Comprehensive Income in Italy: reporting format used, nature of OCI items and

its effects on company performance.

1. Introduction

In September 2007 the IASB, within the ambit of a wide-ranging convergence project set up
some time before, published with the FASB a revised version of the IAS 1- Presentation of
Financial Statements with the aim of bringing accounting data as far as possible into line with what
had been established by the SFAS 130- Reporting Comprehensive Income, in particular with
reference to the representation of economic performance.
As we know, the main activity carried out by IAS 1 (revised 2007) is the substitution of the
simple income statement with comprehensive income statement. This involves adopting an Anglo-
Saxon conception of CI and, in particular, including in the accounting framework comprehensive
income, i.e., a description of income that also includes the variations in assets that do not appear in
the traditional income, in line with standard American practice.
To sum up, IASB model of the economic statement reveals income flows related to:
a) economic cycles closed through the sale on the market of products and services;
b) ongoing economic cycles in relation to which increases of economic gains probably accruing to
the company that can be reliably measured,
c) variations in the value of profit and loss, assessed at fair value regardless of their extinction
when the inflows and outflows of future economic gains are probable, and that can be measured
in a reliable way through reference to market prices formed or through the utilisation of reliable
valuation models.
The above mentioned flows of income lead to three different categories of value each
categorised by a different theoretical notion of income and precise concept of economic
competence:
- the first type is coherent with the notion of realised income, based on the concept of economic
competence that- linked to the logic of business cycles- functions by applying the principal of
realisation of gains and correlation of costs;
- the second type identifies a produced income, based on the concept of competence of obtained
production, in which the positive components of income are recognised on the basis of the
advance of productive processes and the negative components of income are those sustained for
the attainment of production;
- the third type is in line with the notion of realisable income, based on the broad conception of
economic competence that functions on the basis of asset variations and represents the dynamic
of the fair value of the active and passive elements of company capital, admits the revaluation of
assets as yet unrealised, if they are considered to be forthcoming and measurable in a reliable
way.
The notion of income derived from the fusion of the aforementioned categories does not
correspond to a particular theoretical line of thought, but is rather the result of a pragmatic choice
that simply gathers together all the positive and negative components of recognised income in a
company by applying diverse conventions of assessment (Pisani, 2007).
We can, therefore, speak of omni-comprehensive income that by including realised and
realisable components aims to account for the overall performance of a company’s activities (Beale
and Davey, 2000; Mattesich, 2002; Paton and Littleton, 1940; Sprouse and Moonitz, 1962).
If, as regards the content of the new format for the income statement, the IASB has not had any
particular difficulty in aligning itself with American accounting rules, there have been several
problems as regards its representation. In fact, it has not been a simple matter to identify an
accounting format that is able to illustrate in detail the overall income of a company and, at the
same time, enable the statement to supply information on the financial situation, on performance
and on the changes in the company’s financial situation that can be used for a series of indicators to
help users in investment decision making.
The problem of how to represent comprehensive income is mainly a problem of representing
those components of Other Comprehensive Income, that are excluded from traditional income
(Pisani, 2007). On this theme many scholars, through empirical research into the forms of
representation used by companies, have tried to examine the importance and relevance of the
information supplied by OCI.
Depending on the structure of the empirical investigation such research can be subdivided into
three groups. The first studies the behaviours actually practised by companies when representing
comprehensive income. The second group is geared to verifying the effects of the form of
representation of comprehensive income on the indicators in the company financial statement (Hirst
and Hopkins, 1998; King et al., 1999; Hirst et al., 2004; Hunton et al., 2006; Bamber et al., 2007)
and, finally, the third studies the effects of representation formats of comprehensive income on the
market price of shares (Smith and Tse, 1998; Cahan et al., 2000; Dehning et al., 2004; Bloomfield
et al., 2006).
The present study is placed in the first of the aforementioned categories. Through the results of
empirical studies conducted on formats for representing comprehensive income in the United States
markets, our objective is to identify how those groups listed on the Italian Stock Exchange have
actually behaved since the application of the revised IAS 1 to statements for the year 2009. In
particular, the present study aims to investigate, on the one hand, the choices made on how to
account for comprehensive income and, on the other, the impact of this new representation of
income on the indicators of company performance.

