Comprehensive Income Presentation Under IAS 1: the Reporting Practices of the Largest Companies Listed on the Warsaw Stock Exchange

„Zeszyty Teoretyczne Rachunkowości”, tom 68 (124), SKwP, Warszawa 2012, s. 121–145.

Comprehensive income presentation under IAS 1: the reporting practices of the largest companies listed on the Warsaw Stock Exchange

*  Anna Szychta , Denise de la Rosa

Introduction

Accounting theorists have for decades explored and debated the nature, principles and methods of business entities’ financial performance measurements and presen- tations in financial statements. Issues discussed in accounting literature, especially in Anglo-American publications, have raised questions related to the concepts of dirty surplus accounting (DSA) and clean surplus accounting (CSA). DSA is connected with the operational income statement, while CSA underpins the need for a statement of comprehensive income (see e.g. Mattessich, 2008, p. 169). These topics have been addressed since the 1930s1, but in the last two decades they have become more prominent as technology and accounting practices accelerated the number and volume of contentious items bypassing the income statement with little or no disclosure. Increased pressure by users intensified the desire for more transparency and the requirement to present total comprehensive income (CI) and the various components of other comprehensive income (OCI). The practical result was the introduction of accounting standards requiring the presentation of CI and its components in the financial statements of companies in Great Britain (1992), New Zealand (1994), the U.S. (1997), Canada (2005), and those presenting statements in accordance with IFRS (2007). With the revision of IAS 1 Presentation of Financial Statements in 2007, the obligation to present CI has been required since 2009 in consolidated statements of listed companies operating in the European Union (EU). There has been little published research analysing this new requirement for CI under the latest version of IAS 1 in the financial statements of companies publicly traded within the EU. This

* Dr. hab. Anna Szychta, associate professor, Department of Accounting, Faculty of Management, University of Łódź, e-mail: [email protected]  Denise de la Rosa, PhD, associate professor, School of Accounting, Grand Valley State Univer- sity, Grand Rapids, MI. 1 As O’Hanlon and Pope (1999, p. 460) point out, W. Paton in 1934, G. May in 1937 and A. Littleton in 1940 expressed the fear that dirty surplus accounting practice might be used to increase reported earnings. 122 Anna Szychta, Denise de la Rosa

research addresses the void by presenting the practices and the results of companies operating in Poland subject to the new requirement. Specifically, we wanted to know what format had been chosen for the initial presentation of CI of the largest consolidated listed companies on the Warsaw Stock Exchange (WSE), as well as the components of OCI and their values. In 2010 the WSE was one of the largest emerging stock exchanges in the region of Central and Eastern Europe as well as one of the most liquid with a market capitalization increase of 26% from 2009. From an investor perspective, emerging markets offer opportunities for diversification; and the WSE, with a heavy presence of foreign institutional investors, plays a prominent role. The purpose of this paper is to examine the method of presentation and the amounts of total CI and its components in consolidated financial statements for the years 2009–2010 of the largest companies listed on the WSE, in light of the provisions for CI in IAS 1 and its amendments in June 2011. This paper contains an analysis of the compliance of these companies with the requirements provided for CI in IAS 1. The operationalization of the concept of CI is novel for the Polish accounting community. The rules for presentation and the significance of this performance measure present new challenges for preparers and users of financial statements in Poland. It is critical to know the conceptual underpinning and forms of CI presentation in financial statements, as well as the findings of empirical research conducted abroad that focus on net profit (loss), CI and OCI. Observing the initial incorpora- tion of the new IAS 1 reporting requirement by Polish listed companies helps to better understand the accounting practice and the degree of compliance of Polish publicly traded companies. These issues are examined in this study. The paper is based on a literature review, analysis and interpretation of IAS 1, and a review of consolidated financial statements of 24 of the largest companies listed on the Warsaw Stock Exchange. Simple financial analysis indicators were used to establish the relevance and variability of OCI in the companies included in the study. The empirical research carried out by the authors is a pilot project and can provide a starting point for more comprehensive studies – based on a greater number of WSE companies – of various aspects of CI measurement and presentation, and the correlation of CI and OCI with the market value of shares. The paper is divided into five sections. Section 1 provides a discussion of the theoretical basis for CI. Section 2 addresses the requirements under IAS 1 and its amendments in 2011. Section 3 includes a literature review of CI. Section 4 dis- cusses the data and its analysis. Finally, the last section provides concluding remarks and suggestions for future research.

Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 123

1. Theoretical basis of net income and comprehensive income

The scholarly debate on DSA and CSA reflects two conflicting objectives expected of financial statements2: 1) predictive ability, 2) reporting of „the facts”. Presenting information in financial statements in accordance with the DSA concept involves the elimination of transitory and non-operating flows from reported earnings. The proponents of DSA argue that using it as a basis for financial reporting enhances the predictive ability of reported earnings and, as a consequence, the usefulness of information contained in financial statements for equity valuation purposes (O’Hanlon, Pope, 1999, p. 460). Changes in the book value of the enterprise that are transitory in nature and arise from non-core business activities bypass the income statement and are reported in the owners’ equity on the balance sheet. These changes are believed to have limited predictive power. The opponents of this approach point out that items excluded from net income (NI) and recognised directly in the owners’ equity are not easily identifiable in financial statements, which can make it difficult for a company’s investors to estimate the amounts and relevance of these items (see e.g. Bhamornsiri, Wiggins 2001, pp. 54–55; Kanaga- retnam et al., 2009, p. 352). The proponents of CSA claim that it allows information on financial performance of a company to be presented in a clearer way. Under this approach all changes to the book value of shareholders’ equity which are excluded from NI should be reported as OCI in the financial statements. The use of CSA requires presentation in financial statements of CI, which reflects all non-owner changes in equity (net assets) of a company during a reporting period. Proponents of CSA as a basis for presenting information on an entity’s financial performance believe that financial reporting better fulfills its objective of reporting the facts. It makes it easier for investors to know the value of relevant items, which in the case of DSA, bypass the income statement. Total CI recognized and presented under the CSA approach is the foundation of the residual income-based valuation of enterprises (O’Hanlon, Pope, 1999, p. 460; Chambers et al., 2007, p. 561; Kanagaretnam et al., 2009, p. 352). Presentation in financial statements of income representing a company’s financial performance in a given period is closely related to the economic notion of income and wealth. There are two concepts of income in economics (see e.g. Hendriksen, van Breda, 2002, pp. 294–295 and p. 353; Newberry, 2003, p. 327). The first is a measure of performance of an enterprise and its management in

