Accounting and Finance

The volatility of comprehensive income and its

association with market risk
Shahwali Khana, Michael E. Bradburyb
b

a
Institute of Management Sciences, Peshawar, Pakistan
School of Accountancy, Massey University, Auckland, New Zealand

Abstract
Financial statement preparers claim that the excess volatility of
comprehensive income (CI) confuses nancial statement users. We
examine the volatility and risk relevance of CI, relative to net income,
for a sample of 92 New Zealand nonnancial rms for the period 2003
2010. The results show that CI is more volatile than net income.
However, the volatility of CI incremental to net income is not related to
market risk. Furthermore, the incremental volatility of CI does not
modify the pricing of net income. These results hold when asset
revaluations are excluded from other CI.
Key words: Comprehensive income; Income volatility; Asset revaluations;
Risk; IFRS
JEL classification: M41
doi: 10.1111/ac.12108

1. Introduction
Despite a preference for a single statement of comprehensive income, the
International Accounting Standards Board (IASB) has not been able to achieve

This study has beneted from the comments of Andrew Ferguson, Samithamby
Senthilnathan, Laura Schr
oder and the comments of participants at the Quantitative
Accounting Research Network second Annual PhD Consortium (Auckland) and the
Financial Markets and Corporate Governance Conference (Melbourne). Shahwali
Khan acknowledges the nancial support of the Accounting and Finance Association of
Australia and New Zealand and The Higher Education Commission, Government of
Pakistan.
Received 3 October 2012; accepted 13 January 2015 by Steven Cahan (Editor in Chief).
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this objective.1 The IASB allows a one or two statement option in IAS 1
Presentation of Financial Statements.2 In revising this standard, the IASB has
responded favourably to nancial statement preparers that lobbied against a
single statement of performance. In submissions to the joint IASB/FASB
Discussion Paper: Preliminary Views on Financial Statement Presentation,
respondents that disagreed with a single statement presentation argued that
items of other comprehensive income (OCI) are volatile and that their inclusion
with core business results will confuse users of nancial statements and lead to
signicant misinterpretation of an entitys performance.
Motivated by respondents complaints on the volatility of comprehensive
income and the lack of empirical evidence on this issue, we address three
research questions: (i) Is comprehensive income more volatile than net income?
(ii) Is the volatility of comprehensive income, incremental to net income,
associated with market risk? and (iii) Is the incremental volatility of
comprehensive income priced?
We employ a sample of New Zealand nonnancial rms to measure earnings
volatility over the period 20032010. With regard to the rst research question,
67.4 percent of rms experience greater volatility of comprehensive income
than net income. Asset revaluations dominate other comprehensive income and
are the major cause of volatility of comprehensive income. When asset
revaluations are excluded, only 57.6 of rms have greater comprehensive
income volatility than net income volatility. For the second research question,
the three income volatility measures are associated with the volatility of stock
returns (market risk). The volatility of comprehensive income incremental to
net income is not related to market risk. With respect to the third research
question, the volatility of all the three income measures moderates the earnings
price relation. The incremental volatility related to asset revaluations is priced,
but the volatility of the remaining components of other comprehensive income
is not priced.
Most prior research that examines the volatility of comprehensive income
focuses on the volatility of fair value income in the nancial sector (e.g. Barth
et al., 1995; Hodder et al., 2006). More recently, Khan and Bradbury (2014)
provide evidence on the volatility of comprehensive income for a large sample

1
Comprehensive income is the sum of net income plus other comprehensive income
where other comprehensive income (OCI) is the aggregate of all items that bypass net
income. Items that are required or allowed to be presented in OCI include the following:
foreign currency translation adjustments on foreign subsidiaries, actuarial gains and
losses arising from dene benet plans, revaluations of property, plant and equipment
and changes in the fair value of available-for-sale securities and nancial instruments in
a cash ow hedge.
2

