EARNINGS ANALYSIS AND OTHER COMPREHENSIVE INCOME




The last section in the AK Steel Holdings income statement in Exhibit 2.9 is devoted to the reporting of other comprehensive income. This is a relatively new feature of the income statement and was introduced with the issuance by the FASB of SFAS No. 130, Reporting Comprehensive Income. The goal of the standard is to expand the concept of income to included selected items of nonrecurring revenue, gain, expense and loss. Under the new standard, traditional net income is combined with a new component, “other comprehensive income,” to produce a new bottom line, “comprehensive income.”

The principal elements of other comprehensive income are listed in the other comprehensive income section of the AK Steel Holdings comprehensive income statement (Exhibit 2.9). They include:

1. Foreign currency translation adjustments.

2. Unrealized gains and losses on certain securities.

Topics You May Be Interested In
What Are Financial Statements? A Case Study Nonrecurring Items In The Income Statement
How To Analyze Financial Statements Nonrecurring Items In The Statement Of Cash Flows
Using Financial Ratios Nonrecurring Items In The Inventory Disclosures Of Lifo Firms
Introduction To Analyzing Business Earnings Nonrecurring Items In The Income Tax Note
The Process Of Identifying Nonrecurring Items Nonrecurring Items In Other Selected Notes

3. Minimum pension liability adjustments.

Each one of these items was already recognized prior to the issuance of SFAS No. 130. However, they were reported not as part of net income but directly in shareholders’ equity. The items made their way into the income statement only if they became realized gains or losses by, for example, selling securities. Notice that the AK Steel disclosures in Exhibit 2.9 list the reclassification of gains on securities that had previously been recognized in other comprehensive income. When these gains were realized they were reported in net income. However, since they had earlier been included in other comprehensive income, avoiding double counting them requires an adjustment to other comprehensive income in the year of sale.

SFAS No. 130 permitted other comprehensive income to be reported in three different ways. The preferred alternative was the income statement format of AK Steel, though reporting other comprehensive income in a separate income statement was also permitted. The third option permitted other comprehensive income to be reported directly in shareholders’ equity. It should come as no surprise that most firms have elected this third option. Firms have an aversion to including items in the income statement that have the potential to increase the volatility of earnings. Hence, given the option, firms can and did choose to avoid the income statement.

There is scant evidence at this time that statement users pay any attention to other comprehensive income. Companies do not include other comprehensive income in discussions of their earnings performance, nor does the financial press comment on it when earnings are announced. Earnings per share statistics do not incorporate other comprehensive income. Other comprehensive income is not currently part of earnings analysis. Hence, we consider it no further. Attitudes may change, however, about the usefulness of other comprehensive income as analysts and others become more familiar with these relatively new disclosures. It seems worthwhile to at least be made aware of these disclosures as part of a thorough treatment of income statement structure and content.

Topics You May Be Interested In
Financial Statements: Who Uses Them And Why Nonrecurring Items In The Income Statement
Combining Financial Ratios Nonrecurring Items In The Inventory Disclosures Of Lifo Firms
The Z Score Nonrecurring Items In The Other Income And Expense Note
The Nature Of Nonrecurring Items Nonrecurring Items In Managements Discussion And Analysis (md&a)
The Process Of Identifying Nonrecurring Items Nonrecurring Items In Other Selected Notes

With the structure of the income statement and relevant GAAP now reviewed, the nature of nonrecurring items considered, and methods of locating nonrecurring items outlined and illustrated, we can turn to the task of developing the sustainable earnings series.



