Reporting of Other Comprehensive Income Reclassifications (#155)
/In this podcast episode, we discuss the new accounting standard for disclosing the effects of a reclassification of other comprehensive income. Key points made are noted below.
Rules Change for Other Comprehensive Income
This episode is about a new accounting standards update that’s called “reporting of amounts reclassified out of accumulated other comprehensive income.” The update number is 2013-02. This is a minor update, but since a lot of organizations report other comprehensive income, I thought it might be useful to bring up the change.
The rules change basically says that, if GAAP requires an entire amount to be shifted from other comprehensive income to net income, you have to report the effect of the reclassification on the line items into which the amounts have been shifted. Also, in cases where the amount reclassified does not go directly into net income, you now have to cross-reference other GAAP disclosures that describe these changes. So, for example, if a reclassification goes into the balance sheet, you’d have to cross-reference the disclosure. The reason for requiring this information is so that someone reading the financial statements of a business fully understands the effect on the statements of these reclassifications.
All of this information was already required to be disclosed, but it was scattered around in the financial statements. Now, the information is assembled into one place.
Also, the disclosures are required for all financial statements issued by a publicly held company, and for the annual financial statements of privately held companies.
That was the overview. Here are a few more detailed points.
You have to present the information separately for each component of other comprehensive income. Also, you can present the information on either a before-tax or an after-tax basis. And also, you can present the information either on the income statement, or as a separate disclosure in the notes to the financial statements.
If you choose to present the information on the income statement, it’s presented in parentheses next to each line item that’s affected. This also has to include the aggregate tax effect of the reclassifications on the income tax line item.
An example of this type of presentation would be a parenthetical disclosure next to an expense line item that says, “Includes $10,000 of accumulated other comprehensive income reclassifications for net losses on cash flow hedges.” That’s a pretty bulky form of presentation that can clutter up the income statement, so I’d suggest not using it, unless you’re only including this type of information for just one or two line items.
If you choose to present the information in the notes to the financial statements, then present it for each component of other comprehensive income, along with subtotals for each component. In terms of readability, I think you’d do better by disclosing this information in the notes.
So for example, the header for the footnote disclosure might be called “Reclassifications out of Accumulated Other Comprehensive Income.” The first column in the table might have a subheading for gains and losses on cash flow hedges, with individual line items for things like interest rate contracts and credit derivatives. And then you could have additional subheadings for things like unrealized gains and losses on available-for-sale securities, or maybe a separate classification for insignificant items.
Then the second column contains the numbers for each of these line items, and a third column lists which line items in the income statement are affected.
And that covers the new accounting standards update. Overall, I don’t think they should assemble this information in the income statement, since it really will clutter up the presentation. Aggregating everything into a footnote disclosure could put some useful information in one place, and the tabular format is a good way to present it - but this is not what I’d call critical information for the users of financial statements.