Similarly, SFAS 130 Reporting Comprehensive Income does not specify the statement in
which comprehensive income must be displayed.
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of nonnancial US rms. As we examine the same research questions as Khan

and Bradbury (2014), we adopt similar methodology.
Our study contributes evidence that is not available in prior research. It is not
obvious that US evidence on the volatility of comprehensive income will be
useful to inform the IASBs deliberations for several reasons. First, there is a
substantial size dierence between our sample rms and those in Khan and
Bradbury (2014). The US rms are 10 times larger based on price per share and
nearly seven times larger based on book value of equity.
Second, there are dierences in the types of underlying transactions across
jurisdictions, which may give rise to dierences in the materiality of OCI
components. For example, NZ rms have fewer have lower frequency of
pension plans, and they are more likely to be dened contribution than dened
benet.3 Also, NZ rms are more likely to employ foreign currency derivatives
than US rms (Berkman et al., 1997). In 2013, New Zealands exports
(imports) per GDP are 83 percent (28 percent) compared to 13 percent (17
percent in the USA). The descriptive evidence provided in section 3 also
provides further support for the greater use of derivatives and the lower
incidence of pension adjustments in other comprehensive income.
Third, International Financial Reporting Standards (IFRS) have dierent
items of OCI than US GAAP. IFRS allow the option to revalue property, plant
and equipment (IAS 16 Property, Plant and Equipment) and investment
property (IAS 40 Investment Property). Our sample is interesting because it
includes rms that have voluntarily chosen to revalue assets and potentially
increase the volatility of comprehensive income. The revaluation of noncurrent
assets is common in New Zealand, but other IASB jurisdictions may not have a
history or custom of asset revaluation. Hence, we compare the volatility of
three income measures: (i) net income, (ii) comprehensive income and (iii)
adjusted comprehensive income (after excluding asset revaluations).
Essentially, this study contributes to prior literature by providing evidence on
the volatility of comprehensive income from nonnancial rms reporting under
International Financial Reporting Standards. First, non-US evidence is
important for the IASB as it has a growing diversity of constituents (Tokar,
2005). Second, as the IASB-FASB attempts at convergence are almost at an
end, and the IASB is continuing by itself to review the Conceptual Framework
(IASB, 2013). In this review, the reporting of other comprehensive income is
still a major unresolved issue.
The remaining study is organised as follows. Section 2 develops hypotheses
and describes the literature on comprehensive income volatility. Section 3
describes the sample, data and results. The last section concludes the study.

For lower participation in retirement savings schemes in New Zealand, see Matuschka
et al. (2011). For evidence in dierences between Australian and US schemes, see
Forman and Mackenzie (2013).
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2. Hypotheses and literature

2.1. Development of hypotheses
A recent output of the IASB nancial statement presentation project is a
Discussion Paper: Preliminary Views on Financial Statement Presentation
(IASB, 2008).4 This Discussion Paper proposes that comprehensive income be
reported in a single statement. During 2009 and 2010, the IASB and the FASB
developed joint proposals to replace IAS 1 Presentation of Financial Statements
(and the US GAAP equivalent). In May 2010, both boards published an
exposure draft Presentation of Items of Other Comprehensive Income. The IASB
received 170 responses to the Discussion Paper (IASB, 2009) and 139 to the
exposure draft (IASB, 2011).5 More than half the respondents to the IASB
exposure draft and approximately two-thirds of the respondents to the FASB
exposure draft opposed the proposed requirement for a single statement of
performance (IASB, 2010b, paragraph 10). Respondents who disagree with a
single statement of performance are mostly preparer or preparer organisations
(IASB, 2010a, paragraph 16). They express the view that single statement
undermines the importance of prot (net income) by making it a subtotal
(IASB, 2010b). They also argue that the inclusion of other comprehensive
income along with core business results may confuse users of nancial
statements and lead to signicant misinterpretation of performance (IASB,
2009, paragraph 40). The possible causes for user confusion created by a single
statement is that items of OCI are dierent in nature, less controllable,
dicult to predict and not attributable to management performance (IASB,
2010b, paragraph 17).
Similar arguments are echoed in the IASBs conceptual framework project
DP/2013/1 (IASB, 2013). Arguments in DP/2013/1 opposing a single performance statement are that items of OCI cannot be used to infer long-term trends
(IASB, 2013, 8.3(c)), are not likely to persist or recur and are subject to future
changes in estimates or prices (IASB, 2013; 8.20).6 Thus, the respondents
against a single performance statement argue that items of OCI are infrequent,
transitory and price sensitive and that by including them with core earnings will
make comprehensive income volatile relative to net income.
Items that are reported in OCI comprise unrealised gains and losses relating
to property, plant and equipment fair values, available-for-sale security fair
4

Prior to March 2006, it was the performance reporting project.

