Quality Of Net Income Vs Total Comprehensive Income In The Context Of IAS/IFRS Regulation


Worldwide researches in the field of accounting have tried to provide fair and useful financial performance measures for a wide range of users. As well, academics and professionals have established for decade income as the key performance measures in making economic decisions (Ball and Brown, 1968; Beaver, 1968; Lev, 1989). The purpose of this study is to investigate the quality of total comprehensive income TCI relative to net income NI, prepared in accordance with International Financial Reporting Standards IAS/IFRS. Through a data set covering 2,273 firms belonging to 22 countries from Europe, Asia and Australia during (2006-2010), we provide evidence that net income always dominates comprehensive income as a valuation metric. In fact, we find that NI is more value relevant and predicts future operating cash flows and income better than TCI. Also, NI better explain the actual operating cash flows than TCI. Moreover NI is more persistent and timely than TCI. We demonstrate also, that the quality of accruals linked to NI is better than those related to TCI. Though, we find that TCI is less smoothing and more conservative than NI. These results do not support the claim that income measured on a comprehensive basis is a better measure of firm performance than NI. These results raise the questions about the usefulness of mandating TCI in IAS/IFRS regulation. Our findings, therefore, should be of interest to IASB as they provide evidence of the fewer quality of the TCI. Perhaps it is time for the IASB to reconsider other comprehensive income components. The IASB should focus on items included in other comprehensive income to progress the quality of the TCI metric. Our results get evidence else, that net income should be retained as a primary decision-relevant metric as suggested by Goncharov and Hodgson (2011).

Keywords: Earnings Quality, Financial Statement Presentation, IAS/IFRS Regulation, Net Income, Total Comprehensive Income

Unique Article ID: EJAAFR-184b

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