2 This is an opinion of Brief and Peasnell (1996, p. XI) in: R. Brief, K. Peasnell (eds.), Introduc- tion. Clean Surplus: A Link Between Accounting and Finance, Garland Publishing 1996, quoted by O’Hanlon and Pope (1999, p. 460). 124 Anna Szychta, Denise de la Rosa

a given period. The second is the enhancement of the wealth of the entity’s owners. This occurs when the value of equity at the end of a reporting period exceeds its value at the beginning of a reporting period after excluding all transactions with the owners of the enterprise. Income as a measure of performance of an enterprise represents the outcome of intentional, normal, continuous operating activity of an entity. It therefore is a measure of economic efficiency of an enterprise, whereas the enhancement of wealth concept of income focuses on income from the investor’s perspective (Newberry, 2003, p. 328) and is connected with equity maintenance (Hendriksen, van Breda, 2002, p. 353; Bhamornsiri, Wiggins, 2001, p. 54). Viewing income as an enhancement of wealth is based on the economic notion of income discussed in the works of such authors as A. Smith, I. Fisher, J.R. Hicks (e.g. Hicks, 1975, p. 275; Hendriksen, van Breda, 2002, pp. 295–297). Some accounting theorists regard these two concepts of income as disparate views of financial reporting (Newberry, 2003, p. 327; Godfrey et al., 2006, p. 520). The two concepts correspond to two different categories of business activity. The first represents the idea of current operating income as the major component of NI and presented in the income statement. The second concept views the overall increase (decrease) in the book value of net assets (excluding investments by and distributions to owners) in a given reporting period as the important metric for financial reporting. This broader view of income incorporates NI along with additional changes to net assets called OCI. Current operating income recognises changes in value resulting from core business activities, while CI recognises all changes in the value of assets and liabilities, including holding gains and losses. Both concepts of income can be reconciled by the preparation of a statement of comprehensive income that contains both NI and OCI. Total CI includes assets and liabilities remeasured at fair value (Van Cauwen- berge, de Beelde, 2007). The CSA concept requires presentation of CI that corresponds to the theory of capital based on ownership. This theory of capital, called proprietary theory, states that revenues increase capital while expenses reduce it. NI, which belongs to the owner, represents an increase in the proprietor’s capital. Proprietary theory best applies to single proprietor entities and partnerships, but the concept of CI adopted in the USA by the Financial Accounting Standard Board (FASB) in Concepts Statements no. 5 and no. 6, and then in 1997 in SFAS 130 Reporting Comprehen- sive Income, applied the theory to all entities (Hendriksen, van Breda, 2002, p. 760). By introducing into IAS 1 in 2007, regulations on measurement and presentation of CI in financial statements prepared under IFRS, the International Accounting Standards Board (IASB) supported the CSA concept and the opinions of the proponents of an all-inclusive comprehensive view of income, that reporting CI enhances the transparency of financial statements because items that bypass the income statements are clearly presented under the title „other comprehensive income” as Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 125

a separate part of a financial statement that reflects an entity’s financial performance in a period. Revisions to IAS 1, which introduced the obligation to measure and report CI, reflect the IASB’s and FASB’s efforts to converge IFRS with US GAAP and attain the main objective of these two Boards – development of a single set of high quality global standards of public companies’ financial reporting. As of yet, the provisions of IAS 1 are not consistent with the IASB’s Frame- work for Preparation and Presentation of Financial Statements, approved in 1989 and partially updated in 2010 (and now entitled Conceptual Framework for Finan- cial Reporting). Accounting researchers (e.g. Newberry, 2003; Thinggaard et al., 2006), and respondents to Exposure Draft Presentation of Items of Other Compre- hensive Income (Proposed Amendments to IAS 1) of 2010 have criticized the IASB’s lack of definitions for CI and OCI. In the Framework, profit (paragraph 69)3 has been adopted as a measure of a business entity’s efficiency in using re- sources in the process of creating and selling products. Profit is a measure used for the ordinary activity of an entity and as a basis for predicting future cash flows. This implies that the measure of performance prescribed in the IASB Framework of 1989 is based on the concept of DSA. Thinggaard et al. (2006, p. 36), however, point out that in the IASB Framework the definition of income in paragraph 70(a) suggests an all-inclusive (comprehensive, clean surplus) income concept. „On the other hand, paragraphs 69 and 81 acknowledge the link between income and capital and capital maintenance, which could result in the exclusion from income of increases and decreases in assets and liabilities, and thus suggests a non-all-inclusive (dirty surplus) income concept”. The lack of clear definitions of CI and OCI in the IASB Framework makes it difficult to distinguish the underlying economics of items reported in profit or loss (NI) from items reported in OCI (Presentation of Items, 2011, p. 19). These questions are expected to be addressed in the future by the IASB and FASB in succes- sive phases of the joint project on the conceptual framework; however, currently the joint conceptual project is inactive4.

3 „Profit is frequently used as a measure of performance or as a basis for other measures, such as return on investment or earnings per share. The elements directly related to the measurement of profit are income and expenses. The recognition and measurement of income and expense, and hence profit, depends in part on the concepts of capital and capital maintenance used by entity in preparing its financial statements” (Framework, 2001, paragraph 69 and Conceptual Framework, 2010, paragraph 4.24 ). 4 Conceptual Framework for Financial Reporting 2010 includes the two chapters the IASB published in September 2010 as a result of its first phase of the conceptual framework project: Chapter 1 The objective of financial reporting and Chapter 3 Qualitative characteristics of useful financial information (Conceptual Framework, 2010). 126 Anna Szychta, Denise de la Rosa

2. Rules for presentation of CI in financial statements in accordance with IAS 1

2.1. Relevant provisions of IAS 1 revised in 2007

IAS 1 was revised in 2007 to include the reporting of total CI as a concept for financial reporting. Total CI has been defined in IAS 1 (paragraph 7) as „the change in equity during a period resulting from transactions and other events, other than the changes resulting from transactions with owners in their capacity as owners. Total comprehensive income comprises all components of «profit or loss» and of «other comprehensive income»”. The components of profit or loss represent the total of income minus the expenses for the period and exclude the components of OCI. The components of OCI include (IAS 1, paragraph 7): a) changes in revaluation surplus (according to IAS 16 Property, Plant and Equip- ment and IAS 38 Intangible Assets); b) actuarial gains and losses on defined benefit plans recognised in accordance with paragraph 93A of IAS 19 Employee Benefits; c) gains and losses arising from translating the financial statements of a foreign operation (under IAS 21 The Effects of Changes in Foreign Exchange Rates); d) gains and losses on remeasuring available-for-sale financial assets (IAS 39 Fi- nancial Instruments: Recognition and Measurement); e) the effective portion of gains and losses on hedging instruments in a cash flow hedge (according to IAS 39); f) for particular liabilities designated at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liabil- ity’s credit risk (IFRS 9 Financial Instruments). The items of OCI generally incorporate unrealized gains and losses, resulting from specified revaluations in an entity. In addition to the items listed in the standard (points a–f), OCI may include other items, e.g. the share of OCI of associates. What should be included in OCI is given by other IFRSs. Under IAS 1, all items of income and expense for the period can be presented in a single statement of comprehensive income whereas OCI is combined with the profit or loss of the period to determine total CI. A second alternative is to present two separate statements of CI, a separate income statement for the profit or loss for the period and a second statement that begins with the profit or loss for the period combined with OCI. Regardless of the presentation, the components of OCI, when combined with the profit or loss of the period, must have the tax effect removed and displayed individually net of the related tax effect or before the tax effect with an aggregate amount displayed for the total tax effect for all of the components of OCI. Moreover, the standard requires disclosure of reclassification adjustments relating to OCI components as well. These reclassification adjustments represent previous amounts recognized as OCI but currently recognized as a component of the profit Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 127

or loss of the period. The economic content and disclosure principles influence the information provided to users of the financial statements. Each item of OCI that is later reclassified needs to be disclosed with the corresponding item in profit or loss. IAS 1 allows entities to present reclassification adjustments for the components of OCI in the statement of comprehensive income or in the notes to financial statements. If a company presents the adjustments in the notes, it should disclose the components of OCI net of all relevant reclassification adjustments. There are, however components of OCI where reclassification adjustments do not occur. They include changes in revaluation surplus recognised in accordance with IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets, and actuarial gains and losses on defined benefit plans. These components are recognised in OCI and are not reclassified to profit or loss in subsequent periods. Changes in revaluation surplus may be transferred to retained earnings in subsequent periods as the asset is used or when derecognised. Actuarial gains and losses are reported in retained earnings in the period that they are recognised as OCI.