The FASB received 57 submission letters (IASB, 2009).

Respondents to the FASB exposure draft also adopt similar arguments. While most
respondents against a single income statement are in the nancial services, 34 percent of
industrial sector comment letters negatively comment on excess volatility, and eight
percent claim this volatility may misrepresent economic performance (Yen et al., 2007).
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values, foreign currency translation adjustments, cash ow hedges and dened

benet pension actuarial adjustments. However, if items of OCI are negatively
correlated with income or items within income, then this will result in
comprehensive income being less volatile than net income. For example,
foreign currency items or cash ow hedges are likely to be negatively correlated
with net income. Hence, whether items of OCI result in more volatility in
comprehensive income than in net income is an empirical question. This leads
to the following hypothesis:
H1: Comprehensive income is more volatile than net income.
Assuming OCI results in additional volatility, then a second important
question is whether this increased volatility confounds risk assessment? This
reects the concerns of opponents to a single performance statement, who
argue that OCI results in volatility that does not reect management
performance as it is induced by market forces that are beyond managerial
control (IASB, 2010b).
The increased volatility of comprehensive income is an important issue
because it implies a perception of increased risk. Trueman and Titman (1988)
argue that income smoothing allows rms to reduce perceived earning volatility
to obtain cheaper debt nancing. Ronen and Sadan (1981) argue that income
smoothing is potentially useful as it allows managers to signal private
information about the level and persistence of future earnings, without having
to reveal proprietary information.
Accounting risk measures can be viewed as surrogates for the total variability
of return of a rms common equity securities (Beaver et al., 1970). Thus,
accounting measures reect both the systematic and rm-specic (unsystematic
or idiosyncratic) risk components.7 Beaver et al. (1970) regress beta on seven
accounting variables (dividend payout, asset growth, nancial leverage, asset
size, current ratio, earning variability and accounting beta) and nd a high
degree of contemporaneous association between the accounting and market
risk measures. Subsequent studies (e.g. Rosenberg and McKibben, 1973; Lev,
1974) investigate the relation between market risk and accounting risk
measures, by incorporating additional or dierent accounting measures of
risk. In a comprehensive survey of research that relates risk to accounting
variables research, Ryan (1997) nds that earning variability has historically
been the accounting variable most strongly related to equity risk. This leads to
the following hypothesis:

Systematic risk is the portion of the variance of rms returns that is common to the
market and cannot be diversied, while unsystematic or idiosyncratic risk aects a very
small number of assets and can be almost eliminated with diversication. Total risk
includes both systematic and idiosyncratic component.
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H2: The volatility of comprehensive income, incremental to net income, is

associated with an entitys market risk.
The volatility of comprehensive income and the risk associated with it are
important issues in resolving the decision of whether to report a single
statement of performance. This study is motivated to provide evidence to the
IASB on the existence of earning volatility and complaints about the excessive
volatility of comprehensive income and its consequences on nancial statement
users. Hence, we examine the relation between incremental volatility of
comprehensive income and the entitys market price and hypothesise:
H3: The volatility of comprehensive income, incremental to net income, is
associated with an entitys market price.

