Components of Comprehensive Income under IFRS in the Earnings-Return
Relation: Some preliminary findings
Janice Loftus and Maxwell Stevenson
Faculty of Economics and Business, University of Sydney
Contact details:
Janice Loftus
J.Loftus@econ.usyd.edu.au
Abstract
This study examines the role of components of comprehensive income in the
earnings-return relation. Australian data, post adoption of AIFRS, is used to capture
the components of comprehensive income that arise from the application of IFRS.
Unrealised gains and losses on available-for-sale investments are associated with
returns, indicating that these unrealised gains and losses have value relevance. There
is no evidence that asset revaluations and movement in the foreign currency
translation reserve are associated with stock returns, indicating that these items are
transitory components of earnings. A weak, negative association between returns and
amounts deferred in equity for cash flow hedges is found, but this result is limited to
one of several sensitivity analyses. This study raises concerns about the basis for
distinguishing between profit for the period and other components of comprehensive
income reported in accordance with the revised version of IAS 1.
January 2009
Acknowledgements:
The authors gratefully acknowledge the research assistance provided by Bruno
Rodrigues, the finance support provided by the Faculty of Economics and Business,
University of Sydney and the comments provided by participants in research seminars
at Queensland University of Technology and The University of Canberra.
Please do not quote without permission from the authors.
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1.
Introduction
More than a century has passed since Sir Arthur Lowes Dickinson initiated the debate
on how summary firm performance should be measured (Dickinson 1904, 1905).
Brief and Peasnell (1996) provide a chronological summary of the debate. Central to
this debate has been whether firm performance is better captured by