Comprehensive Income
The FASB and IASB have determined that the balance sheet is the cornerstone of accounting and that income should be measured by changes in the values of assets and liabilities. To provide relevant and reliable measures of assets and liabilities, U.S. GAAP and IFRS use a variety of measurement attributes, some of which require firms to adjust asset or liability values to reflect changes in net realizable values, fair values, or present values. Valuation adjustments to assets and liabilities usually give rise to revenues (or gains) or to expenses (or losses). For example, if a firm determines that it will not collect some of its accounts receivable or will not be able to sell some items of inventory, it should adjust receivables and inventory to their net realizable values and recognize those adjustments as expenses or losses in net income. The FASB and IASB have determined that four particular types of valuation adjustmentsrepresent unrealized gains or losses that should be reported in a statement of comprehensive income for reporting periods beginning after December 15, 2012.6 Other comprehensive income items are accumulated over time in a special equity account
titled Accumulated Other Comprehensive Income or Loss (AOCI). These other comprehensive income items are not recognized in net income until they are realized in an economic transaction, such as when the related assets are sold or the liabilities are settled. The segregation of AOCI acts as a temporary ‘‘holding area’’ for such gains or losses until their ultimate settlement. Review the consolidated statement of equity for PepsiCo in Appendix A. It details the four types of unrealized gain/loss items that are triggered by the revaluation of assets and liabilities. The accumulated effects of these items over several periods are reported as the components of accumulated other comprehensive loss: (1) currency translation adjustments; (2) cash flow hedges, net of tax; (3) certain changes in pension and retiree medical plan obligations, net of tax; and (4) unrealized losses/gains on securities, net of tax. Because PepsiCo uses U.S. GAAP instead of IFRS, it does not report the fifth possible item related to revaluations of property, plant, and equipment.
The FASB and IASB are aware that unrealized gains and losses of this nature affect the market value of firms, but users of financial statements might overlook them because they do not yet appear in net income. Therefore, firms must report comprehensive income.7 Comprehensive income equals all revenues, expenses, gains, and losses for a period, both realized and unrealized. Comprehensive income includes net income plus or minus the other comprehensive income items. Refer to PepsiCo’s consolidated statement of comprehensive income in Appendix A. Comprehensive income for PepsiCo for 2012 is as follows (in millions):
The FASB and IASB have determined that the balance sheet is the cornerstone of accounting and that income should be measured by changes in the values of assets and liabilities. To provide relevant and reliable measures of assets and liabilities, U.S. GAAP and IFRS use a variety of measurement attributes, some of which require firms to adjust asset or liability values to reflect changes in net realizable values, fair values, or present values. Valuation adjustments to assets and liabilities usually give rise to revenues (or gains) or to expenses (or losses). For example, if a firm determines that it will not collect some of its accounts receivable or will not be able to sell some items of inventory, it should adjust receivables and inventory to their net realizable values and recognize those adjustments as expenses or losses in net income. The FASB and IASB have determined that four particular types of valuation adjustmentsrepresent unrealized gains or losses that should be reported in a statement of comprehensive income for reporting periods beginning after December 15, 2012.6 Other comprehensive income items are accumulated over time in a special equity account
titled Accumulated Other Comprehensive Income or Loss (AOCI). These other comprehensive income items are not recognized in net income until they are realized in an economic transaction, such as when the related assets are sold or the liabilities are settled. The segregation of AOCI acts as a temporary ‘‘holding area’’ for such gains or losses until their ultimate settlement. Review the consolidated statement of equity for PepsiCo in Appendix A. It details the four types of unrealized gain/loss items that are triggered by the revaluation of assets and liabilities. The accumulated effects of these items over several periods are reported as the components of accumulated other comprehensive loss: (1) currency translation adjustments; (2) cash flow hedges, net of tax; (3) certain changes in pension and retiree medical plan obligations, net of tax; and (4) unrealized losses/gains on securities, net of tax. Because PepsiCo uses U.S. GAAP instead of IFRS, it does not report the fifth possible item related to revaluations of property, plant, and equipment.
The FASB and IASB are aware that unrealized gains and losses of this nature affect the market value of firms, but users of financial statements might overlook them because they do not yet appear in net income. Therefore, firms must report comprehensive income.7 Comprehensive income equals all revenues, expenses, gains, and losses for a period, both realized and unrealized. Comprehensive income includes net income plus or minus the other comprehensive income items. Refer to PepsiCo’s consolidated statement of comprehensive income in Appendix A. Comprehensive income for PepsiCo for 2012 is as follows (in millions):
Thus, PepsiCo’s comprehensive income exceeded net income, primarily due to a large favorable effect of currency translation. Firms may present a single statement of comprehensive income, which includes the standard statement of net income, but continueswith other comprehensive income to arrive at comprehensive income. Alternatively, firms may present other comprehensive income as part of a separate statement of comprehensive income, which begins with net income and adds or subtracts various elements of other comprehensive income to compute comprehensive income. PepsiCo uses the second method of disclosure. Appendix A indicates that PepsiCo uses the term accumulated other comprehensive loss on its consolidated balance sheet. In addition, PepsiCo reports the accumulated balances for each component of its other comprehensive income in Note 13, ‘‘Accumulated Other Comprehensive Loss Attributable to PepsiCo,’’ to the financial statements.
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