The value relevance of comprehensive income and components for industrial firms

The tentative decisions under International Accounting Standards Reporting Comprehensive Income (Performance Reporting) (IAS Plus 2004c) require several items that are noncore business to be included as comprehensive income. Using data from Australian firms we replicate the IAS adjustments and use linear and non-linear association regressions to test value relevance of these components. Essentially, our study provides a market test of the Maines and McDaniel (2000) hypothesis that the inclusion of noncore operations in comprehensive income may introduce extraneous noise for investors as a single class. We find evidence that the incorporation of revaluations of non-current operating assets and the non-reporting of extraordinary items in comprehensive income significantly reduces value relevance, with net income from ordinary operations the dominant valuation metric. Our results are consistent with the argument that temporary income and capital adjustment components should be identified and reported separately in flow and stock accounts in order to signal relative importance to investors. We also raise the questions about whether the IAS should uniformly accept the financial concept of capital.

Key Words: comprehensive income, noisy presentation formats, noncore income components