2.2. Literature on the volatility of comprehensive income

Several studies have examined the value relevance of comprehensive income
in international settings. For example, it has been researched in the USA
(Dhaliwal et al., 1999; Biddle and Choi, 2006; Chambers et al., 2007), UK
(OHanlon and Pope, 1999), New Zealand (Cahan et al., 2000), Canada
(Kanagaretnam et al., 2009) and Europe (Goncharov and Hodgson, 2011). In
contrast, very few studies have examined the volatility of comprehensive
income and related consequences (i.e. Barth et al., 1995; Hodder et al., 2006;
Khan and Bradbury, 2014). Furthermore, these studies are undertaken using
US data.8
Barth et al. (1995) examine a sample of 137 US banks over the period of
19711990. They nd that fair value based earnings are more volatile than
historical cost-based earnings and that share prices do not reect the
incremental volatility.
Hodder et al. (2006) examine the risk relevance of the standard deviation of
three performance measures (net income, comprehensive income and a
constructed full fair value income measure) for 202 US commercial banks
from 1996 to 2004. They nd that the volatility of full fair value income is more
than three times that of comprehensive income and more than ve times that of
net income. They nd the constructed measure of full fair value reects
elements of risk not captured by volatility in net income or comprehensive
income.
Bamber et al. (2010) do not directly address earning volatility, rather they
examine a broad section of US rms that change comprehensive income
reporting choice between 1998 and 2001. They report that for 78 percent of
8

It is not obvious that US evidence is appropriate for the IASB, especially as the
attempts for convergence between the IASB and FASB have been abandoned.
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their sample, comprehensive income is greater than net income and that that
comprehensive income for the mean (median) rm is 29 percent (9 percent)
more volatile than net income.
Khan and Bradbury (2014) examine the volatility of comprehensive income
relative to net income for a sample in excess of 2,500 US nonnancial rms.
They nd that comprehensive income is more volatile than net income and
that it is associated with market-based measures of risk (volatility of stock
returns and beta). However, the incremental volatility of comprehensive
income, relative to net income, is not associated with market risk and is not
priced.
To maintain comparability with prior research, we adapt the research design
in Hodder et al. (2006) and Khan and Bradbury (2014) and apply this to
nonnancial rms in an IFRS environment. In the next section, we describe
how we introduce a third income measure by adjusting for asset valuations.
3. Sample, data and results
3.1. Sample and descriptive statistics
The initial sample comprises all nonnancial companies listed on the New
Zealand Stock Exchange and the New Zealand Alternative Exchange. The
eect of sample selection criteria is documented in Table 1. Finance companies,
equity trusts and fund entities are excluded as they have dierent capital
structures, are subject to regulatory prudential supervision and have specic
nancial reporting requirements. In addition, nancial companies hold large
amounts of nancial instruments for purposes that dier from other corporate
rms. We also eliminate, from the sample, rms that do not report in New
Zealand dollars or have missing data. The resulting sample is 92 rms with
complete data over the period 20032010. This is a trade-o between sample
size and having sucient time series observations to measure volatility.9
Table 1
Eect of sample selection criteria
Firms listed on NZSX
Firms listed on NZAX
Total listed rms
Less nance, equity trusts and funds entities
Less rms not reporting in NZ dollars and with missing data
Firms with all income measures available for the period 20032010

127
24
151
12
47
92

If we increase the period to measure volatility from 2001 to 2010, the sample decreases
to 71 rms. Repeating the analysis on this smaller sample yields similar results.
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We hand-collect data for net income, other comprehensive income and

comprehensive income from annual nancial statements. Other comprehensive
income data are reported in the statement of total recognised revenues and
expenses and statement of movements in equity required by FRS-2 Presentation of Financial Reports. The 1994 Interpretation of FRS-2 requires disclosure
of total recognised revenues and expenses (which we label comprehensive
income).10 Thus, we are able to use as reported measures of comprehensive
income, rather than as constructed. This is important because constructed
measures of items of other comprehensive income introduce measurement error
and are unreliable (Chambers et al., 2007). Stock price data are downloaded
from Datastream International.
Table 2 provides descriptive statistics of income measures and the components of comprehensive income where all measures are scaled by the market
value of opening equity: net income (NI), comprehensive income (CI) and
adjusted comprehensive income (ACI). Table 2 also reports items of other
comprehensive income (OCI) that bypass net income: assets revaluations (AR),
foreign currency translation (FCT), derivative gains and losses on cash ow
hedges (CFH), gains and losses on available-for-sale securities (AFSS),
actuarial gains and losses on dened benet plans (DBP) and other.11 Panel
A contains descriptive statistics for the pooled sample of 92 rms over the
period 20032010 (i.e., n = 736). Panel B reports the annual means.
The pooled 8-year mean of NI (0.015) is less than CI (0.032). The standard
deviation of NI (0.202) is less than CI (0.244) and ACI (0.214). This supports
the view that comprehensive income has greater volatility than net income. The
mean of 0.018 for OCI is mostly driven by asset revaluations (mean 0.016). The
interquartile range for most components of OCI is zero, indicating the low
frequency of occurrence. However, while the frequency is low, the maximum
and minimums indicate that when items of OCI occur they are material.12
Panel B reports annual means. Over the period 20032010, asset revaluation
reserves and foreign current translation adjustments are the most dominant
component of other comprehensive income.13
10