2.2. Modification of OCI presentation format (2011 amendment of IAS 1)

Transparency of the presentation of OCI components in financial statements should improve when companies implement the revised rules for the reporting of these items, introduced by the IASB on 16 June 2011 in the amendments to IAS 1 Presen- tation of Items of Other Comprehensive Income. These amendments were the outcome of the IASB’s efforts to improve the transparency and comprehensibility of financial statements with regard to OCI disclosure, and to achieve convergence between IAS 1 and SFAS 130 regarding presentation of the statement of comprehensive income. The amendments to IAS 1 are effective for financial years beginning on or after 1 July 2012. Following consultations with the users and preparers of financial statements, the IASB acknowledged that changes in IAS 1 in 2007 did not provide a consistent basis for OCI presentation, which resulted in differences in the disclosures of the components of OCI by companies and problems with identifying which items should be included in OCI and which in the income statement (Project Summary, 2011). The 2011 amendments to IAS 1 require the presentation of OCI components into two groups, one that will not be reclassified to net profit or loss in the future and one that will be reclassified. The income tax relating to OCI components should be disclosed for those items which will be reclassified to net income and the items which will not be reclassified, if OCI components are presented before tax. Components of OCI can be reported in the statement before related tax effects or in net amounts, and income tax relating to each of them can be disclosed in the notes, separately for the two groups. In the revised IAS 1, the title of a single statement presenting CI has been changed from Statement of Comprehensive Income to Statement of Profit or Loss 128 Anna Szychta, Denise de la Rosa

and Other Comprehensive Income. This new title, however, is not mandatory for use. Entities may use other titles for this statement, e.g., as before, Statement of Comprehensive Income. The new format of presenting OCI should be more helpful to financial statement users in understanding the role, the importance, and the effect of the various OCI components and CI on the financial statements for a given accounting period’s net profit (loss) and future periods.

3. Literature review

The research on CI focuses on various aspects of CI measurement, presentation, and the correlation of CI, OCI or particular OCI components with the market value of shares. The research has been mostly based on financial statements of companies before or after introducing SFAS 130 in the USA in 1997. The extent and varying scope of empirical research on CI in the USA was a consequence of accounting standards based on an all-inclusive income concept. The Accounting Principles Board in 1966 issued APB Opinion no. 9, Reporting the Results of Operation, which advocated a broader concept of income and FASB Concepts Statements no. 5 (in paragraph 13) indicated in 1984 (FASB Concepts Statements, 1993/94) that income measured on an all-inclusive basis should be reported in a full set of financial statements. In 1985 FASB’s concept statement SFAC 6 defined ten elements of financial statements. CI is the only summary income measure that is included in those ten elements. In 1997 FASB implemented the CSA concept with the issuance of SFAS 130, Reporting Comprehensive Income, which mandated that entities report CI and OCI in a primary financial statement. The standard allowed the presentation of OCI and CI in one of three formats: as an addendum to the income statement, as a separate statement of CI, or disclosed within the statement of stockholders’ equity. Empirical research on CI in the USA can be classified into three main groups. The first examines the reasons and effects of choosing a particular variant of reporting CI from among the three options permitted by SFAS 130, and analysis of the structure of OCI presentation (e.g. Bhamornsiri, Wiggins, 2001; Jordan, Clark, 2002; Pandit, Phillips, 2004; Bamber et al., 2010). Research confirmed that companies usually present CI and its components in the statement of changes in equity, despite the fact that FASB recommends using the first or second reporting format (Camp- bell et al., 1999; Crawford et al., 1999, p. 442; Bhamornsiri, Wiggins, 2001, p. 55). Bamber et al. (2010) conducted a study to find reasons for choosing this form of presenting OCI. From the viewpoint of financial market models and rational investors it should make no difference in which part of the financial statement CI and its components are disclosed since the items and amounts are the same. The authors found that managers of companies act as if they believed that the place Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 129

where OCI is disclosed is of some significance to investors. However, research has shown that CI items are presented in the statement of changes in equity in those companies where CEO remuneration is more strongly related to equity and further employment in the company is less certain. The second group of studies analyzes the differences between the amounts of CI and NI and their effect on key financial indicators (e.g. Bhamornsiri, Wiggins, 2001). The research investigating the relationship between NI, CI and stock prices has been mixed. Some studies have found little or no support that CI is more strongly associated with returns/market value or is a better predictor of future cash flows or NI (eg. Dhaliwal et al., 1999; O’Hanlon, 2000). However, other researchers, e.g. Chambers et al. (2007, pp. 558–559), found evidence suggesting a correlation between CI and returns by studying data from statements of companies included in S&P 500, published after issuing SFAS 130. They found that two components of OCI, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities, are positively priced. Moreover, their research suggests that investors attached more significance to information about CI if it was presented in the statement of changes in equity than in one of the two rec- ommended options. This may be due to the fact that the usual place for presenting CI and OCI in the USA was the statement of changes in equity, so the investors were more familiar with this format (Chambers et al., 2007, pp. 558–559). Finally, the last group studied the statistical correlation between CI and stock prices and the usefulness for investors of CI and OCI disclosures (eg. Dhaliwal et al., 1999; Dehning, Ratliff, 2004; Chambers et al., 2007). The predictive value of CI and OCI, then, is not generally acknowledged. Thinggaard et al. (2006) reviewed 17 research studies (carried out in varius countries in 1993–2006) that addressed the presentation of income and the format of the income statement. The authors found mixed results. While some research supported a single statement of (total) recognized income and expense, other research found that NI was more relevant than CI and thus supporting a two-statement approach. The authors suggest that „While this result is in line with the IASB’s option of the two formats, it does not support the IASB’s preference for a single statement” (Thinggaard et al., 2006, p. 35). Empirical research in other countries, mainly those where accounting regulations use the clean surplus approach, present similar results. O’Hanlon and Pope (1999) conducted a study in Great Britain to examine the value relevance of UK dirty surplus accounting flows. They found – on the basis of analysis of UK stock returns and data from financial statements from 1972 to 1992 – strong evidence that UK ordinary profit is value relevant, and very weak evidence that aggregate dirty surplus flows are incrementally value relevant. The study covered a period before the issuance in 1992 of FRS 3 Reporting Financial Performance. FRS 3 introduced fundamental changes in the reporting of financial performance by UK companies by introducing an obligation to present from 1993 the Statement of Total Recognised Gains and Losses and the disclosure of CI. 130 Anna Szychta, Denise de la Rosa

