comprehensive income items so the income statement becomes clearer and easier to analyze.

The separate statement of comprehensive income improves the transparency by providing more information for investors. Therefore, it reduces the possibility for companies to manipulate the earning by buying or selling securities.

Disadvantage:

Companies need to prepare two statements; hence this approach will increase the cost of preparing financial statements.

Compared to appendix 1, the statement from Allianz Group provides more information for each other comprehensive income item. It does not only provide the subtotal for each category but also how companies calculate these numbers. This statement enables investors to better understand the company.

Conclusion

Most companies prefer to use the statement of comprehensive income approach despite its higher cost. With more information, this method helps companies better attract investors. Few companies adopt the one statement approach because it may confuse the investors. If your company wants to change method, two-statement approach is a good choice.

Appendix 1

LIHIR GOLD LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year ended 31 December 2007, 2006 and 2005

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2007

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2005

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Revenue

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498.4

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386.0

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264.0

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Cost of sales

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Gross profit from mining activities

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237.1

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175.0

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67.6

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Corporate expense

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Project studies

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Exploration expense

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Operating profit before other income / (expense)

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Other income / (expense):

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Hedging loss

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Other expenses

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Operating profit before finance costs

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Financial income

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Financial expenses

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Profit / (loss)Â before tax

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Income tax benefit / (expense)

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Net profit / (loss)Â after tax

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Other comprehensive income

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Exchange difference on translation of foreign operations

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27

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Cash flow hedges

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Share based payments

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Net change in fair value of available for sale financial assets

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Income tax on other comprehensive income

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Other comprehensive income for the period net of tax

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Total comprehensive income

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Earnings / (loss)Â per share

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