Frequently Asked Questions

+
Ans: Typically, most material nonrecurring items will have been located by proceeding through the first six steps of the search sequence in Exhibit 2.3. However, some additional nonrecurring items may be located in other notes. Nonrecurring items can surface in virtually any note to the financial statements. We will now discuss three selected notes that frequently contain other nonrecurring items: notes on foreign exchange, restructuring, and quarterly and segment financial data. Recall that inventory, income tax, and other income and expense notes have already been discussed in steps 3 to 5. view more..
+
Ans: Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is an annual and a quarterly Securities and Exchange Commission reporting requirement. Provisions of this regulation have a direct bearing on the goal of locating nonrecurring items. As part of the MD&A, the SEC requires registrants to: view more..
+
Ans: An “other income (expense), net,” or equivalent line item is commonly found in both the single- and multistep income statement. In the case of the multistep format, the composition of other income and expenses is sometimes detailed on the face of the income statement. In both the multi- and single-step formats, the most typical presentation is a single line item with a supporting note. Even though a note detailing the contents of other income and expense may exist, companies typically do not specify its location. Other income and expense notes tend to be listed close to the end of the notes to the financial statements view more..
+
Ans: The last section in the AK Steel Holdings income statement in Exhibit 2.9 is devoted to the reporting of other comprehensive income. This is a relatively new feature of the income statement and was introduced with the issuance by the FASB of SFAS No. 130, Reporting Comprehensive Income.44 The goal of the standard is to expand the concept of income to included selected items of nonrecurring revenue, gain, expense and loss. Under the new standard, traditional net income is combined with a new component, “other comprehensive income,” to produce a new bottom line, “comprehensive income.” view more..
+
Ans: The work to this point has laid out important background but is not complete. Still required is a device to assist in summarizing information discovered on nonrecurring items so that new measures of sustainable earnings can be developed. We devote the balance of this chapter to introducing a worksheet specially designed to summarize nonrecurring items and illustrating its development and interpretation in a case study. view more..
+
Ans: The sustainable earnings worksheet is shown in Exhibit 2.26. Detailed instructions on completing the worksheet follow: 1. Net income or loss is recorded on the top line of the worksheet. 2. All identified items of nonrecurring expense or loss, which were included in the income statement on a pretax basis, are recorded on the “add” lines provided. view more..
+
Ans: The sustainable earnings base provides earnings information from which the distorting effects of nonrecurring items have been removed. Some analysts refer to such revised numbers as representing “core” or “underlying” earnings. Sustainable is used here in the sense that earnings devoid of nonrecurring items of revenue, gain, expense, and loss are much more likely to be maintained in the future, other things equal. Base implies that sustainable earnings provide the most reliable foundation or starting point for projections of future results. The more reliable such forecasts become, the less the likelihood that earnings surprises will result. Again, Phillips Petroleum captures the essence of nonrecurring items in the following: view more..
+
Ans: This case example of using the SEB worksheet is based on the 1997 annual report of Baker Hughes Inc. and its results for 1995 to 1997. The income statement, statement of cash flows, management’s discussion and analysis of results of operations (MD&A), and selected notes are in Exhibits 2.27 through 2.34. Further, to reinforce the objective of efficiency in financial analysis, we adhere to the search sequence outlined in Exhibit 2.3. view more..
+
Ans: The nonrecurring items located in the Baker Hughes annual report are enumerated in the completed SEB worksheet in Exhibit 2.35. Each of the nonrecurring items is recorded on the SEB worksheet. When an item is disclosed for the first, second, third, or fourth time, it is designated by a corresponding superscript view more..
+
Ans: The construction of an SEB worksheet always requires a judgment call. One could, of course, avoid all materiality judgments by simply recording all nonrecurring items without regard to their materiality. However, the classification of items as nonrecurring, as well as on occasion their measurement, calls for varying degrees of judgment. Some examples of Baker Hughes items that required the exercise of judgment, either in terms of classification or measurement, are discussed next. view more..
+
Ans: An estimation of the sustainable portion of earnings should be the centerpiece of analyzing business earnings. This task has become a far greater challenge over the past decade as the number of nonrecurring items has increased dramatically. This explosion has been driven by corporate reorganizations and associated activities. Some of the labels attached to these producers of nonrecurring items are restructuring, rightsizing, downsizing, reengineering, redeployment, repositioning, reorganizing, rationalizing, and realignment. view more..
+
Ans: Abigail Peabody was a very well-known nature photographer. Over the years she had had a number of best-sellers, and her books adorned the coffee tables of many households worldwide. On this particular day she was contemplating her golden years, which were fast approaching. In particular she was reviewing her year-end investment report and wondering why she was not better prepared. After all, she had been featured in the Sunday New York Times book section, had discussed her works with Martha Stewart, and had been the keynote speaker at the Audubon Society’s annual fund-raiser. She knew it was not her investment advisers’ fault. Their performance over the past years had been better than many of the market indixes. She wondered if she was just a poor businessperson. view more..




Rating - 4/5
540 views

Advertisements