Similar to O’Hanlon and Pope (1999) Wang et al. (2006) examined the value relevance of DSA of Dutch companies. The study covered 82 Dutch listed companies during the 1988–1997 period. The authors found consistent evidence that reported income appears to be a more relevant measure of firm value than CI. In New Zealand, a form of disclosure of CI has been required since January 1, 1995. Financial Reporting Standard no. 2 requires the presentation of CI as a part of a separate Statement of Movements in Equity. Examining a sample of 48 listed companies in New Zealand from 1993–1997 Cahan et al.’s (2000) results suggest that CI is more value relevant than NI; however there seemed to be no support for the items of OCI having incremental value relevance beyond CI. In Canada research on the usefulness of CI was carried out on a sample of 75 Canadian companies cross-listed in Canada and in the USA during the 1998–2003 period (Kanagaretnam et al., 2009). Since 1 January 2005 Canadian accounting standards require recognizing holding gains and losses related to certain assets and liabilities as OCI, but Canadian firms cross-listed in the USA were required to reconcile the difference between Canadian and US GAAP in the notes to their financial statements. The authors found evidence that available-for-sale financial assets and cash flow hedges are significantly associated with price and market returns, and aggregate CI is more strongly associated (in terms of explanatory power) with both stock price and returns compared to NI; however their results indicated that NI, rather than CI, was a better predictor of future NI (Kanagaretnam et al., 2009). Research conducted in Egypt was intended to establish whether the incremental usefulness of the items of OCI relative to NI changed after the issuance of the Egyptian Accounting Standard no. 1 (EAS–1) in 2002. This standard introduced the obligation to present a statement of changes in equity that disclosed the components of OCI. Using a sample of public companies included in the CASE 30 index, Awadallah and Elbayoumi (2011) found that the aggregated OCI has no usefulness in explaining the following period’s NI, the following period’s cash flow, nor the stock’s returns. The authors did find an exception to the overall results for firms in the post-EAS1 period. For these firms, the aggregated OCI had significant usefulness in explaining the following period’s cash flow. Little has been published on the usefulness of reporting CI in financial statements prepared according to IFRS, especially after 2009. For example, Demir et al. (2011) examined publicly traded IFRS-compliant Turkish companies during the 2005–2007 period (864 observations during 3 years). The findings demonstrated that CI is more useful than NI as a measure of financial performance, but that the „revaluations surplus adjustments” drove the results between CI and stock returns. The other individual components had no usefulness. Ferraro (2011) studied the consolidated financial statements of 160 companies listed on the Milan Stock Exchange in 2009. The research aimed to establish what format of CI disclosure Italian public companies tended to choose under the 2007 revised IAS 1, and what the effect of CI on ROE and EPS was. The majority of the Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 131

companies (86%) prepared two statements (an income statement and a separate statement of comprehensive income) while the remaining 14% provided a single statement of comprehensive income. Analysis of ROE and EPS calculated using total CI amounts in the numerators shows that the impact on EPS for measuring company performance appears to be significant. For 66 companies the inclusion of OCI would have a negative effect on EPS, while for 69 the effect would be positive (Ferraro, 2011). The results of empirical research on CI and the components of OCI provide no definitive answer to the value relevance of the information in financial statements nor whether NI or CI has greater decision-usefulness for investors. It is therefore important that accounting regulations, moving towards more fair value measurements and emphasis on reporting CI, do not result in weakening the informative role of NI. Research indicates that both NI and CI provide important information about the financial performance of business entities.

4. Comprehensive income in financial statements of the largest companies quoted on the Warsaw Stock Exchange

Polish literature on the nature, presentation and decision-usefulness of CI has been addressed by such authors as Marcinkowska (2003), Gierusz (2005), Walińska (2009), Wójtowicz (2009), Szychta (2010, 2011), Walińska and Bek-Gaik (2011), and Szewc (2011). So far, only two papers have examined the consolidated financial statements for 2009 of selected companies listed on the WSE. Walińska and Bek- Gaik (2011) focused on the form of CI presentation adopted by companies and the relation between the items of OCI and items of equity in the balance sheet. Szychta (2011) analysed the relation between OCI and net profit (loss) and the level of variability of total CI in the consolidated financial statements for 2009 of the 20 largest companies traded on the WSE. The following is an expansion of this analysis. It also relates to the first and partly to the second group of research described in section 3 of this paper, i.e. it is concerned with the choice of OCI reporting variant and the structure of OCI presentation, and offers a simple analysis of the relevance of OCI amounts to NI and the variability of NI and CI in the studied companies in the first two years after IAS 1 was revised in 2007 and became effective in 2009.

4.1. Data

Data for this study are from the individual consolidated financial statements for 2009 and 2010 of the 24 largest companies listed on the WSE and comprising the Warsaw Stock Exchange Index (WIG). The WIG represents a measure of total return on the Polish market. The weight of any one individual company is limited to 10% with a sector limitation of 30%. 132 Anna Szychta, Denise de la Rosa

The WIG-20 index includes twenty of the largest listed WSE companies. The port- folio of companies that are included in the index is measured quarterly to ensure that the index represents the shares of the 20 largest and most liquid listed Polish companies. The factors affecting the choice of companies included in this index are their market capitalisation and their free float (turnover of the listed securities). The authors analysed the consolidated financial statements of the year-end WIG-20 listed companies for 2009 and 20105. Because of the change in the index, the financial statements of 24 companies are included in the analysis rather than 20. Four companies (Bioton, Polimex-Mostostal, Cyfrowy Polsat and Bank Zachodni WBK) were replaced with Tauron Polska Energia, LW Bogdanka, Bank Hand- lowy, and KERNEL Holding in 2010 and in first months of 2011. The financial statements of all listed companies are available from company websites. Table 1 provides a list of industries and companies examined in this study.

Table 1. Twelve industries represented in the WIG-20 Industry Companies Banksa Bank Pekao, BRE Bank, Bank Zachodni WBK, Getin Holding, PKO Bank Polski, Bank Handlowy Construction industry PBG, Polimex-Mostostal Developers Globe Trade Centre Energy industry Čez, PGE Polska Grupa Energetyczna, Tauron Polska Energia Technology Asseco Poland Media TVN, Cyfrowy Polsat Pharmaceuticals Bioton Oil industry Grupa LOTOS, Polskie Górnictwo Naftowe i Gazownictwo, PKN Orlen Mining KGHM Polska Miedź, LW Bogdanka Food processing KERNEL Holding Telecommunications Telekomunikacja Polska Insurance PZU a Five banks are included in WIG-20 in accordance with the principle that one sector of the econ- omy (classification of the Warsaw Stock Exchange) cannot be represented in the index by more than 5 entities. Bank Zachodni WBK was replaced in WIG-20 on 6.04.2011 by Bank Handlowy SA. Source: author’s elaboration based on Lista spółek (2011).

The authors’ decision to use the above-listed companies was based on size and range of business activity. These companies provided a greater probability of economic events bypassing the income statement and generating revenues and costs recognized directly into equity.

