Comprehensive income in Europe: Valuation, prediction and conservatism issues

The IASB Discussion Paper (2008), Preliminary Views on Financial Statement Presentation promises to extend the 'fair value' measurement concept into an aggregated comprehensive income statement. This article extends prior Anglo-Saxon based research by using 56,700 European firm years from sixteen countries and by examining valuation, prediction and conservatism issues. Findings show net income dominates aggregated comprehensive income as a shareholder valuation metric and in predicting cash flows. Results are robust to pooled and country specific regressions, controls for non-linearities, the impact of reporting incentives, and the underlying accounting framework (local GAAP, US GAAP, IFRS). Aggregated comprehensive income also switches the conservative attributes of income towards a more timely recognition of good news over bad news, thus reducing the agency contracting role for debt. Disaggregated components of comprehensive income, however, do provide incremental situation specific information; the available-for-sale securities component for the general investor and revaluation reserves and exchange rate translations for financial analysts for their price revisions. Our research offers several contributions to the policy debate. The functional aggregation of income that mixes operating capital increments with unrealised gains and with realised historic net income introduces considerable noise and reduces the utility of the contracting role. The agenda item for the IASB should consider how to disaggregate and report income by event nature with a clear delineation on capital increments, permanence of income, and unrealised financial gains. These issues are especially important in Continental Europe reliant to a greater extent on debt capital and with an under-developed corpus of financial analysts.