2. Comprehensive Income and IAS 1 (revised 2007)

As hinted above, the main innovation carried out by the IASB with the revised version of IAS 1
is the substitution of the traditional income statement with the comprehensive income statement
(Allegrini and Ninci, 2008; Bertoni et al., 2007; Dezzani et al., 2010).
The new statement provides a configuration of comprehensive income that keeps two economic
results separate:
a) profit (or loss) that represent the total turnover minus costs, excluding the items of the statement
on other components of comprehensive income;
b) other comprehensive income that includes profit and loss items not revealed in company
earnings, as required or allowed by other IFRS. In a nutshell, this component includes variations
in fair value contained in the reserves of the company’s net assets.
The sum of the two classes of values constitutes the “Total Comprehensive Income”, that
corresponds to the variation in the company’s overall net assets through the effects of the
different operations and events, after taking into account the contributions and gains of the
different partners in the company.
As regard the means of presentation of the statement of comprehensive income, paragraph 81 of
the IAS 1 in envisages two alternatives:
1) a single statement, called Statement of Comprehensive Income which contains both results on
earnings: the first part of the statement reports the profit and loss of the company, while the final
part includes the other components;
2) two statements:
- a first statement displaying components of profit (loss) of the company, called Separate
Income Statement;
- a second statement that details the profit (or loss) of the company and the components of
other comprehensive income, entitled Statement of Comprehensive Income.
 The IASB leaves it to the company to decide whether to present all the items concerning revenue
and costs in a single statement or two statements. This is really a compromise solution that the
IASB accepted as transitory, until such time as other aspects involved in the presentation of the
comprehensive income statement have been resolved (Basis for conclusions- BC51, BC52, BC53,
BC54).
In May 2010 the IASB issued the Exposure Draft- Presentation of Items of Comprehensive
Income, that should come into force on 1st January 2011; this entails, amongst other things, a single
“statement of profit and loss and other comprehensive income” divided in two sections: “profit or
loss” and “items of other comprehensive income”. In this way the Board eliminates the choice
between the two ways of reporting comprehensive income since, they believe two alternatives
reduce the homogeneity and comparability of company financial statements, and can create
confusion for users regarding which measure of income (traditional or comprehensive) to consider.

3. Literature Review

With the revision of the IAS 1 international accounting regulations in 2007 the obligation to
account for comprehensive income was extended to listed companies operating inside the EU
starting from their 2009 financials statements. Consequently, before that period there was no
empirical evidence available in Italy on this matter, unless we consider provisional and intermediate
company results (D’Este and Fellagara, 2010). In contrast, in the English speaking countries
(Britain and the US) the inclusion of comprehensive income in accounts has been in operation for
some considerable time and there are a good number of studies covering various aspects of this
practice (in the UK the 1992 Financial Reporting Standard 3; in the US the SFAS 1998).
In the following pages we shall illustrate the main investigations, compiled on the basis of SFAS
N. 30, carried out on companies operating in the US. The exclusive attention dedicated to empirical
research conducted into US companies is due to the fact that, following an agreement between the
IASB and FASB (Memorandum of Understanding), the accounting precepts of SFAS 130 are very
similar to those of the revised IAS 1, thereby enabling researchers to adapt empirical models to the
Italian situation more easily.
Before going on to the round up of the conducted studies we need, however, to remember that
unlike IAS 1, the SFAS 130 identifies three alternative accounting models for comprehensive
income. The first entails a single statement, called the Statement of Income and Comprehensive
Income, that lays out in a graded manner, first the components of income that make up net income
(representing the intermediate results in a traditional account) and then the components of other
comprehensive income; the sum of the two results gives the comprehensive income (final results in
the traditional income statement). The second alternative entails two separate statements, the first
(Statement of Income) dedicated to the representation of net income, while the second (Statement of
Comprehensive Income), dedicated to the representation of comprehensive income, starts from net
income, then illustrates the components of the other comprehensive income. Finally, the third
alternative illustrates the formation of other comprehensive income in the statement of changes in
stockholders’equity.
We applying these empirical models to the Italian situation it is essential to take into account the
greater flexibility provided by the US accounting principles.