FRS-7 Paragraph 7.3 requires disclosure of net surplus (decit), changes in the
revaluation reserve, currency translation dierences and minority interests. For
consistency of terminology with prior research, we use the term net income rather
than net surplus, where net income is the prot for the period under IFRS.
11

A large proportion of other items in OCI are taxation on other OCI items and that
due to aggregation they cannot be allocated to individual items.

12
A similar feature is observed in US data (Khan and Bradbury, 2014). The eect is not
due to scaling as it exists in the raw data. Scaling by book equity or total assets yields
similar results as those reported.
13

Available-for-sale (AFSS) and cash ow hedges (CFH) were not required to be

reported under old NZ GAAP, prior to the adoption of IFRS in 2007. We assess the
impact of the introduction of IFRS in a later section.
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Table 2
Descriptive statistics of income measures and other comprehensive income components
Panel A: Pooled sample

NI
AR
FCT
CFH
AFSS
DBP
Other
OCI
CI
ACI

Mean

SD

Min.

25%

Median

75%

Max.

0.015
0.016
0.002

0.001
0.001
0.000

0.001
0.018
0.032
0.016

0.202
0.075
0.059
0.019
0.042
0.002
0.025
0.104
0.224
0.214

0.965

0.407

0.151

0.230

0.345

0.032

0.356

0.450

0.965

0.965

0.007
0.000
0.000
0.000
0.000
0.000
0.000

0.001

0.008

0.010

0.058
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.063
0.056

0.091
0.000
0.000
0.000
0.000
0.000
0.000
0.007
0.113
0.090

1.998
1.166
1.539
0.165
0.864
0.010
0.439
1.540
1.996
2.000

Panel B: Annual means

NI
AR
FCT
CFH
AFSS
DBP
Other
OCI
CI
ACI

2003

2004

2005

2006

2007

2008

2009

2010

0.027
0.015

0.001
0.000
0.000
0.000

0.002
0.012
0.039
0.024

0.008
0.044

0.002
0.000
0.000
0.000

0.001
0.041
0.048
0.005

0.032
0.019
0.015
0.000
0.000
0.000

0.001
0.032
0.065
0.046

0.051
0.024
0.005
0.000
0.000
0.000

0.001
0.029
0.080
0.056

0.035
0.023

0.003

0.003
0.010
0.000
0.000
0.026
0.062
0.039

0.021
0.006
0.005
0.001

0.003
0.000

0.004
0.005
0.024
0.018

0.023
0.001
0.001

0.011

0.002
0.000

0.002

0.007

0.030

0.031

0.036
0.000

0.004
0.005
0.004
0.000
0.003
0.009

0.028

0.028

Panel C: Comparison with Khan and Bradbury (2014)

