Formato y Resultados de la encuesta de prestadores de servicios

Definition: Accumulated other comprehensive income (AOCI) accrues all items of OCI, which archives unrealised and realised gains and losses from specific business transactions (Jones & Smith, 2011; Hirst & Hopkins, 1998; Rees & Shane, 2012; Black, 2016).

These irregular or unusual gains/losses recorded in OCI include foreign currency translation adjustments, minimum pension benefit plans and marketable securities classed as available for sale (Elliott & Hanna, 1996; Bradshaw & Sloan, 2002; Cready et al., 2010). The unusual gains and losses of OCI are deferred in the balance sheet’s AOCI until realised (Dhaliwal et al., 1999; Jones & Smith, 2011).

Jones and Smith (2011) argued that the correlation between gains and losses presented in OCI and AOCI are very high on the balance sheet. At the time of sale of assets or the settlement of obligation, accumulated OCI gains or losses will ‘recycle’. For instance, if the fair value of marketable securities is sold for an accumulated gain, then this gain will be eliminated from AOCI on the balance

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sheet and be recorded as a negative item of OCI, while also being documented as a positive component of net income and cash flow.

Regular reversal of OCI items leads to negative persistence, as per the current accounting treatment of OCI gains and losses (Black, 2016; Jones & Smith, 2011). However, unrealised OCI gains and losses may persist in part of the balance sheet for many years until the sale of underlying assets or settlement of liability (Emrick et al., 2006).

The use of AOCI is expanded to identify numerous variations in net assets and, probably, the extension of OCI items, strengthening the perception that the FASB must ultimately come to terms with the difference between OCI and NI (Rees & Shane, 2012).

The realised gains and losses on marketable securities detained by commercial banks and re-categorised from AOCI to net income offer step-by-step information to the market (Dong et al., 2011; Rees & Shane, 2012).

These re-categorised gains and losses of OCI are treated like other earnings components with high persistence, while gains and losses that are unrealised and documented in OCI are treated like earnings items with low persistence (Dong et al., 2011).

Ohlson (1995) argued that transitory flow of OCI items should not be included at the time of valuing shareholders’ equity and predicting upcoming earnings, although the ‘supplies’ of these items included in AOCI ‘may be pertinent for the sake of predicting and assets valuation’. In particular, Ohlson (1999) claimed that predicting the insignificance and unimportance value suggests that an item is transitory if these circumstance hold.

The transitory flow of OCI items may not be valuable for obligation contracting. However, Ohlson (1999) also argued that the OCI may be a valuable pointer of

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stockholders’ wealth due to their impacts on the book value of shareholder’s equity through AOCI.

Black (2016) reviewed the possibility of conducting research on AOCI and tier 1 capital for financial organisations. He argued that recent changes in accounting treatment of AOCI are important to consider while calculating regulatory capital for banks. He further argued that tier 1 capital is considered an important indicator of solvency and financial strength of a bank.

Similarly, debate between standard setters and researchers regarding OCI and numerous similar issues were related to the Federal Deposit Insurance Corporation (FDIC) via comments on changes that were proposed to tier 1 capital. Banking organisations, industry groups and public officials gave contrasting opinions regarding the inclusion of AOCI components in common shareholders’ equity in tier 1 capital. They argued that inclusion of most AOCI components in tier 1 capital, particularly gains and losses that are unrealised on AFS debt security, may cause volatility in capital levels (Black, 2016).

However, FDIC believed that the planned changes in the accounting treatment of AOCI in relation to the measurement of regulatory capital-improved FDIC- supervised institutions posed real risk at a particular time. The FDIC also claimed that accumulated OCI is a fundamental indicator of market spectators, which is used to assess the capital strength of financial institutions (Black, 2016).

Smith and Reither (1996) argued that accrued balance of pension plan liability constantly decreases shareholders’ equity. The variation in minimum pension liability is recorded as one component of OCI, as per the exposure draft FASB (1975) provision. The change in comprehensive income depends on the decrease or increase in equity balance. The amount recognised in OCI may be volatile as an entity identifying an adjustment, which reduces equity and comprehensive income in one period and reverses that adjustment, with an increase in equity and comprehensive income, in the following period.