The first empirical evidence on the means of representation of comprehensive income comes
from a study by Campbell et al. (1999) on those American companies that applied the SFAS N.130
a year early, that is in1997 rather than 1998.
Out of a sample of 73 American companies, 39 opted to represent components of comprehensive
income in a “Statement of changes in Stockholders’equity”, 22 in a “Separated Statement of
Comprehensive Income”, and the remaining 12 in a “Combined Statement of Net Income and
Comprehensive Income”.
In order to throw light on the reasons for the different accounting formats adopted, the Authors
carry out a comparison of the characteristics - in terms of amount, direction and size - of net income
and of the OCI and CI components of the 73 American companies. The results appear to indicate
that the companies that opt for the “Combined Statement of Net Income and Comprehensive
Income” or the “Separate Statement of Comprehensive Income” are the ones that present positive
and material amounts of OCI and thus, through these forms of representation, wish to highlight
comprehensive income as a measure of their performance; on the other hand, the companies with
materially negative amount of CI adopt the “Statement of Stockholders’ Equity”, thereby reducing
attention on the role of comprehensive income as a measure of performance. Another advantage of
the latter option is that it offers greater simplicity when drawing up the account.
The results obtained by Campbell et al., however, are not confirmed by later research carried out
by Bhamornsiri and Wiggins (2001) on the financial statement of S&P 100 companies for fiscal
years 1997 through 1999. As regards the comprehensive income presentation format, the Authors
show that, although companies show a preference for a representing CI in a “Statement of changes
in Stockholders’ Equity”, this does not depend on the income results and, above all, it does not
depend on their direction.
In addition to the aforementioned study by Campbell et al., Bhamornsiri and Wiggins (2001)
assess the impact of the components of CI on Earnings per Share (EPS), through an analysis of the
percentage change in the latter, if Comprehensive Income instead of reported net income. The EPS
of 60 companies would have a negatively affected with the inclusion of OCI, whereas only 35
companies would be positively affected. The inclusion of OCI components could have a strong
impact on EPS: some companies’EPS would change by more thean 100%.
Jordan and Clark (2002) aimed to verify the results of the study by Campbell et al. (1999)
through an examination of the financial statements for the year 1998 on a sample of 100 financial
service firms. In particular, the Authors wanted to ascertain whether there was any correlation
between the direction and the size of the OCI components, the size of the company and the chosen
format for presenting the comprehensive income.
In this case again, a large majority of the companies analysed (63%) chose to represent
comprehensive income in the statement of variations in net equity, while 25% preferred a Separate
Statement of Comprehensive income and only 12% two in a Combined Statement of Net income
and Comprehensive income.
On the possible correlation between the direction or size of the total OCI and the choice of
reporting format, the Authors underline the impossibility of establishing a cause and effect relation.
Nevertheless, the data obtained show that firms whit negative or relatively small amounts of total
OCI tend to choose a Statement of changes in Stockholders’ Equity, probably because this format
does relate the OCI items to financial performance of the firm.
Finally, Jordan and Clark (2002) show that the reporting format decision does not appear to be
significantly related to company size.
Results in some degree similar to those of Campbell et al. (1999) are found in a study by Pandit
and Phillips (2004) on a sample of 100 annual reports of NYSE-listed companies; in a later work
Pandit (Pandit et al. 2006) returned to the issue, focusing on 100 companies listed on the
NASDAQ. In both studies it clearly emerges that the statement of changes in stockholders’ equity is
still predominant presentation for comprehensive income.
However, when compared to previous investigations, the Authors have further objectives, among
which they aim to verify whether, five years after the adoption of SFAS n. 130, companies continue
to prefer the statement of changes in stockholders’ equity to represent CI and whether any such
preference depends on the direction of OCI.
The study showed that 89 of the 100 companies used the third format, which included OCI and
total comprehensive income in the Statement of changes in stockholders’ equity. Only nine of the
sample companies choice the second format and presented a Separate Statement Comprehensive
Income. The remaining two companies chose the first format and presented comprehensive income
as a component of their income statement.
Of the 89 companies that used the statement of changes in stockholders' equity to report OCI,
only 31 companies reported overall positive OCI, while the remaining 58 companies reported
overall negative OCI. This finding is largely consistent with that of Campbell et al. In that a
significant percentage—65%—of the companies in the current sample that chose the third reporting
format had negative OCI. Companies with negative OCI were almost twice as likely to present it in
the statement of changes in stockholders' equity, despite FASB's preference that these items be
shown either in the income statement or in a separate statement of comprehensive income. Both
companies that used the first format had negative OCI, whereas, of the nine companies that used the
second format, six had negative OCI and three had
To sum up, the empirical investigations conducted at international level on the search for a
correlation between the direction of OCI and the format for presenting OCI in financial statements
have been inconclusive. The work of Campbell et al. (1999) and Jordon and Clark (2002) find that
when, as is the case for most of their sample, the components of OCI are presented in the statement
of net equity, the OCI has a negative influence on company performance; Bhamornsiri and Wiggins
(2001) and Pandit and Phillips (2004), on the other hand, have been unable to find any correlation
between direction and accounting format.

