From compromise to concept? – a review of ‘other comprehensive income’

Abstract

This paper reviews how ‘other comprehensive income’ (OCI) entered financial reporting by tracing major Financial Accounting Standard Board (FASB) and International Accounting Standards Board (IASB) projects that required direct entries to equity and describing recent efforts to make sense of the practice. It was the fixation on net income that brought about departures from all-inclusive income, which were repeatedly made over the years without decidedly devoting attention to developing a conceptual basis. OCI was used as a compromise to incorporate current values in the balance sheet, while retaining historical cost principles in the income statement. When the practice was labeled as OCI, it became institutionalized without a clear meaning. A sense-making of the practice then replaced the debates on the adequacy of using OCI and standard setters have realized that additional layers of theory became necessary to explain, for example, reclassification adjustments. Yet, the IASB has made clear in its recent Exposure Draft of a revised conceptual framework that it does not intend to pursue a fresh start in performance reporting that appears to be needed conceptually. Instead, practical considerations, primarily on International Financial Reporting Standards adoption in Japan, seem to lead to another ex-post rationalization of OCI, this time around a conceptually vacuous use of the relevance characteristic.