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                              Accounting 518 Teaching Notes
               All Inclusive Income Statements and Comprehensive Income

I.     Introduction
       In this class, we will focus on the usefulness of income
            1) All -inclusive versus current operating earnings approach
            2) Concern over how to handle unusual items
            3) Combination with MD&A and footnote disclosure
            4) Practice preparing a statement of comprehensive income (SFAS 130)

II.    All inclusive versus current operating approach
       A. Define
       B. Which do we follow?
           (In general, all-inclusive with some deviations--give examples)

III.   Cover Standards
          Give definitions of extraordinary items and format for bottom of income statement
       Lecture/problem example on SFAS 130

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                                        APBO 30
                            Reporting Results of Operations:
                        Segment Disposals and Extraordinary Items

I.     Introduction
       Undertaken because
       1) "Interpreting the criteria for extraordinary items has been difficult and;
       2) Significant differences of opinion exist about provisions in APB 9”

II.    Standard covers extraordinary items requirements
       A. Requirements
           1) Unusual in nature
           2) Infrequently occurring

       B. Specifically excludes:
          1) Asset write-downs
          2) Foreign exchange gains and losses
          3) Segment disposals
          4) Other asset sales or disposals
          5) Long-term Contract accrual adjustments

III.   Reporting Format

       A. Defines the all-inclusive approach verses the current operating performance approach
           Board uses all-inclusive approach but embraces current operating performance
             theory in requiring continuing operations

       B. Present form of Income Statement:
          Income from continuing operations before taxes
              Income tax expense
          Income from continuing operations
          Discontinued operations
              Income/Loss from operations prior to discontinuation (N.O.T.)
              Loss of Disposal (N.O.T.)
          Income before extraordinary items and cumulative effect of changes in accounting
              Extraordinary items (N.O.T.)
              Cumulative Effect of Change in Accounting Principles (N.O.T.)
          Net Income

I.     Extraordinary Items

       Must be...
       A. Unusual in nature - not just in dollar amount
       B. Infrequently occurring - not just in dollar amount
       C. If one or the other, but not both, then disclose separately

II.    Accounting for the Disposal of a Segment: Superseded by SFAS 144

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                       FASB Statement 130: Reporting Comprehensive Income

I. Purpose: To report a measure of overall enterprise performance by displaying all changes in equity that
result from recognized transactions and other economic events of the period other than transactions with
owners in their capacity as owners. “As a first step in implementing the concept of comprehensive income,
this Statement requires that all items that meet the definition of components of comprehensive income be
reported in a financial statement...that is displayed as prominently as other financial statements.”
          A. Should help investors and creditors assess the timing and magnitude of future cash flows.
          B. Users (financial statement analysts) have expressed concern about the increasing number of
items that bypass the income statement and the effort that is required to analyze them. They have urged the
Board to develop and implement the concept of comprehensive income to show the changes in items--such
as unrealized gains and losses on available-for-sale securities, pension liability adjustments, and foreign
currency translation adjustments--which currently are taken directly to the equity section of the balance
          C. Information about components of comprehensive income is expected to be more informative
than the total amount of comprehensive income.

II. Definition of comprehensive income (from SFAC6) and other terms

A. Comprehensive income is the change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by and distributions to owners.

B. Comprehensive income refers to the total of all components of comprehensive income, including net
income. Other comprehensive income refers to items included in comprehensive income but not net

C. SFAC5 recommends showing comprehensive income as part of a full set of articulated financial
statement, along with: 1) financial position at the end of a period, 2) earnings (net income is what is now
presented; SFAC5 defines earnings as excluding cumulative effects of changes in accounting principles); 3)
cash flows; and 4) investments by and distributed to owners.

III. Standard
A. Specifies how to report and display; does not specify when to recognize or how to measure constituent
items; existing and future accounting standards will provide guidance and items that are to be included in
comprehensive income and its components.

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B. Classifications within comprehensive income
          1) Net Income: Net Income still includes cumulative effects of changes in accounting principle.
The FASB decided on this treatment more for practical reasons--to get this statement out--than based on
technical merit. Leaving cumulative effect-type adjustments in the income statement limits the scope of
this new statement to display issues, as stated in A above.
          2) Other Comprehensive Income: Items included are classified according to their nature (e.g.,
unrealized gains and losses on securities held available for sale are described as such.)
          3) Reclassification Adjustments
Items such as unrealized gains and losses on investments may eventually be included in net income. When
they are, they also must be backed out of comprehensive income in that period to avoid double-counting
the item in Cumulative Comprehensive Income. Reclassification adjustments are the amounts included in
the calculation of comprehensive income which offset the items included in the current year’s net income.
          Companies must determine the amount of reclassification adjustments for all items of
comprehensive income except minimum pension liability adjustments. They may be displayed on the face
of the statement or disclosed in the notes:
                   a. gross display: shows reclassification adjustments deducted from comprehensive
                   b. net display: show reclassification adjustments separately in the footnotes.
          4) Income tax treatments: income tax effects from the items in comprehensive income must be
reported for each item of comprehensive income. These tax effects may be presented in the statement of
comprehensive income either
          a)       as one item of income tax expense/benefits (gross amount); or,
          b)       netted against each individual item (net of tax).
This tax treatment facilitates comparison to components of net income (gross amount) and to changes in
equity (net of tax).

C. Title for stockholders’ equity account: “Cumulative Other Comprehensive Income”

D. Amendments to existing pronouncements
The standard amends current pronouncements for items which were taken directly to stockholders’ equity
but which now go to comprehensive income
        a)      SFAS52: foreign currency translation adjustments
        b)      SFAS80: Futures contracts: gains and losses (deferred due to hedging)
        c)      SFAS115: Unrealized holding gains and losses on securities available for

IV. Presentation Formats: alternatives are possible. See attached examples

V. Effective for years beginning after December 15, 1997.

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