4. Research Design
Objectives
The present study has a dual aim: on the one hand to identify the criteria used for the
presentation of comprehensive income by a sample of companies listed on the Italian Stock
Exchange, on the other, to assess the impact of comprehensive income on a number of indicators
most commonly used for measuring company performance, such as Return on Equity (ROE) and
Earnings Per Share (EPS).
For the realisation of the first objective the following research hypotheses have been formulated:
H1. There is a positive relation between format used for OCI and the direction of the OCI
components;
H2. There is a positive relation between format used for OCI and the size of the OCI components.
For the second objective:
H3. There is a positive relation between EPS(CI) and companies performance;
H4. There is a positive relation between ROE(CI) and companies performance.

Methodology and data collection

In order to test H1 and H2 we examine the actual behaviours of the compagnies listed on the
Milan Sock Exchange regarding their choice of format for representing CI, while for H3 and H4 we
calculate ROE and EPS with CI as numerator, rather than net income, and through this calculation
of the variation in these indicators following the change from net income to CI we determine the
impact (positive, negative or zero) on company performance.
The results illustrated below derive from the analysis of the contents of consolidated financial
statements of 160 groups company that on 31st December 2009 were listed on the Milan Stock
Exchange, included in the product sector industry in line with the classification adopted by the
Stock Exchange itself (table 6).
In order to be able to draw conclusions from the research, companies in the financial sector were
excluded on the grounds that their account records are less homogeneous than other sectors.
Moreover, the selection criteria for the sample excluded other categories:
- Companies not set up as group that do not present a consolidated account;
- Companies whose shares, at the time of the sample selection, were suspended on the Stock
Exchange, being subjected to competition procedures, and therefore present financial statement
with different specifications;
- Companies whose closing date for their financial statements was different from 31/12/2009 (for
example, 30/9) and thus were not obliged to adopted the revised IAS 1.

Table 1 – Industrial classifications of sample firms

Sectors No. Society %
FTSE Italia All-Share Oil and Gas 5 3%
FTSE Italia All-Share Basic Materials 1 1%
FTSE Italia All-Share Industrials 52 31%
FTSE Italia All-Share Consumer Goods 38 26%
FTSE Italia All-Share Health Care 5 3%
FTSE Italia All-Share Consumer Services 23 14%
FTSE Italia All-Share Telecommunications 6 3%
FTSE Italia All-Share Utilities 16 10%
FTSE Italia All-Share Technology 14 9%
Total 160 100%

The decision to use the data is linked to the fact that this is the first period in which listed
companies in Italy are requested to present comprehensive income.
For each group the accounting values have been taken from the financial statements and, where
necessary, from other accounting documents.