5 As of 6.09.2011, 365 joint stock companies, including 35 foreign companies, were listed on the main market of the Warsaw Stock Exchange, and 59 companies, including two foreign entities – on the parallel (GPW. Analizy i statystyki, 2011). Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 133

4.2. Analysis of total comprehensive income and its components6

Of the 24 companies studied, 6 (25%) prepared a single statement of comprehensive income for 2009 and 2010: KGHM Polska Miedź, Lotos, PGE Polska Grupa Energetyczna, PKN Orlen, Tauron i Lubelski Węgiel (LW) Bogdanka. The remaining companies (75%) prepared two statements: the income statement and the statement of comprehensive income, beginning with net profit (loss) and presenting the items of OCI. In percentage terms, this is a result similar to the one obtained in the study of financial statements for 2009 of 160 companies listed on the Milan Stock Exchange – only 16% prepared a single statement of comprehensive income. The two-statement option chosen by the Italian companies was explained in the notes only in a few cases that indicated that this format is „consistent with the presentation format used by our main competitors and with international practice” (Ferraro, 2011). The choice of the two-statement option in most of the analysed companies listed on the WSE was most likely influenced by Polish accounting tradition that empha- sizes the income statement and management’s results. A single statement of CI can reduce the importance of the income statement, a fundamental statement used for financial performance evaluation of a company and its management in a given period. The income statement has been used for decades in Poland as the primary tool in assessing performance. According to the Polish Act of 29 September 1994 on Accounting (Ustawa z 29.09.1994) net profit (loss) presented in the income statement is directly transformed to the balance sheet as a position of the entity’s own capital (a separate position of net profit (loss) for the year in the balance sheet). The single statement of comprehensive income is a continuous presentation of two separate concepts melded together into two sections, one that represents management’s performance for the period and another that denotes market condi- tions. With two separate statements, CI is treated as an additional part of financial reporting, rather than a substitute for the income statement. Those deciding about the reporting format in these Polish companies may expect that if the single- statement version was used, some financial statements users would focus attention on the last item of this statement, i.e. total CI, paying less attention to net profit (loss), which becomes an internal item in this format choice. It can be assumed that for the companies which prepared a separate income statement and a statement of comprehensive income the income statement is more significant as the basis for evaluating the ability of a company to generate future profit, and therefore it can be concluded that these companies pay more attention to the result of operating activity as an element of net profit (loss), in line with the DSA concept, than the companies which chose preparation of a single statement of comprehensive income. The companies in the first group (75%) fulfilled the new

6 Subsection 4.2. of this paper is a modified version of the findings of financial statements analysis published in Polish in the local journal (Szychta, 2012). 134 Anna Szychta, Denise de la Rosa

requirement of presenting CI and OCI elements but do not regard CI as a significant measure of their financial performance important to investors, consistent with the CSA concept. Naturally, it is not possible to verify these opinions within the scope of this paper; verification requires further empirical research comprising a greater number of reporting entities, as well as examination of the motives behind the choice of CI presentation format by persons formulating accounting policy in these entities. Financial statements of 22 analysed companies (92%) disclosed OCI; in GK Cyfrowy Polsat and LW Bogdanka total CI was equal to NI in both 2009 and 2010. Consolidated financial statements and disclosure notes of these two companies do not provide information concerning any occurence of OCI. Data in table 2 [net profit/loss (NI), OCI and total CI] report that in 2009 21 companies (87.5%) had positive total CI, and three [Bioton, Globe Trade Centre (GTC) and KERNEL] reported negative values for total CI. In 2010 only GTC reported negative CI. Its negative total CI (–32,323 PLN) is the result of its NI in the amount of 113,446 PLN and negative OCI (–145,769 PLN). The entities with negative CI did not increase the wealth of its shareholders at the end of these two years.

Table 2. Comprehensive income and its components in consolidated financial statements for financial years 2008–2010a of selected companies listed on the Warsaw Stock Exchange (in thousandb) Other Total Percentage of compre- compre- change to the Net hensive hensive previous year profit/loss income income OCI / NI (%) Lp. Group Year (NI) (OCI) (CI) × 100% NI CI (1) (2) (3) (4) (5) (6) (7) (8) (9) 1. Asseco Poland 2010 498 894 –23 157 475 737 –4.64 13.94 16.98 (ASSECOPOL) 2009 437 866 –31 198 406 668 –7.13 9.61 –16.47 2008 399 460 87 404 48 6864 21.88 2. Bioton (BIOTON) 2010 110 726 –5 532 105 194 –5.00 117.90 116.67 2009 –618 593 –12 345 –630 938 2.00 –177.35 –690.96 2008 –223 033 143 265 –79 768 –64.23 3. Bank Pekao 2010 2 530 339 112 349 2 642 688 4.44 4.50 16.24 (PEKAO) 2009 2 421 345 –147 862 2 273 483 –6.11 –31.62 –39.60 2008 3 540 936 223 225 3 764 161 6.30 4. BRE Bank (BRE) 2010 660 865 172 788 833 653 26.15 406.2 262.49 2009 130 523 99 454 229 977 76.20 –85.32 –62.35 2008 889 344 –278 443 610 901 –31.31 5. Bank Zachodni 2010 1 040 569 11 964 1 052 533 1.15 10.79 2.44 WBK (BZWBK) 2009 939 222 88 271 1 027 493 9.40 – 11.58 11.16 2008 954 286 –29 986 924 300 –3.14 6. Čez (CEZ) 2010 47 158 1 617 48 775 3.43 –9.06 –7.46 2009 51 855 851 52 706 1.64 9.51 47.41 2008 47 351 –11 596 35 755 –24.49

Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 135

Other Total Percentage of compre- compre- change to the Net hensive hensive previous year profit/loss income income OCI / NI (%) Lp. Group Year (NI) (OCI) (CI) × 100% NI CI (1) (2) (3) (4) (5) (6) (7) (8) (9) 7. Cyfrowy Polsat 2010 258 470 0 258 470 0.00 12.22 12.22 (CYFRPLSAT) 2009 230 319 0 230 319 0.00 –14.62 –14.62 2008 269 763 0 269 763 0.00 8. Getin Holding 2010 476 019 –32 360 443 659 –6.80 41.62 50.94 (GETIN) 2009 336 127 –42 189 293 938 –12.55 –40.02 –46.28 2008 560 372 –13 224 547 148 –2.36 9. Globe Trade Centre 2010 113 446 –145 769 –32 323 –128.49 119.86 95.33 (GTC) 2009 –571 193 –121 067 –692 260 21.20 –181.68 –154.54 2008 699 325 569 949 1 269 274 81.50 10. KGHM Polska 2010 4 714 863 83 520 4 798 383 1.77 102.48 147.67 Miedź (KGHM) 2009 2 328 561 –391 155 1 937 406 –16.80 –15.81 –40.76 2008 2 765 866 504 338 3 270 204 18.23 11. Grupa LOTOS 2010 681 353 –2 744 678 609 –0.40 –25.27 –26.93 (LOTOS) 2009 911 812 16 849 928 661 1.85 334.15 356.14 2008 –389 415 26 856 –362 559 –6.90 12. PBG (PBG) 2010 218 559 20 534 239 093 9.40 –0.59 –24.31 2009 219 860 96 040 315 900 43.68 17.41 799.56 2008 187 254 –152 137 35 117 –81.25 13. PGE Polska Grupa 2010 3 627 087 1 837 3 628 924 0.05 –16.27 –15.54 Energetyczna (PGE) 2009 4 337 223 –40 715 4 296 508 –0.94 62.43 59.10 Polskie Górnictwo 2008 2 670 247 30 187 2 700 434 1.13 2010 2 457 184 80 175 2 537 359 3.26 98.66 102.89 14. Naftowe i Gazo- 2009 1 236 886 13 721 1 250 607 1.11 42.87 53.40 wnictwo (PGNIG) 2008 865 742 –50 476 815 266 –5.83 15. PKN Orlen 2010 2 455 467 202 757 2 658 224 8.26 88.86 119.43 (PKNORLEN) 2009 1 300 167 –88 753 1 211 414 –6.83 151.46 206.53 2008 –2 526 626 1 389 458 –1 137 168 –54.99 16. PKO Bank Polski 2010 3 212 806 84 299 3 297 105 2.62 38.98 37.31 (PKOBP) 2009 2 311 784 89 430 2 401 214 3.87 –26.36 –23.50 2008 3 139 187 –288 3 138 899 –0.01 17. Polimex-Mostostal 2010 119 301 –8 048 111 253 –6.75 –31.94 –50.26 (POLIMEXMS) 2009 175 282 48 386 223 673 27.60 24.81 132.73 2008 140 439 –44 331 96 108 –31.57 18. PZU SA (PZU) 2010 2 439 229 35 910 2 475 139 1.47 –35.18 –37.57 2009 3 762 911 201 518 3 964 429 5.36 61.52 78.88 2008 2 329 718 –113 409 2 216 309 –4.87 19. Tauron Polska 2010 991 383 630 992 013 0.06 4.56 2.47 Energia 2009 948 163 19 906 968 069 2.10 420.17 (TAUONPE) 2008 182 281 X X X X X 20. Telekomunikacja 2010 108 000 –27 000 81 000 –25.00 –91.58 –93.84 Polska (TPSA) 2009 1 283 000 31 000 1 314 000 2.42 –41.42 –39.89 2008 2 190 000 –4 000 2 186 000 –0.18

