Comprehensive Income Value Relevance Research

Comprehensive income is an important accounting concept which had rised in lately few decades. After UK, US and so on adopted this concept at the end of last century, IASB officially adopted it in the amended version of IAS1-Presentation of Financial Statements in2007This amendment was the first batch of new standards released by IASB after the substantive convergence between Chinese accounting standards and international financial reporting standards (hereafter referred to as IFRS) since2007. The Mof of China adopted this disclosure requirement of comprehensive income in2009through Interpretations of Standards to ensure its standards being synchronizing with IFRS.Since the burst of global financial crisis in2008, iASB has made continuous and material revisions on IFRS in response to requests from different parties concerned. Although China has taken part in the discussing process actively, and put forward many constructive recommendations, some revisions taken by IASB are obviously not suited for the actual environment of China. The cancelation of cost measure requirement of equity instruments is one of them. Under this circumstance, how to adhere to the substance of convergence to the international accounting standards and protect our national interest has become a real issue, which Chinese rule-setters and researchers must face and ponder seriously. If we consider the release of Chinese Accounting Standards (hereafter referred to as CAS) in conformity with IFRS in2007as a political decision, then how to tackle the issue of continuous convergence between Chinese and international accounting standards has become a much more tough test of the wisdom and courage of Chinese rule-setters.As the first requirement of IFRS introduced in China after CAS became effective, comprehensive income offers an ideal window for observing the convergence strategy of Chinese rule-setters. Under the current circumstance, it is a significant topic to study and test whether the introduction of the disclosure requirement of comprehensive income could offer more value relevance information to the financial report users, and whether there exists a problem of path dependence. By the deeply study of comprehensive income, including analyses of the evolution of its connotation, a review of the evolution of the standard, an empirical study of its value relevance in Mainland China, and a comparison with what it will be in capital markets of US and Hong Kong, this dissertation endeavors to assess the actual significance of introducing comprehensive income disclosure requirement in China. Then based on the study of this special event, recommendations on the policies are put forward with regards to continuous convergence of accounting standards in China to the international ones.Findings and conclusions of this dissertation are summarized in the following five perspectives.1. After studying the Comprehensive income theoretically, summing up the historical evolution detailedly, this dissertation comes to the conclusion that comprehensive income is a rationality and advanced theoretic concept. To clarify the theoretical origin of comprehensive income, this dissertation, from economic perspective of income, compares the concept of income in different periods of history and studies relationship between accounting income and economic income. It is found that theory of comprehensive income results from both continuous development and enrichment of the concept of accounting income, as well as the dynamics with economic income. Compared with traditional net profit, comprehensive income better reflects the principle of economics and better suits the economic reality of huge volatility in values of assets since the collapse of the Bretton Woods System. Therefore, the concept is theoretically sound and advanced.2. Analysis is made with regards to the making process of the standard of disclosure of comprehensive income. The key point is that release and deployment of any standard should take into account not only whether it is theoretically advanced, but also what the needs of the society are. The gradual adoption of the comprehensive income by the UK and US proves that the reality and different interest parties have influence over the setting of the standard, though the standard is theoretically advanced. The purpose of setting accounting standards is to provide useful information for decision-making. In release and application of any accounting standard, whether it is theoretically advanced is a necessary condition and the society’s need is the decisive factor. During the process of the convergence of accounting standards, more efforts should be made to balance these two factors in determining whether and when to introduce specific IFRS in China.3. Empirical study has been done to assess the value relevance of comprehensive income in different countries/regions. We found that currently value relevance of comprehensive income is lower than that of net profit in China. It is opposite to the results for the US and Hong Kong. This dissertation designs unified return model, pricing model and incremental return model. We use these models to carry out relative correlation study and incremental correlation study on value relevance of net profit, comprehensive income and other comprehensive income of public companies on stock exchanges of Mainland China (Shanghai), the US and Hong Kong. Contrary to findings in the US and Hong Kong, value relevance of comprehensive income is lower than that of net profit in China and other comprehensive income does not offer significant incremental information. It shows that there are substantial differences in usefulness of comprehensive income to decision making between China and the US/Hong Kong. As a by-conclusion of this dissertation, it is found that during the period of financial crisis, information of accounting income no longer has value relevance. This finding can be considered a supplement to the study of usefulness of accounting information since Paul Brown founded empirical accounting research method.4. Analysis of the causes leading to differences in value relevance of comprehensive income in different countries/regions has been done. It is found that the effects of implementation of accounting standards are not entirely determined by the standards themselves, but also depend on other factors such as political&legal environment, economic environment, cultural environment as well as views and knowledge of the stakeholders. Making of high-quality financial reports is influenced by a series of institutional arrangements and accounting standards are only part of them. It is difficult to achieve the goal of improving quality of financial reports only through amendments of accounting standards but not taking into consideration the influences of external environment factors.5. The questionnaire study on value relevance of comprehensive income explicitly indicates that there is only low awareness of comprehensive income in China and the usefulness of it for decision making is limited. The questionnaire study shows that the majority of financial report users have very limited knowledge of comprehensive income and comprehensive income is not of widespread use. Net profit still plays a dominant role in economic decision making. Findings of the questionnaire study not only verify the influence of external environments on accounting and offer powerful explanations to empirical study results, but also suggest that adoption of the change in IFRS does not necessarily improve usefulness of financial reports to decision making. On the other hand, it is likely to increase the preparation costs.Based on the above findings and conclusions, five policy recommendations are proposed with respect to continuous convergence of accounting standards.1. Take IFRS as "Nominal Anchor" as said by the economists, and further make it "standard anchor" of the governing bodies in different countries. Thus, the "anchoring" role of IFRS could be secured in global convergence of accounting standards.2. Have a clear position of China in setting of IFRS, that is, from follower to leader, and secure a position compatible with her economic power.3. Take a reasonable approach to the technical nature of accounting standards. Make financial reports simpler and accounting standards easier to understand. Construct "financial report cloud" and increase the social efficacy of accounting.4. Scientifically set standard making process, including setting transparent standard recognition mechanism; determining convergence approach and timing its application based on economic impact and cost-benefit evaluations; soliciting all the stakeholders concerned to participate in standard making, especially the business community.5. Strengthen the buildup of supporting systems and mechanisms for accounting standards to enhance the influence of the standards.