5. Results
Reporting Format Used, Direction and Size of OCI
As regards the accounting format adopted for comprehensive income by Italian companies in the
first application of the revised IAS 1, 86% of the sample opted to present components of OCI in a
“Separate Statement of Comprehensive Income”. Only a small proportion of the companies (14%)
chose to represent comprehensive income in a “Statement of Comprehensive Income”.

Table 2 – Comprehensive Income presentation formats, 2009

No. %
On the income statement 22 14%
In a separate statement of comprehensive income 138 86%
Total 160 100%

This is hardly surprising in a context such as Italy’s, where traditional criteria and practices for
dealing with income are firmly rooted in the accountancy culture; in fact, only through the
separation of the two results, can the earnings and costs related to the operating cycles be
identifiable and, at the same time different from those results set out in the single statement of
changes in stockholders’ equity. The latter are actually seen as complementary information and not
as a substitute for traditional income statements.
Moreover, the representation in a single document can lead to excessive focus on the bottom line
of the statement (total comprehensive income for the year) without explicating its make up. The
uncertainty due to the lack of adequate guidelines from the IASB on what the categories outlined in
the statement of comprehensive income should be and which items should be included in each
category has certainly encouraged companies to opt for presenting their OCI in two separate
statements.
 In order to confirm the above considerations, as well as identify other possible reasons why
companies choose one format rather than another, we have decided to compare the format chosen
with the characteristics, in terms of direction and size, of net income, of OCI items and of CI.
Since there has not emerged a homogeneous and uniform expression of itemising OCI
components we have followed the general classification reported in IAS 1 to wit:
- Changes in Revaluation Surplus (IAS 16 and IAS 38);
- Actuarial Gains and Losses on Defined Benefit Plans Recognised in accordance with IAS 19;
- Gains and Losses Arising from Translating the Financial Statements of a Foreign Operation
(IAS 21);
- Gains and Losses on Remeasuring Available-for-Sale Financial Assets (IAS 39);
- The effective portion of Gains and Losses on Hedging Instruments in a Cash Flow Hedge (IAS
39).
To the above we must add a residual item “Other” and further item relating to the “Taxes on
OCI” where the person drawing up the account has opted to present the single items at their gross
value.
Tables 3 and 4 show how companies that opt to present an account of operations in the second
part of the income statement are those with a positive net income and OCI values of little
significance on the overall total and who, therefore, probably desire to underline traditional income
as a measure of company performance through this format.
“The operational account that is added to the traditional income statement is the simplest
solution when one decides to keep traditional income in the forefront of the account. In this case, in
fact, the profits and losses revealed are necessarily divided into two categories, that of the income
included in the traditional account and the other for the components excluded from it, identified as
other profits and losses detailed in the operational statement.”
Moreover if, on the one hand, this solution enriches the structure of the traditional account by
presenting a new statement including comprehensive income and its components, on the other hand
it allows companies to keep the traditional, and hence familiar (and easily identifiable) means of
accounting. Nevertheless, for some people this is its main disadvantage: i.e., by adding another
financial statement we, in fact, make the system more complicated and thereby create confusion for
the users.
The companies in the sample that record negative values for net income but positive values of
OCI adopt a single comprehensive income statement to “relegate” traditional income with a
negative (hence unattractive) direction to the simple role of intermediate result.

Table 3 – Presentation format and nature of OCI, 2009

(€/000) CRS AGLB GLTFO GLAFS GLCFH Tax Other
Income Statement 2,952 (22) (237) 27,667 (112) 3,444 0
Separate Statement of CI (27,289) (196,986) 2,232,360 160,899 (1,850,652) 479,023 (34,349)
Total (24,337) (197,008) 2,232,123 188,566 (1,850,765) 482,467 (34,349)
CRS= Changes in Revaluation Surplus AGLB=Actuarial Gains and Losses on defined Benefit plans GLTFO=Gains and
Losses arising from Translating the financial statements of a Foreign Operation GLAFS=Gains and Losses on remeasuring
Available-For-Sale financial assets GLCFH=the effective portion of Gains and Losses on hedging Instruments in a Cash
Flow Hedge Tax=comprehensive income Taxes.