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AOCI is an important measure of earnings quality for a range of reasons, including: the reclassification from AOCI to NI offers step-by-step information to the market (Dong et al., 2011; Rees & Shane, 2012); it is an important indicator for investors to assess the financial position of entities (Black, 2016); reclassification of gains and losses from AOCI to earnings in the subsequent period increases transparency and visibility of earnings (Hernandez, 2003); and it avoids repeating gains/losses in OCI as opposed to gains/losses presented in reported earnings (Hunton et al., 2006).

When presenting OCI gains and losses as part of the changes in the balance sheet account, AOCI is not prominent and, therefore, reduces the transparency of earnings items (Hirst & Hopkins, 1998; Maines, 1995), reduces expert aptitude to notice poor earnings quality and earnings management (Hirst & Hopkins, 1998), and captures various changes in assets (Rees & Shane, 2012). Further, AOCI includes dirty surplus items, which impair the quality of earnings and reduce the usefulness of income information (Dhaliwal et al., 1999; Biddle & Choi, 2006).

2.7.1: Reclassification Adjustments out of Accumulated Other Comprehensive Income

The FASB requires entities to display separately the OCI components in comprehensive income. Stakeholders raised many concerns on the reclassification adjustments out of AOCI. They argued that timely reclassification adjustment avoids double counting and increases the transparency of OCI items. In addition, they claimed that allowing reclassification adjustments to be reported in the footnotes may present vague information and, as a result, reduce the transparency of information.

2.7.1.1: Location of OCI items and Transparency

SFAS No. 130 allows entities to show reclassification adjustment in the statement of comprehensive income or in the footnotes (FASB, 1997). Regarding the display of information in the statement of comprehensive income, FASB require entities to show each component of reclassification adjustment except pension

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liability adjustment or total OCI displayed. Reclassification adjustments are not organised for the adjustments of minimum pension plan liability, because these adjustments are measured by mesh or plugging (Ketz, 1999; Foster & Hall, 1996; Hunton et al., 2006; Brauchle & Reither, 1997).

Hunton et al. (2006) argued that the realised gains and losses on sales of marketable security is the only OCI component that is clearly presented in the financial statement where comprehensive income is presented.

SFAS No. 130 offers numerous potential formats for reporting OCI items (FASB, 1997). However, FASB encourages entities to report OCI items in the income statement. This can be done by merging the statement of earnings with the statement of comprehensive income or by displaying two different statements separately. The least preferred format for reporting OCI items was in a statement of changes in shareholders’ equity (Ketz, 1999; Bamber et al., 2010; Bhamornsiri & Wiggins, 2001; Maines & McDaniel, 2000).

Several respondents, who prepared financial statements, claimed that the location of OCI items and reclassification adjustments may affect the judgement of investors (Yen et al., 2007; Shi et al., 2017).

2.7.1.2: Double Counting of OCI Items in Net Income and Transparent Information

SFAS No. 130 permitted entities to display all CI items net of income taxes (FASB, 1997). Conversely, entities could show all components of CI on a before- tax basis and link the total tax, because of each OCI item. Variations in presenting OCI items does not affect liability of income tax; therefore, the expense of income tax or benefit is offset by deferred taxes (Ketz, 1999; Hunton et al., 2006; Foster & Hall, 1996).

The FASB prefers not to double count business transactions in comprehensive income, which may be likely if an entity places OCI items into the statement of

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comprehensive income in one year and the same items into the statement of operations in a later year.

To manage the risk of double counting, the FASB requires entities to record reclassification adjustments for transparent information (Ketz, 1999; Hunton et al., 2006; Cope et al., 1996; Goncharov & Hodgson, 2011; Jones & Wilson, 2000; Nobes, 2012; Luecke, 1998).

Nishikawa et al. (2016) used the terms ‘reclassification adjustments’ and ‘recycling’ interchangeably. They argued that the main purpose of reclassification adjustment is to avoid double counting of CI items that are shown once in net income and again in OCI.

Hodgson and Russell (2014) defined recycling and reclassification adjustments and further argued that items that are recycled may be more likely to be double counted, first as unrealised gains/losses in OCI and then as realised items in the income statement. This leads to reduced transparency of earnings information.