Discussion Question: "Comprehensive Income and the Income Statement"
Please respond to the following:
• From the e-Activity, create one argument to support the use of a two-step approach over the single-step approach when reporting comprehensive income. Support your response with specific examples that illustrate why the two-step approach is more beneficial than the single-step approach.
• Differentiate between a multi-step income statement and a comprehensive income statement, and suggest which income statement is more useful to investors and creditors. Provide a rationale for your suggestion.
From e-Activity:
NEWS RELEASE 06/16/11
FASB Issues Accounting Standards Update to Improve Presentation of Comprehensive Income
Norwalk, CT, June 16, 2011-The Financial Accounting Standards Board (FASB) today issued Accounting Standards Update (ASU) No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The Update is intended to increase the prominence of other comprehensive income in financial statements.
In US GAAP, the ASU will supersede some of the guidance in Topic 220 of the accounting Codification.
The main provisions of this Update provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements:
• A single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income.
• In a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.
The option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated.
Leslie F. Seidman, chairman of the FASB, said: "We heard from investors there was a need to present other comprehensive income information more prominently in financial statements. This Update, which was developed jointly with the International Accounting Standards Board, responds to those investor needs, and will bring greater consistency and prominence to the reporting of other comprehensive income around the world."
The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted, because compliance with the amendments is already permitted.
The Update, a "FASB In Focus" (a high-level summary of the proposal), and a podcast discussing the Update is available at www.fasb.org.
About the Financial Accounting Standards Board
Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. For more information about the FASB, visit our website.