136 Anna Szychta, Denise de la Rosa

Other Total Percentage of compre- compre- change to the Net hensive hensive previous year profit/los income income OCI / NI (%) Lp. Group Year s (NI) (OCI) (CI) × 100% NI CI (1) (2) (3) (4) (5) (6) (7) (8) (9) 21. TVN (TVN) 2010 45 861 569 46 430 1.24 –86.75 –86.54 2009 346 156 –1 110 345 046 –0.32 –4.82 –5.26 2008 363 676 541 364 217 0.15 22. LW Bogdanka 2010 230 122 0 230 122 0.00 20,58 20,58 (BOGDANKA) 2009 190 842 0 190 842 0.00 22,50 22,50 2008 155 791 0 155 791 0 23. Bank Handlowy 2010 754 811 35 117 789 928 4.65 49.65 39.39 (HANDLOWY) 2009 504 399 62 299 566 698 12.35 –15.99 –12.05 2008 600 434 43 888 644 322 7.31 24. KERNEL Holding 2010 151 701 12 897 164 598 8.50 14.94 479.09 SA (KERNEL) c 2009 131 982 –175 401 –43 419 –132.90 60.56 2008 82 203 X X X X X a Data from consolidated financial statements of WIG-20 companies were taken from websites in December 2010 and in June and July 2011. b Data for Čez in thousand CZK, KERNEL Holding SA in thousand USD, and for other groups in thousand PLN. c Financial year in KERNEL Holding SA lasts from 1 July to 30 June. The table presents data from consolidated financial statements for financial years: 1.07.2008–30.06.2009 and 1.07.2009 –30.06.2010. Source: author’s research based on consolidated financial statements for 2009 and 2010 of the selected companies.

The relation of OCI to NI for 2008, 2009 and 2010 calculated in table 2 (column 7) shows that OCI in the studied companies: 1) often constituted a substantial amount in relation to net profit (loss) in 2009, from –132.90% (in KERNEL Holding) to 76.20% (in BRE Bank); in 2010 results indicate, for example, –128.49% of net profit in GTC, –25% in TP SA and 26.15% in BRE; 2) were characterised by considerable variability of levels in 2008–2010 in some of the companies, such as Bioton, BRE Bank, CEZ, GTC, KGHM Polska Miedź, PBG, PKN Orlen and Polimex-Mostostal. The significant change in the level of OCI in 2009 in comparison with 2008 and in 2010 in comparison with 2009 caused significant differences between total CI (column 9 in table 2) and net profit/loss (column 8 in table 2), mainly in such groups as Bioton, GTC, PBG, PKN Orlen, Polimex-Mostostal and KERNEL. OCI in 2010 in the majority of the analysed companies (62.5%) had positive values, which caused an increase of total CI in relation to net profit (table 3). In the remaining entities which reported OCI its values were negative, which had a negative effect on total CI, decreasing net profit or increasing net loss. The number of groups reporting positive OCI grew from year to year in the studied period (from 10 in 2008 to 15 in 2010). Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 137

Table 3. OCI in the studied companies Specification 2010 2009 2008 Number (percent) of groups with positive OCI 15 (62.5%) 12 (50%) 10 (41.7%) Number (percent) of groups with negative OCI 7 (29.2%) 10 (41.7%) 10 (41.7%) Groups which did not report OCI 2 (8.3%) 2 (8.3%) 2 (8.3%) No data available 0 0 2 (8.3%) Total 24 (100%) 24 (100%) 24 (100%) Source: author’s elaboration based on data in table 2.

The data in table 4 show that in the years 2009–2010 the following items of OCI were disclosed in consolidated financial statements of the companies covered by the study: 1) gains and losses on remeasuring available-for-sale financial assets – AFA, 2) the effective portion of gains and losses on hedging instruments in cash flow hedges – HCF, 3) gains and losses arising from translating the financial statements of foreign operations – TFO, 4) income tax relating to components of OCI, reported when their gross amounts are presented – IT, 5) other.

Table 4. Components of OCI in consolidated financial statements for 2009 and 2010 of selected companies listed on the Warsaw Stock Exchange (in thou- sanda) Lp. Group Year AFAb HCF TFO IT Other OCI 1. ASSECO Poland 2010 –1 330 829 –22 104 463 –1 015 –23 157 2009 2 972 –1069 –31 811 –275 –1 015 –31 198 2. Bioton 2010 157 –5 689 –5 532 (BIOTON) 2009 –12 345 –12 345 3. Bank Pekao 2010 17 320 67 569 11 964 15 496 112 349 (PEKAO) 2009 52 121 –150 781 –66 774 17 572 –147 862 4. BRE Bank (BRE) 2010 178 019 –5 231 172 788 2009 93 340 6 114 99 454 5. Bank Zachodni 2010 11 867 97 11 964 WBK (BZWBK) 2009 61 681 26 590 88 271 6. Čez (CEZ) 2010 364 6 394 –3 860 –1 286 5 1 617 2009 101 4 362 –2 716 –885 –11 851 7. Cyfrowy Polsat 2010 0 (CYFRPLSAT) 2009 0 8. Getin Holding 2010 –549 –46 745 5 957 8 977 –32 360 (GETIN) 2009 –18 702 –6 749 –23 712 4 826 2 148 –42 189 9. Globe Trade Centre 2010 –13 741 –134 787 2 759 –145 769 (GTC) 2009 –26 555 –99 458 4 946 –121 067 10. KGHM Polska 2010 147 512 –44 401 –19 591 83 520 Miedź (KGHM) 2009 –10 384 –472 524 91 753 –391 155