Table 4 – Average of Net income, OCI, Comprehensive Income, 2009

(€/000) NI OCI CI
Income Statement (58,655) 33,692 (24,963)
Separate Statement of CI 19,612.049 763,006 20,375,055

Information on the choice of accounting format in the notes

Through a study of the explanatory notes of the consolidate financial statements of 160
companies groups it emerged that, although the choice of accounting format is indicated in the
majority of the financial statements analysed, in very few cases do the accountants make explicit the
reasons for their choice. Where this is the case, these choices are connected with a particular sector
and international praxis. Indeed, the formula generally adopted is as follows: «the choice is in line
with the mode of presentation of our major competitors and with international praxis».
The lack of additional information regarding the choice of format for representing
comprehensive income does not allow the user to evaluate the results through an examination of the
direction and size in OCI or to identify motivations other than those connected with the desire for as
little change as possible in the format for representing the company budget.

Impact of OCI on company performance indicators

The final phase of this investigation concerns an examination of the impact generated by other
comprehensive income on the measure of performance of the companies in the sample. To this end
the values of net income, total comprehensive income and net assets were extracted in order to
estimate the main performance indicators calculated through procedures that take account of OCI.
Through the calculation of the variation in company income after the inclusion of OCI it was
possible to identify the number of cases where company income recorded a gain or a loss, as well as
the number of cases where profit turned into loss or vice versa (Table 5). The results show how, for
136 companies, the inclusion of OCI generated a positive (or negative) impact in the calculation of
company earnings, increasing (or decreasing) net income or losses, for 136 companies overturning
in certain cases the direction from profit to loss and vice versa.

Table 5 – Impact of OCI on net operating income

Negative variation: 70
From profit to loss 1
Reduction of profit 42
Increase in loss 27
No Variation 24
Positive variation 66
From loss to profit 3
Increase in profit 41
Reduction of loss 22
Total 160

These results can be seen as the first indication of the wide room for manoeuvre enjoyed by
management when putting into practice important budgetary policies. Indeed, since company
earnings constitute the basis for calculating the main performance indicators (ROE and EPS) the
chosen format for representing said performance and the consequent role attributed to OCI (as
integral part of the final result or secondary information) can have a considerable influence of the
evaluation of the indicators.
In order to arrive at an initial judgement, albeit provisional and certainly open necessary
correction, on the impact of OCI on ROE and EPS, these were calculated first using net income,
then with comprehensive income. In particular, a comparison was made between ROE(NI),
calculated as the ratio between Net Income and Equity, and ROE(CI), calculated as the ratio between
Comprehensive Income and Equity.
Finally, a further comparison was made between EPS(NI), calculated on the basis net income of
the group in question and l’EPS(CI), calculated on the basis the comprehensive income of the group
in question. Depending on the percentage variation of EPS(NI) in the change to EPS(CI), the impact
on the value of the account was then assessed. The number of shares used as denominator,
constituted by the average number of shares in circulation, is that reported in the supplementary
note of each of the financial statements studied. The point of this is to illustrate how profit per share
(basic and diluted*) reported in the income statement is calculated. As regards this it should be said
that it has not been possible, either directly or indirectly, to calculate this figure for a number of the
groups; hence these have been discarded from the sample.
Graph 1 shows the relation between ROE(NI) and ROE(CI), while Table 6 illustrates the impact -
negative, positive or zero - of OCI on EPS. In particular, the data in the table highlight how, for 66
groups, the move from EPS(NI), to EPS(CI) had a negative effect, for 69 groups it was positive, while
for the remaining 25 there was no effect either way.

