Let's Scrap the Comprehensive Income Statement

Just found this article http://accounting.smartpros.com/x62289.xml
H.

The Accounting Cycle
Let's Scrap the Comprehensive Income Statement
Op/Ed
By: J. Edward Ketz


June 2008 -- The statement of comprehensive income, whether displayed as a separate financial statement or in conjunction with the income statement or as part of the statement of changes in shareholders' equity, has served its purpose. It is time to scrap the concept and incorporate these items where they actually belong -- in the income statement.


Over the years the Financial Accounting Standards Board created a problem by allowing a variety of items to bypass the income statement, a result of te FASB's bias toward the balance sheet. In other words, FASB focused on reporting assets and liabilities of the business enterprise, but did not worry too much about the impact on the income statement. Included within the comprehensive income statement were foreign currency translation adjustments under the all-current method, holding gains and losses for investments under the available-for-sale category, gains and losses on derivatives if they are considered cash flow hedges, and losses if necessary to establish a minimum pension liability. If these things make sense to include on the balance sheet, surely their income statement effects are meaningful as well.

The board sometimes justified this approach by claiming that these items had less reliability than other events and transactions included in the income statement. But, this argument loses water in today's world. Surely if the fair value changes recently booked in the accounts of financial institutions are reliable, then these other measurements are equally reliable. This follows because the fair value changes recently recognized are the result not of changes in market values but in changes in model estimates.

Consider last year's 10-K for Merrill Lynch. The firm did not have a particularly good year, as witnessed by its 7.7 billion dollar loss. If the items in other comprehensive income are incorporated as well, the loss grows to almost 9 billion dollars.

The foreign currently translation loss, net of taxes, is a mere 11 million dollar loss. Nonetheless, it is a real economic loss to shareholders and should be recognized as such.

Merrill Lynch had losses on its investment securities considered available for sale of 2.5 billion dollars. Again, this is net of income taxes. As these securities reflect certain real changes of value, they too would be better displayed on the income statement.