138 Anna Szychta, Denise de la Rosa

Lp. Group Year AFAb HCF TFO IT Other OCI 11. Grupa LOTOS 2010 –2 005 –739 –2 744 (LOTOS) 2009 14 378 2 471 16 849 12. PBG 2010 28 476 3 252 –5 790 –5 404 20 534 2009 120 429 –10 131 –21 761 7 503 96 040 13. PGE Polska Grupa 2010 80 1 757 1 837 Energetyczna 2009 –41 287 531 41 –40 715 14. Polskie Górnictwo 2010 71 103 42 036 –11 468 –21 496 80 175 Naftowe i Gazow- nictwo (PGNIG) 2009 31 880 –12 102 –6 057 13721 15. PKN Orlen 2010 25 502 153 734 –11 499 35 020 202 757 (PKNORLEN) 2009 –4 491 –203 395 –26 891 146 024 –88 753 16. PKO Bank Polski 2010 –16 159 121 788 –1 211 –20 390 271 84 299 (PKOBP) 2009 26 582 147 254 –51 321 –33 085 – 89 430 17. Polimex-Mostostal 2010 –1 679 –6 685 316 –8 048 (POLIMEXMS) 2009 70 920 –9 060 –13 474 48 386 18. PZU SA 2010 641 –15 388 50 657 35 910 2009 184 693 –138 16 963 201 518 19. Tauron Polska 2010 1 112 –271 –211 630 Energia (TAURONPE) 2009 24 576 –4 670 19 906 20. Telekomunikacja Polska (TPSA) 2010 –18 000 7 000 –16 000 –27 000 2009 50 000 2 000 –7 000 –14 000 31 000 21. TVN 2010 702 –133 569 2009 –1 370 260 –1 110 22. LW Bogdanka 2010 0 (BOGDANKA) 2009 0 23. Bank Handlowy 2010 36 178 –1 061 35 117 (HANDLOWY) 2009 63 084 –785 62 299 24. KERNEL Holding 2010 1 532 –3 789 15 154 12 897 SA (KERNEL) 2009 –175 401 –175 401 25. Mean value of OCI 2010 29 892 (in thousand PLN)c 2009 –5 476 a Data for Čez in thousand CZK, KERNEL Holding SA in thousand USD, and other groups in thousand PLN. b Meanings of acronyms in table head: AFA – gains and losses on remeasuring available-for-sale financial assets, HCF – the effective portion of gains and losses on hedging instruments in a cash flow hedge, TFO – gains and losses arising from translating the financial statements of a foreign operation, IT – income tax relating to components of OCI, reported when their gross amounts are presented. c Mean values of OCI were calculated for companies which prepared consolidated financial statements in PLN. Čez and KERNEL Holding SA were not included in the calculations. Source: author’s elaboration based on consolidated financial statements of the selected companies listed on the WSE.

The mean value of OCI in the companies which prepared statements in PLN (i.e. without CEZ and KERNEL) was –5,474 PLN in 2009 and 29,892 PLN in 2010. Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 139

The most commonly presented component of OCI was exchange differences on translating financial statements of a foreign operation – it was reported for both years in 18 companies (75%). More than 50% of the companies disclosed in their statements for 2009 and 2010 two OCI items relating to measurement of financial instruments: AFA and HCF. Relatively high values of these items were reported for the bank sector (see lines in bold in table 4). All banks reported item AFA and the highest amounts of AFA were in BRE Bank. Use of cash flow hedging effected amounts HCF in five banks. The highest amounts of this item was in PKO Bank Polski – the biggest bank in Poland. About 60% of the 24 studied companies (14 in 2009 and 15 in 2010) presented gross amounts of OCI components in both years, separately disclosing income tax relating to these items. The remaining entities reported OCI items net of income tax. The column „Other” in table 4 shows the amounts included in the statement of comprehensive income as „other” components of OCI or in items called e.g. „share of OCI of associates (in PKO Bank Polski), „share of change in equity of associates and joint ventures” (in CEZ Group), „revaluation of associates’ property” (in PGE), „amortisation of intangible assets accounted for directly in equity” (in Asseco Poland)7, „actuarial losses on defined benefit pension plans” (in TP SA), „reclassification of fixed property to investment property” (in PZU SA), and „property revaluation” (in PBG and KERNEL). Only KERNEL Holding and PBG, use the revaluation model for fixed assets measurement, which means valuation of these assets at fair value. The remaining groups use the cost model for this purpose. The item of OCI called „actuarial gains and losses on defined benefit pension plans” was reported in only one company – TP SA. The structure of presenting OCI items in the single format of the statement of comprehensive income or in a separate statement of CI was not uniform. The nam- ing of these items was not uniform either, which can be misleading for the users. Interpretation problems may arise especially in cases of imprecise, incomplete titles, e.g. „exchange differences on consolidation” (in Polimex-Mostostal), „financial assets available for sale” (in PZU and BRE Bank), „financial instruments valuation”(in PGNiG), „gains from exchange differences” (in Bioton), or „valuation of hedging instruments” (in PKN Orlen). Only 50% of the analysed statements for 2010 provided supplementary information in notes referring to OCI components, including income tax relating to these items. Only in two cases (CEZ and PBG) did the statement of comprehensive income provide data on reclassification of OCI items to profit or loss during the accounting period. The remaining entities reported values of OCI components after reclassification adjustments, providing relevant information in the notes (in BRE Bank, Bank Handlowy, PKO Bank Polski and Polimex-Mostostal), or without any

7 Disclosure note 9 in the consolidated financial statements of Assecco Poland for 2010 does not explain the reason for this OCI position. This note only repeats the name and the value of the item on the list of depreciation. 140 Anna Szychta, Denise de la Rosa

explanations in the notes, which may suggest that such reclassifications did not take place. The presentation and disclosure of information on the components of OCI in the statement of comprehensive income and in the notes was not fully consistent with the requirements of IAS 1 relating to income tax on OCI components and reclassification adjustments (paragraph 90 and paragraph 94 IAS 1). In a number of cases the amounts of income tax relating to OCI components whose net amounts were reported in the statement of comprehensive income were not disclosed in additional information. The same applies to reclassification adjustments, which should be disclosed in the notes to financial statements where an entity reports in the statement of comprehensive income the components of OCI after reclassification adjustments. Moreover, in some cases the notes do not supply explanations relating to data presented as components of OCI. Such practices do not provide financial statement users with readily available, transparent and understandable information regarding the nature and role of OCI and CI. The companies whose statements have been analysed considered presentation of OCI as an additional obligatory element of financial reporting, without recognizing the importance of disclosure. The lack of clear presentation of OCI components diminishes the usefulness to those investors who analyse the relations between NI and CI for the reporting period and want to know if the company actually increases the wealth of its owners through its ongoing operations