Graph 1 –ROE(NI) and ROE(CI)

Table 6 – Impact of OCI on EPS

Negative Impact:
X%≥50% 7
10%≤ X%≤49% 21
1%≤ X%≤9% 38
No Impact 25
Positive Impact
1%≤ X%≤9% 29
10%≤ X%≤49% 23
X%≥50% 17
Total 160

In Table 7 are various groups who could experience a strong impact from the inclusion of OCI
components in EPS. As can be seen here the percentage variation (positive or negative) for these
groups of EPS exceeds 100.

Table 7 – Largest Effects of OCI

EPS (NI) EPS (CI) Change
Negatively affected:
Grantifiandre 0.024 -0.037 -254%
Positively affected:
Acotel Group 0.319 0.803 152%
Gruppo Beghelli 0.040 0.178 345%
Gruppo Elica 0.004 0.014 250%
Gruppo Isagro 0.040 0.350 775%
Gruppo Sadi Servizi Industriali -0.004 0.008 300%
Sogefi -0.067 0.045 167%
6. Conclusions and suggestions for future research

In this study we have examined the means of representing, and the impact generated by CI on the
listed companies in Italy that have, for the first time, drawn up their financial statements according
to the specifications in the revised IAS 1.
There is substantial uniformity across Italian companies, as regard how the company accountants
present OCI in their budget, insofar as a large majority of them- 154 or 88% of the sample- opted to
present two separate and successive income statements.
The decision to add a second income statement, rather than integrate the components of OCI in a
single document, is justified by accountants on the grounds of the need for uniformity that
facilitates not only interpretations of published accounts, but also comparisons between national
competitors, as well as obviating the need to turn upside down the traditional and familiar
accounting structure used hitherto.
Moreover, the mode of accounting chosen in our sample appears to be in line with the main
precepts of accounting culture in Italy, which revolves around the concept of historic cost and hence
traditional income. Indeed, presentation in two separate statements allows accountants to:
1) maintain the separation between realised (i.e., traditional) income from as yet unrealised income
(i.e., comprehensive income);
2) avoid clouding the traditional income statement with transitory sums;
3) supply data on the values given to net equity in a later schedule to be considered equally as
important as the traditional income statement also because it must be included in the necessary
budget documentation.
Along with the above-mentioned advantages, however, there is the corresponding risk of
attributing a secondary role to comprehensive income, and thereby vitiating the goal set by the
IASB with the publication of the revised version of IAS 1, i.e. that of giving greater importance to
comprehensive income in order to provide the public and analysts more reliable information on
current and future company performance.
The danger of paying insufficient attention to comprehensive income, whose inclusion ought to
make published accounts more informative, also emerges from the empirical evidence gathered at
international level; in fact, in most cases OCI is to be found in the statement of net equity (an option
not permitted under the revised IAS). The decision to draw up a comprehensive income statement
(single or separate) has been taken in very few cases which tends to illustrate the lack of importance
given to this measure by budgetary accountants. This observation is further confirmed by the results
of studies verifying the effects of the different formats for representing comprehensive income on
the users of company accounts (Hirst and Hopkins, 1998; King et al., 1999; Hirst et al., 2004;
Hunton et al., 2006; Bamber et al., 2007).
In order to find out if there are other reasons for the choice of format for representing CI in Italy
as well as the margin of action left to management when carrying out accounting policies, the study
proceeds with a search for a link between the format chosen and the characteristics- in terms of
direction and size - of net income, OCI and CI.
The results show that the companies that opt for the second income statement are those with
positive net income and negative OCI values with a significant impact on the overall total and that,
therefore, seek to highlight traditional income as a measure of company performance through the
use of this format. On the other hand, companies that opt for the single comprehensive income
statement relegate to a mere intermediary result traditional income with a (negative) direction,
which the market is likely to find unattractive.
At international level, however, the results of the search for a correlation between the direction
of the OCI and how OCI is represented in income statements have been inconclusive. Some
Authors (Cambell et al., 199; Jorden and Clark, 2002) show that when, as in the majority of their
sample, the OCI components are represented in the statement of net equity, they have a negative
effect on company performance. Other Authors (Bhamornsiri and Wiggins, 2001; Pandit and
Phillips, 2004), on the contrary, have not been able to find any correlation between the direction and
the accounting format.
Regardless of the direction (negative or positive), OCI assumes a certain importance in the
estimation of the overall comprehensive value in all the Italian financial statements analysed and,
therefore, the variation in income is significant. Consequently, the impact on one of the key
indicators for measuring company performance, i.e. EPS, would appear to be significant. In
particular, for 66 companies the inclusion of OCI would have a negative effect on EPS, while for 69
the effect would be positive. Moreover, for 24 companies the impact- be it positive or negative- is
over 50%; indeed, in 7 cases the percentage variation is over 100%.
Although net income remains the base value for estimating EPS 1 , the estimates reported in this
study highlight the fact that the analysts’ conclusions would change in many cases, if they based
their estimations of performance on OCI.
The analysis on the impact of OCI on company performance clearly requires further study, yet
the results obtained in this study allow us to offer various reflections on the initial application in
Italy of the revised IAS1, at least as regards comprehensive income.
Though fully understanding the decision by Italian companies to adopt two successive
statements, thereby avoiding the need to turn on its head the traditional procedure in operation since
1991 with the application IV European Community Directive, this should not, in our opinion, be the
end of the matter. Indeed, in the ambit of the ongoing project to harmonise accounting practices
across all member states of the EU, the aim is to ensure that all documentation be brought into line
with the IASB model. This means that, even if in Italy there persists a strongly rooted tradition
based on prudence and historic cost, the income statement should aim at an accounting format that
gives it an instrumental and supportive role that can express the results in such a way as to provide a
more reliable guide to a company’s performance and future prospects. Moreover, the presentation
of two distinct values for income can lead to confusion among budget users and make it difficult to
understand which of the two measures can be taken as a parameter on which to base future
investment decisions.
In support of the above, the IASB with the proposal to modify the revised IAS1 (contained in
ED/2010/5), has requested the substitution of the two alternative formats for presenting CI with a
single document called, Statement of Profit and Loss and Other Comprehensive Income, divided in
two sections: the first dedicated to the values of the traditional income statement (entitled profit and
loss) and the second reserved for the components of OCI (entitled “items of other comprehensive
income”).
As regards management’s discretionary freedom in carrying out budgetary policies, the results
obtained show that the possibility to choose between two distinct values for income- traditional and
comprehensive- can allow accountants to choose their presentation format according to which of the
two values to be used as a measure of company performance will give the results a better “spin” in
the eyes of the market. The obligation to represent CI in a single document, emphasising
comprehensive income as the final result, should deter such behaviour.

