Is a Second Income Statement Needed

Reporting comprehensive income could enhance the understandability of financial statements. The Financial Accounting Standards Board is considering whether to establish a vehicle for reporting comprehensive income defined as all non-owner changes in equity that would augment or supplement the traditional income statement. It could take the form of either a second income statement or an expanded version of the traditional statement. The drive to report comprehensive income is fast gaining momentum at the FASB, in part because of issues related to the board's financial instruments project. The FASB determined that constituents need fair value information about financial instruments and took the first steps by requiring disclosure of such information in Statement no. 107, Disclosures about Fair Value of Financial Instruments, and Statement no. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. However, requiring disclosure of fair value information in the notes to the financial statements is not entirely satisfactory. Those pronouncements have substantially increased footnote disclosures, thus contributing to what some constituents perceive as disclosure overload. Maintaining historical cost measures in the financial statements themselves is not entirely satisfactory either (particularly in balance sheets) because many instruments are obtained without explicit cost and hence are "off balance sheet." Interest rate swaps, for example, do not generally involve an exchange of cash at the contract's inception and therefore are not recognized on the balance sheet. However, measuring financial instruments at fair value in balance sheets would result in more volatile income statements if gains and losses resulting from changes in their fair values were recognized. What is the solution? Report those changes in a vehicle that would complement--but not replace--the traditional income statement. WHAT IS COMPREHENSIVE INCOME AND WHY REPORT IT? Comprehensive income is defined by the FASB as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." While the FASB concluded in its concepts statements that a full set of financial statements for a period should show comprehensive income for the period, they have not yet required business enterprises to report it. The FASB and its predecessor, the Accounting Principles Board, both embrace the all-inclusive income concept as the foundation for reporting. However, the FASB's adherence to that concept gradually eroded in Statement no. 12, Accounting for Certain Marketable Securities, Statement no. 52, Foreign Currency Translation, Statement no. 80, Accounting for Futures Contracts, Statement no. 87, Employers' Accounting for Pensions, and Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities, in which certain income items are reported directly in equity. If more items are taken directly to equity--as is likely without another means of reporting comprehensive income--equity will become a dumpster for an amorphous and growing mass of important information. Thus, the more different items there are in non-owner changes to equity, the more important it becomes to have a statement that displays them in an organized way on their way to becoming equity. Reporting comprehensive income may help resolve some difficult and challenging financial reporting issues, particularly in the area of financial instruments, because the way certain issues involving recognition and measurement are resolved often hinges on whether and when items are to be reported in net income. For example, Statement no. 115 links how securities are classified (as trading, available-for-sale or held-to-maturity) to how they are to be measured as well as to where and when gains and losses on those securities are to be reported. …