5   ASC 220 COMPREHENSIVE INCOME

Perspective and Issues

Subtopic

Scope Exceptions

Overview

Technical Alert

Definitions of Terms

Concepts, Rules, and Examples

Limitations of the Income Statement

Other Comprehensive Income

Format of Statements of Income and Comprehensive Income

Example of Single Statement of Income and Comprehensive Income “Net of Tax” Presentation

Example of Single Statement of Income and Comprehensive Income “Gross of Tax” Presentation

Example: Note X: Income Taxes

Reporting Comprehensive Income in Two Separate but Consecutive Statements of Income and Comprehensive Income

Example of Two Separate but Consecutive Statements of Income and Comprehensive Income—Net of Tax Presentation

PERSPECTIVE AND ISSUES

Subtopic

ASC 220, Comprehensive Income, consists of one topic:

• ASC 220-10, Overall, which provides guidance on the reporting, presentation, and disclosure of comprehensive income.

Scope Exceptions

Per ASC 220-10-15-4, the ASC 220 does not apply to the following entities:

1. Those that do not have any items of comprehensive income
2. Those not-for-profit entities that are required to follow the guidance in ASC 958-205.

Overview

In financial reporting, performance is primarily measured by net income and its components, which are provided in the income statement. During the 1990s, a second performance measure was introduced—comprehensive income—which is a more inclusive notion of performance than net income. It includes all recognized changes in equity that occur during a period except those resulting from investments by owners and distributions to owners.

Because comprehensive income includes the effects on an entity of economic events largely outside of management's control, some have said that net income is a measure of management's performance and comprehensive income is a measure of entity performance.

Technical Alert

ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, (June 2011). ASU 2011-05 eliminated the previous third option to present comprehensive income in an expanded statement of stockholders' equity. This change and others are applied retrospectively and are effective:

• For public entities, fiscal years, and interim periods within those years, beginning after December 15, 2011
• For nonpublic entities, fiscal years ending after December 15, 2012, and interim and annual periods thereafter.

Not-for-profit entities and entities with no OCI items are outside the scope of this requirement. For interim reporting, entities must present a total for comprehensive income but are not required to present the individual components of other comprehensive income (OCI). Entities that present two statements in their annual financial reports have the option of using a single-statement approach in their condensed interim financial statements. Using one statement avoids the presentation of a separate statement of comprehensive income that contains only one line item for total comprehensive income.

Regardless of the reporting format chosen, totals for net income, other comprehensive income, and comprehensive income must appear in the statement, and the statement must be given the same prominence as other financial statements. ASU 2011-05 also initially required more disclosures regarding OCI reclassifications, including reclassification adjustments from AOCI to be shown by income statement line item in net income and in OCI on the face of the financial statement.

ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (December 2011). Because of constituent concerns about whether the presentation requirements were operational for reclassification adjustments on the face of the financial statements, with ASU 2011-12, the FASB indefinitely deferred those requirements to allow time for redeliberation.

ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, (February 2013). ASU 2013-02 addressed the preparer concerns outlined above and requires that entities present information about reclassification adjustments:

• In a single note or
• Parenthetically on the face of their annual financial statement.

Public companies also have to include this information in their interim reports. All required information must be in a single location. ASU 2013-02 requires new disclosures for items reclassified out of AOCI. These disclosures include:

• The effect of significant amounts reclassified from each component of AOCI based on its source
• The income statement line items affected by the reclassification.

If a component is only partially reclassified to net income, entities must cross reference to the related footnote for additional information.

The requirements are effective

• For public entities:

  – Prospectively for periods beginning after December 15, 2012

• For nonpublic entities:

  – Prospectively for periods beginning after December 15, 2013

Early adoption is permitted.

DEFINITIONS OF TERMS

(Source: ASC 220-10-20)

Available-for-Sale Securities. Investments not classified as either trading securities or as held-to-maturity securities.

Comprehensive Income. The change in equity (net assets) of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income comprises both of the following:

1. All components of net income
2. All components of other comprehensive income.

Net Income. A measure of financial performance resulting from the aggregation of revenues, expenses, gains, and losses that are not items of other comprehensive income. A variety of other terms such as net earnings or earnings may be used to describe net income.

Noncontrolling Interest. The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is sometimes called a minority interest.

Nonpublic Entity. Any entity that does not meet any of the following conditions:

1. Its debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally.
2. It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
3. It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.
4. It is required to file or furnish financial statements with the Securities and Exchange Commission.
5. It is controlled by an entity covered by criteria (a) through (d).

Other Comprehensive Income. Revenues, expenses, gains, and losses that under generally accepted accounting principles (GAAP) are included in comprehensive income but excluded from net income.

Parent. An entity that has a controlling financial interest in one or more subsidiaries. (Also, an entity that is the primary beneficiary of a variable interest entity.)

Reclassification Adjustments. Adjustments made to avoid double counting in comprehensive income items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.

Subsidiary. An entity, including an unincorporated entity such as a partnership or trust, in which another entity, known as its parent, holds a controlling financial interest. (Also, a variable interest entity that is consolidated by a primary beneficiary.)

CONCEPTS, RULES, AND EXAMPLES

Limitations of the Income Statement

Economists have generally adopted a wealth maintenance concept of income. Under this concept, income is the maximum amount that can be consumed during a period and still leave the enterprise with the same amount of wealth at the end of the period as existed at the beginning. Wealth is determined with reference to the current market values (fair values) of the net productive assets at the beginning and end of the period. Therefore, the economists' definition of income would fully incorporate market value changes (both increases and decreases in wealth) in the determination of periodic income.