Concluding Remarks

Since 2009 the regulations to present total CI and its components in company financial statements have become a requirement for companies publicly traded within the EU and obliged to prepare consolidated financial statements in accordance with IFRS. The tendency to use the CSA approach in financial reporting has become a fact in the 21st century, in which dominant notions in the sphere of management and finance are: „value”, „value management”, „creating value to shareholders”, or „economic value added”. CI is a company performance measure concept connected with viewing profit as an increase in the wealth of the company’s owners. The obligation to present CI does not, however, mean giving up the measurement and presentation of net profit (loss) or NI. In the case of Poland, the concept of presenting the statement of comprehensive income, including disclosure of OCI and its components, is new to the preparers and users of financial statements. It was introduced into Polish accounting practice by the revision of IAS 1 in 2007 with the requirement for the presentation of CI for public companies beginning with financial statements in 2009. Polish accounting regulations do not require disclosures of OCI or preparation of a statement of CI. Major importance and emphasis is attached in Polish financial reporting practice to Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 141

the disclosure of net operating profit (loss), which indicates the DSA rather than the CSA approach to presentation of an entity’s financial results. This seems to be the reason why the majority of the 24 analysed large companies listed on the WSE (75%) present CI and its component, OCI, in two statements: income statement and the statement of comprehensive income. The analysis of consolidated financial statements of these companies also shows that: 1) the structure of OCI presentation is not uniform, which impairs comparability of financial statements; 2) the titles of the presented components of OCI are imprecise and ambiguous; 3) only 50% of the statements contain notes relating to some of the OCI items, and in only a few cases was the information complete. The form, presentation, and disclosure of related information in the notes of the OCI items is not transparent, which hinders the understanding of their information content and hinders the prediction of their effect on NI and CI in the following accounting period. Walińska and Bek-Gaik (2011, p. 339) seem to be right in concluding that none of the companies (whose statements for 2009 were examined) presented a model statement of comprehensive income. Most of the statements are characterized by opacity and poor comparability. The elements of CI are presented rather loosely, without clearly showing the interrelationship and connectivity with the reported items of equity. The reason for this unsatisfactory situation regarding the presentation of information about OCI may simply be that Polish companies do not attach sufficient importance to total CI as a new measure of performance. It also should be stressed that the IAS 1 provisions concerning the reporting of information about OCI are too general. The IASB did not provide in IAS 1 of 2007 a consistent basis for de- termining how the items of OCI should be presented. The IASB has recognized that this shortcoming has resulted in the inconsistent use of OCI in IFRSs-prepared financial statements (Project Summary, 2011, p. 4). A review of the main findings of selected empirical research and the analysis and data presented in this paper indicate that the determination and presentation in public companies’ financial statements of two categories of income reflecting financial results of activity in a reporting period should give the users of a company’s statements a basis for evaluating the company’s performance and its management in this period. If provided, users should be able to draw their own conclusions as to the impact of CI and its components on the increase of value to the shareholders. It also should allow for prediction of net profit (loss) in future periods. Empiri- cal research carried out in different countries in the last two decades does not provide definitive evidence on whether requiring companies to report CI and components of OCI increases or decreases the value relevance of the information in financial statements and which of the financial results, NI or CI, is more decision- 142 Anna Szychta, Denise de la Rosa

useful to investors. It is certain, however, that the more transparent the presentation and disclosure of CI and OCI in one of the formats prescribed in IAS 1, the greater their comprehensibility and usefulness will be. The examination of consolidated financial statements for 2009–2010 of selected companies listed on the WSE shows that the statement of comprehensive income and disclosures concerning OCI in the notes did not present the most complete and transparent information. It can be expected that the modified, more ordered format of presenting OCI components prescribed in the amendments to IAS 1 in 2011, will help Polish preparers to provide more transparent, useful, and relevant information regarding CI and OCI for users of financial statements. Further research should concentrate on the value relevance and the usefulness of NI, OCI, and CI in the Polish market. Emerging markets, like the WSE, provide investors with opportunities for diversification. Understanding the significance of these various metrics (NI, OCI, CI) and the relation to stock returns is important to assist with investment decisions.

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Summary With the revision of International Accounting Standard 1 Presentation of Financial Statements in 2007, the obligation to present comprehensive income (CI) is required since 2009 in consolidated statements of listed companies operating in the European Union. The purpose of the paper is to examine the presentation and amounts of total CI and its components in consolidated financial statements for the years 2009–2010 of the largest companies listed on the Warsaw Stock Exchange (WSE), in light of the provisions for CI in IAS 1 and its amendments in June 2011. The authors reviewed the consolidated statements of 24 of the largest and most liquid companies operating in Poland. This paper includes, besides the introduction, four sections and concluding remarks. Section 1 provides a discussion of the theoretical basis for CI. Section 2 addresses the requirements under IAS 1 and its amendments in 2011. Section 3 includes a literature review of CI. Section 4 presents the data and its analysis. The results of the consolidated financial statements review highlight how the largest companies listed on the WSE incorporated the new IFRS reporting requirement into their financial statements, e.g. they indicate that the preference of most companies (75%) was the two statement format (a separate income statement and a separate statement of comprehensive income), the values of other comprehensive income (OCI) in some of the companies were significant, OCI in 2010 in the majority of the analysed companies had positive values, which caused an increase in total CI in relation to net profit.

Keywords: comprehensive income, other comprehensive income, net income, financial statements, IAS 1, Warsaw Stock Exchange.

Comprehensive income presentation under IAS 1: the reporting practices of the largest ... 145

Streszczenie Prezentacja dochodów całkowitych zgodnie z MSR 1: praktyki sprawozdawcze największych spółek notowanych na GPW w Warszawie Od 2009 r. spółki notowane na giełdach papierów wartościowych w Unii Europejskiej mają obowią- zek prezentowania dochodu całkowitego (CI) w skonsolidowanych sprawozdaniach finansowych na mocy Międzynarodowego Standardu Rachunkowości 1 Prezentacja sprawozdań finansowych, zmie- nionego w 2007 r. Celem artykułu jest analiza sposobu prezentacji i poziomu wartości dochodu całkowi- tego i jego składników w skonsolidowanych sprawozdaniach finansowych za lata 2009–2010 sporzą- dzonych przez największe spółki akcyjne notowane na Giełdzie Papierów Wartościowych w Warsza- wie, w świetle regulacji dotyczących CI określonych w MSR 1 i jego nowelizacji z 2011 r. Autorki dokonały przeglądu skonsolidowanych sprawozdań finansowych 24 największych spółek publicznych działających w Polsce. Artykuł obejmuje poza wstępem cztery części i podsumowanie. Część 1 doty- czy zysku netto (NI) i dochodu całkowitego w ujęciu koncepcyjnym. W części 2 przedstawiono zasa- dy prezentowania CI w sprawozdaniu finansowym według MSR 1 i jego nowelizacji z 2011 r. Część 3 syntetycznie informuje o wynikach różnych badań empirycznych dotyczących CI i zysku (straty) netto (NI) przeprowadzonych przez innych autorów. Część 4 przedstawia dane i ich analizę zgodnie z celem artykułu. Wyniki dokonanego przeglądu skonsolidowanych sprawozdań finansowych pokazują, jak spółki notowane na GPW w Warszawie stosują nowe wymagania sprawozdawcze określone w MSSF, np. wskazują, że większość spółek (75%) sporządziła dwa sprawozdania (jednostkowy rachunek zysków i strat oraz sprawozdanie z całkowitych dochodów), a pozostałe – pojedyncze sprawozdanie z całko- witych dochodów, wartości innych dochodów całkowitych (OCI) w części spółek stanowiły istotne kwoty w stosunku do NI, suma OCI w 2010 r. w większości spółek była dodatnia, co spowodowało wzrost CI ogółem w stosunku do NI.

Słowa kluczowe: dochody całkowite, pozostałe dochody całkowite, zysk netto, sprawozdania finan- sowe, MSR 1, Giełda Papierów Wartościowych w Warszawie.