COMPREHENSIVE INCOME IN EUROPE: VALUATION, PREDICTION AND CONSERVATIVE ISSUES

The IASB comprehensive income project extends the ‘fair value’ measurement conceptfrom the balance sheet into the income statement. This article extends prior research, primarilybased on Anglo-Saxon countries, by using a comprehensive data set of 56,700 European firm yearsover sixteen countries. We find that other comprehensive income provides incremental informationto investors – due to unrealised available-for-sale securities component – and affects analysts’decision to revise price estimates. On the other hand, traditional operating net income dominatesaggregated comprehensive income as a valuation metric and in predicting cash flows. Results arerobust to pooled and country specific regressions, controls for non-linearities, impact of reportingincentives, and the underlying accounting framework (local GAAP, US GAAP, IFRS). We also findthat aggregated comprehensive income switches the conservative attributes of income towards amore timely recognition of good news over bad news, reducing the conservative agency contractingrole. One possible explanation is the mixing of different concepts of operating capital incrementswith unrealised gains and realised historic net income. An agenda item for the IASB is how incomereporting should be disaggregated with a clear delineation on capital increments, conservativeoperating income, and unrealised financial gains. This is especially important in ContinentalEurope which relies to a greater extent on debt capital and has an under-developed corpus ofequity financial analysts.