This study
Mean
NI
AR
FCT
CFH/DGL
AFSS/SGL
DBP
Other
OCI
CI

0.015
0.016
0.002

0.001
0.001
0.000

0.001
0.018
0.032

KB (2014)
Mean
0.017
0.001
0.000
0.000

0.002
0.000

0.001
0.016

This study
SD

KB (2014)
SD

0.202
0.075
0.059
0.019
0.042
0.002
0.025
0.104
0.224

0.125
0.022
0.007
0.004
0.017
0.000
0.041
0.132

This table presents descriptive statistics of income volatility measures. Panel A reports the
summary statistics of net income (NI), comprehensive income (CI), comprehensive income
adjusted for asset revaluations (ACI), other comprehensive income (OCI) and the
components of other comprehensive income. The following components are examined: asset
revaluation (AR), foreign currency translation (FCT), cash ow hedge (CFH), other (Other),
available-for-sale securities (AFSS) and dened benets plans (DBP). All variables are scaled
by opening equity. The sample is pool for 92 rms over period is from 2003 to 2010 (n = 736).
Panel B reports annual means for the same variables. Bold type denotes the income measures.
For Panel C, KB (2014) is Khan and Bradbury (2014). Derivative gains and losses (DGL) and
securities gains and losses (SGL) are assumed to be equivalent to CFH and AFSS,
respectively.

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3.2. Comparison with Khan and Bradbury (2014)

The motivation and contribution of this study is that data are dierent from
the US sample in Khan and Bradbury (2014) because of dierences in
underlying transactions and accounting. Table 2, Panel C, reports a comparison of the components of OCI between this study and Khan and Bradbury
(2014).14 Overall, the average (standard deviation) of OCI is 18 times (2
times) greater in this study than the US data reported in Khan and Bradbury
(2014).
The revaluation of noncurrent assets is common in New Zealand. IAS 16
Property, Plant and Equipment and FRS 3 Accounting for Property, Plant and
Equipment allow revaluations of major assets and account for this by taking
revaluation gains to other comprehensive income. On average, 23 percent of
rms have a revaluation in each year, the range is 18 percent to 27 percent. As
the act of asset revaluation is voluntary, in subsequent tests, we examine the
volatility of comprehensive income including and excluding asset revaluations.
As an alternative measure, comprehensive income is adjusted by eliminating
asset revaluations owing through other comprehensive income and is termed
adjusted comprehensive income.15
As the means in both samples are small, we focus the discussion on the
standard deviations. Consistant with Berkman et al. (1997), the use of
derivatives in cash ow hedges and available-for-sale securities (as measured
by the standard deviation) is more than double that of the US sample, as is
foreign currency translations. On the other hand, the standard deviation of
pension adjustments in OCI in the US sample is almost ten times that of the
New Zealand sample. It is worth noting that greater frequency or value of items
in OCI will not necessarily result in more volatility of comprehensive income.
This will depend on the sign and magnitude of the volatility of OCI and net
income.
3.3. Results: volatility of income (H1)
To examine H1, we estimate rm-specic standard deviations of NI, CI and
ACI as measures of volatility. Table 3, Panel A, provides descriptive statistics
14

This comparison assumes that derivate gains and losses and securities gains and losses
in the US sample are equivalent to cash ow hedge and available for sale securities,
respectively.

15

We acknowledge that this is only a partial adjustment. A full adjustment would also
account for any depreciation of the revalued asset in net income and any related deferred
tax eect. There is insucient information in the annual reports to make these
adjustments. Using standard assumptions is not feasible because some revalued assets
are not depreciated (e.g. land), and deferred tax may not be relevant (e.g. if the partial
method has been adopted).
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11

Table 3
Comparative analyses of income volatility
Mean

SD

Min.

25%

Median

75%

Max.

Panel A: Descriptive statistics of rm-specic measures of income volatility

rNI
0.118
0.128
0.007
0.027
0.069
rCI
0.143
0.136
0.010
0.054
0.099
rACI
0.126
0.141
0.008
0.026
0.072

0.149
0.184
0.159

0.689
0.687
0.688

Panel B: Descriptive statistics of income volatility ratios

rCI/rNI
1.986
3.014
0.267
1.000
rACI/rNI
1.118
0.437
0.267
0.999

1.450
1.112

22.578
3.861

1.052
1.005

Panel C: Distribution and statistical comparisons of income volatility ratios

rCI/rNI > 1
rCI/rNI = 1
rCI/rNI < 1

Count

Comparisons

Count

62
10
20

67.4
10.9
21.7

rACI/rNI > 1
rACI/rNI = 1
rACI/rNI < 1

53
14
25

57.6
15.2
27.2

Panel D: Wilcoxons signed-rank test (p-values)

