Analysis of Dual Capital Concept: From Dual Measurement to Dual Recognition of Income

ABSTRACTThis paper explains the relationship between net income and comprehensive income, on the basis of differences in their recognition. Current accounting standards require disclosure of net income (profit and loss) and comprehensive income. During the 1980s, it was required to disclose multiple income figures adjusted for inflation or price changes. On the basis of historical and international comparative research on accounting standards and a review of accounting literature, this paper clarifies the difference between, and provides a rationale for, the current presentation of income and that in the 1980s.Although multiple concepts of income and multiple concepts of capital were applied, those in 1980s were multiple measurements, which were different from the current accounting treatment. Current accounting treatment can be described as dual recognition rather than dual measurement. As long as other comprehensive income items are recycled, it could be described as dual income concept based on dual recognition is applied under the single capital maintenance concept. The change in fair value included in other comprehensive income will not be directly credited to shareholders 'equity, but will be credited through comprehensive income.INTRODUCTIONCurrent accounting standards require disclosure of net income (profit and loss) and comprehensive income (Accounting Standards Codification, ASC 220-10-45; International Accounting Standard, IAS 1 par. 81 A; Accounting Standard Board of Japan, ASBJ Statement No.25). During the 1980s, it was required to disclose multiple income figures adjusted for inflation or price changes (Statement of Financial Accounting Standards, FAS 33, pars.29-30). This paper explains the differences between the multiple income figures disclosed in both cases.A number of existing studies have focused on the pricing of other comprehensive income (Dhaliwal, Subramanyam & Trezevant, 1999; O'Hanlon & Pope, 1999; Biddle & Choi, 2006; Chambers, Linsmeier, Shakespeare & Sougiannis, 2007). In contrast, this paper theoretically analyzes the explanation of the relationship between net income and comprehensive income.The Japanese conceptual framework defines comprehensive income as the change in net assets during a certain period resulting from transactions or events other than direct transactions with shareholders, minority shareholders, and option holders. Net income is defined as the result of investments attributable to the owners of the reporting entity (ASBJ, 2006, 24).Existing studies in Japan have analyzed the relationships between net income and comprehensive income as well as between owners' equity and net assets. In 2010, ASBJ Statement No.25, Accounting Standard for Presentation of Comprehensive Income was issued. Ishikawa (1997b) discussed the meaning of recycling. Akiba (2013) discussed and explained the meaning of recycling under current International Financial Reporting Standards (IFRSs). Suzuki & Yabushita (2012) discussed recycling issues related to IFRS 9.Yamada (1999) discussed the relationship between net income and comprehensive income from the revenue-expense view and the asset-liability view. Yoshida (2011) discussed the concept of other comprehensive income on the basis of an international comparison of the relationship between net income and comprehensive income. Kawai (2012) discussed the relationship between net income and comprehensive income from the perspective of the distinction between capital and income.Ishikawa (1997a) discussed the capital maintenance concept for the calculation of comprehensive income. Ono (2008) discussed the possibility of a capital maintenance concept other than nominal capital to explain other comprehensive income. Ono (2012) concluded that net income is based on a nominal capital maintenance concept and that comprehensive income is based on a net assets maintenance concept. Suzuki (2002) summarized the history of fair value accounting for financial instruments. …