Accountants, on the other hand, have generally defined income by reference to specific events that give rise to recognizable elements of revenue and expense during a reporting period. The events that produce reportable items of revenue and expense are a subset of economic events that determine economic income. Many changes in the market values of wealth components are deliberately excluded from the measurement of accounting income, but are included in the measurement of economic income.

Accountants have moved closer to an economic measure of income by introducing the measure comprehensive income into the financial statements. Because of the realization and recognition of accounting principles discussed earlier, comprehensive income remains a subset of economic income.

Other Comprehensive Income

Comprehensive income is the change in equity that results from revenue, expenses, gains, and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by owners and distributions to owners.

Items of Comprehensive Income. ASC 220-10-45-10A lists the following as items currently within other comprehensive income:

• Foreign currency translation adjustments (see paragraph 830-30-45-12)
• Gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity, commencing as of the designation date (see paragraph 830-20-35-3(a))
• Gains and losses on intra-entity foreign currency transactions that are of a long-term-investment nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting entity's financial statements (see paragraph 830-20-35-3(b))
• Gains and losses (effective portion) on derivative instruments that are designated as, and qualify as, cash flow hedges (see paragraph 815-20-35-1(c))
• Unrealized holding gains and losses on available-for-sale securities (see paragraph 320-10-45-1)
• Unrealized holding gains and losses that result from a debt security being transferred into the available-for-sale category from the held-to-maturity category (see paragraph 320-10-35-10(c))
• Amounts recognized in other comprehensive income for debt securities classified as available-for-sale and held-to-maturity related to an other-than-temporary impairment recognized in accordance with Section 320-10-35 if a portion of the impairment was not recognized in earnings
• Subsequent decreases (if not an other-than-temporary impairment) or increases in the fair value of available-for-sale securities previously written down as impaired (see paragraph 320-10-35-18)
• Gains or losses associated with pension or other postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost) (see paragraph 715-20-50-1(j))
• Prior service costs or credits associated with pension or other postretirement benefits (see paragraph 715-20-50-1(j))
• Transition assets or obligations associated with pension or other postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost) (see paragraph 715-20-50-1(j)).

Other comprehensive income is recognized and measured in accordance with the accounting pronouncement that deems it part of other comprehensive income. The Codification notes that additional classifications or additional items within current classifications may result from future accounting standards.

Format of Statement of Income and Comprehensive Income

ASC 220 requires that the components of other comprehensive income along with totals for net income, other comprehensive income, and comprehensive income must appear in a statement of the same prominence as other financial statements. (An entity that has no items of other comprehensive income in any period presented is required to report only net income.) Presenting those required amounts in a combined statement of income and comprehensive income is one of two permissible methods. The other is two separate, but consecutive statements.

Some items impact other comprehensive income in one period and then affect net income in the same or a later period. For example, an unrealized holding gain on an available-for-sale security is included in other comprehensive income in the period in which the market fluctuation occurs. Later, perhaps years later, the security is sold and the realized gains are included in net income. An adjustment to the unrealized holding gain component of other comprehensive income is necessary to avoid double counting the gain—once in net income in the current year and also in other comprehensive income in the earlier period. Adjustments of that type are called reclassification adjustments. The process of including in net income an item previously reported in other comprehensive income is often referred to as “recycling.”

Usually, a sale triggers the need for a reclassification adjustment. The sale of an available-for-sale security in the current period triggers the need for an adjustment for the gains (losses) that had been included in other comprehensive income in a prior period. Likewise, the sale of an investment in a foreign entity triggers an adjustment for foreign currency items that had been included in other comprehensive income previously (i.e., accumulated translation gains or losses). Amounts accumulated in other comprehensive income from cash flow hedges are reclassified into earnings in the same period(s) in which the hedged forecasted transactions (such as a forecasted sale) affects earnings. If it becomes probable that the forecasted transaction will not occur, the net gain or loss in accumulated other comprehensive income must be immediately reclassified. An adjustment is also necessary upon the complete (or substantially complete) liquidation of an investment in a foreign entity. Only minimum pension liabilities will not require reclassification adjustments (because they will not be reported in net income in any future period).

Reclassification adjustments can be presented by component of other comprehensive income, either:

• By displaying each component on a gross basis on the face of the appropriate financial statement.
• By displaying each component net of other changes on the face of the appropriate financial statement and with the gross change disclosed in the notes.

The tax effects of each component of other comprehensive income must be presented in the statement in which those components are presented or in the notes of the financial statements. The items of other comprehensive income can be reported either:

• Net of related tax effects in the statement or
• Gross with the tax effects related to all components reported on a single, separate line.

If gross reporting is used, the notes to the financial statements must disclose the tax effects related to each component (if there is more than one component). The following examples illustrate the two presentations.

Reporting Comprehensive Income in Two Separate but Consecutive Statements of Income and Comprehensive Income

Entities are not required to present information about comprehensive income in a continuous statement of income and comprehensive income. Instead, they can present the components of other comprehensive income, the totals of other comprehensive income, and a total for comprehensive income in a statement which must immediately follow a statement of net income.

Hypothetical Corporation

Statement of Income

For the Year Ended December 31, 2013

($000 omitted)