Finally, we should point out that, at the international level, the debate on the relevance of CI as a
measure of company performance vis-à-vis the traditional concept of income is still ongoing. While
theoretical approaches underline the potential of CI to provide reliable answers for users, the
significance of the results of the empirical investigations undertaken on this issue is still unclear
(VanCauwenberge and De Beelde, 2007; Cheng et al., 1993; Dhaliwal et al., 1999; O’Hanlon and
Pope, 1999; Dee, 2000; Isidro et al., 2006; Wang, 2005; Wang et al., 2006; Francis and Schipper,
1999; Obinata, 2002; Giner and Pardo, 2004).

2
«The Board has no plans to eliminate profit or loss as a measure of performance. Profit or loss will still be presented
clearly and will remain the required starting point for the calculation of earnings per share» (ED/2010/5, p. 5).
 The findings of this work can be a useful starting point for future research aimed at assessing the
significance of the notion of income in accounting. Based on international experience a study of
predictive value, in terms of future earnings and turnover, of comprehensive income and traditional
income could shed light on the question of which of the two notions should be adopted as a measure
of company performance. In particular, through a study based on linear regression techniques one
could attempt to compare the significance and value relevance, expressed in terms of statistical
correlation, with the market price of shares and gains from variations in market prices of traditional
income and CI as measures of company performance.

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