0.000
rCI and rNI

rACI and rNI

0.001

This table reports the results for hypothesis H1. Panel A reports descriptive statistics of
income volatility measures. rNI, rCI, and rACI are rm-specic standard deviations measured
over the period 20012010 for net income, comprehensive income and comprehensive income
adjusted for asset revaluations scaled by opening market values. Panel B reports descriptive
statistics for income volatility ratios. Panel C reports the distribution of income volatility
ratios, and Panel D provides a statistical comparison using a Wilcoxon signed-rank tests.

of these volatility measures. The mean (median) standard deviation of NI, CI

and ACI is 0.118 (0.069), 0.143 (0.099) and 0.126 (0.072), respectively. The
closeness of rNI and rACI suggests that it is asset revaluations that make CI
more volatile.
To assess H1, the relative volatility of CI or ACI compared to NI, in Panel B
of Table 3, we report standard deviation ratios (i.e. rCI/rNI and rACI/rNI). The
mean standard deviation ratio of CI to NI is 1.986 indicating that CI is 98
percent more volatile than NI. The median standard deviation ratio is 1.052.
The mean (median) standard deviation ratio for ACI to NI is 1.118 (1.005). The
dierences in means and medians suggest that nonparametric statistics are
appropriate.
Panel C shows that the volatility of CI is greater than NI for 67.4 percent of
rms. There are 10 observations (10.9 percent) where there is no dierence
between NI and CI volatility (indicating no items of other comprehensive
income). As CI is adjusted for revaluations, the number of no dierence rms
increases to 14 (15.2 percent). The Wilcoxon signed-rank test (Panel D) shows
that volatility of CI and ACI is signicantly higher than volatility of NI (at the
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S. Khan, M. E. Bradbury/Accounting and Finance

0.01 level). This result rejects the null hypothesis of no dierence in the
volatility of CI and NI and supports the alternative hypothesis raised by the
opponents of a single statement of performance, who claim that the OCI
components make CI more volatile than NI. Furthermore, this result persists
when asset revaluations are eliminated from OCI. It therefore is likely to apply
to jurisdictions that do not actively of revalue assets.
3.4. Results: association between income volatility and market risk (H2)
To assess H2, we regress market risk measures on accounting risk measures.
The accounting risk measure of interest is income volatility. However, as
control variables, we also include other accounting variables to represent
leverage and solvency. Hamada (1972) shows that the systematic risk of a rms
common stock is positively correlated with the rms leverage. Bowman (1979)
provides the theoretical relation between a rms systematic risk and its
leverage. Therefore, the leverage ratio can be used as a measure of risk induced
by the capital structure (Beaver et al., 1970). The debt-to-equity ratio is used as
a proxy for default risk. Beaver et al. (1970) argue that liquid or current assets
have a less volatile return than noncurrent assets. The operating cash ow-tocurrent liabilities ratio is used as a proxy for liquidity risk.
We employ the following models16:
MRi a0 a1 IVOLj a2 DTE a3 CTL e

MRi 0 !0 0 !1 rNI 0 !2 INCVOLk 0 !3 DTE 0 !4 CTL e

where MRi is a market measure of risk, IVOLj is an income volatility measure,

DTE is the debt-to-equity ratio, CTL is the operating cash ow-to-current
liabilities ratio, rNI is net income volatility and INCVOLk is a measure of
volatility incremental to rNI.
We use two market measures of risk: (i) the volatility of stock returns (rSR)
and (ii) beta. The standard deviation of raw returns used as a measure of total
risk. Beta is used as a measure of systematic risk and is estimated from a least
squares regression between prices of the stock and the corresponding market
index. We anticipate the correlations between accounting risk measures and
market risk to be positive. For regressions of equation (1), we use three income
volatility measures: rNI, rCI and rACI. If income volatility provides market riskrelevant information, then a1 should be positive and signicant. Equation (2) is
used to test whether the volatility of CI or ACI that is incremental to NI
16

Time and rm subscripts are omitted from all equations.

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provides market risk-relevant information. If so, then 2 will be positive and

signicant.
Table 4 provides descriptive statistics for the market risk measures (Panel A).
The mean (median) standard deviation of returns is 0.398 (0.350). The mean
(median) beta is 0.884 (0.743), which is lower than the market-wide average of
1. This perhaps reects the survivorship bias in the sample selection procedures
which require complete data for the period 20032010. The mean debt-toequity ratio is 0.441, and the operating cash ow-to-current liability ratio is
0.406. From the correlations reported in Panel B, the income volatility
measures and stock return volatility exhibit positive and signicant correlations.
Table 4, Panel C (and D), reports the regression coecients from equations (1) and (2) where stock return volatility (and beta) is the dependent
variable. In Panel C, models 1, 2 and 3 show a signicant positive relation
between income volatility and volatility of stock returns. With respect to
models 4 and 5, the incremental volatility of CI or ACI does not provide any
market risk-relevant information beyond NI. Hence, hypothesis H2 is rejected.
The results in Panel D are disappointing in that none of the income volatility
measures are associated with beta. The adjusted R squares in Panel D are much
lower than those in Panel C. This result is not unexpected, as betas of New
Zealand portfolios are unstable (Burke et al., 1996, 1997; Li, 2001). Furthermore, even with US data, Hail and Leuz (2006) nd the association of beta with
the implied cost of capital is lower than the return variability. They nd that
beta is insignicant once control variables are added, whereas return variability
remains signicant.
3.5. Results: association between income volatility and price (H3)
To test H3, we adopt the model in Hodder et al. (2006), which is a simplied
version of the residual income model (Ohlson, 1995). Equation (3) is the
benchmark model before introducing any income volatility measures:
P k0 k1 BVE k2 AE e

where P is the price per share for rm, BVE is the end of year book amount of
equity per share and AE is the period t abnormal earnings per share, which is
used as a proxy for expected future abnormal earnings. AE is calculated using
current period earnings (scaled by the number of shares outstanding) less the
product of the risk-free rate of return at the beginning of year times book value
per share at the beginning of year. We use the yield to maturity on long-term
New Zealand government bonds as the risk-free rate (see Chay et al., 1993),
which enables us to include the eect of risk in the model. We expect the

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Table 4
Association between income volatility and market risk
Panel A: Descriptive statistics of market risk and accounting risk measures

rSR
Beta
DTE
CTL

Mean

SD

Min.

25%

Median

75%

Max.

0.398
0.884
0.441
0.406

0.271
0.683
0.563
1.617

0.052
0.071

0.518

6.995

0.210
0.495
0.123
0.140

0.350
0.743
0.356
0.496

0.502
1.121
0.546
1.214

1.504
4.497
4.232
3.671

Panel B: Pearson (above diagonal) and Spearman (below diagonal) correlations between risk
measures

rSR
Beta
rNI
rCI
rACI
DTE
CTL

rNI

rSR

Beta

0.242**
0.405***
0.299***
0.366***

0.192*

0.550***

0.035

0.041
0.015
0.025

0.414***

0.397***

rCI

0.439***
0.127
0.808***
0.967***

0.063

0.466***

rACI

0.269***
0.022
0.914***
0.837***

0.057

0.303***

0.434***
0.124
0.953***
0.956***

0.048

0.455***

DTE

CTL

0.012

0.009
0.143
0.111
0.121

0.394***

0.32***

0.308***

0.226**

0.299***
0.124

0.102

Panel C: Regression results of stock return volatility on accounting risk measures

(1)
Intercept
rNI
rCI
rACI
rCI
rNI
rACI
rNI
DTE
CTL
F-value
Adjusted R2

0.340 (8.60)***
0.661 (3.15)***

(2)
0.354 (8.34)***

(3)
0.350 (8.79)***

(4)
0.357 (8.71)***
0.659 (3.16)***

(5)
0.342 (8.61)***
0.682 (3.22)***

0.432 (2.20)**
0.519 (2.69)***
0.002 (0.05)

0.050 (3.01)***
9.46***
0.218

0.015 (0.32)

0.058 (3.52)***
7.45***
0.175

0.009 (0.20)

0.053 (3.16)***
8.41***
0.196

0.675 (1.24)

0.003 (0.06)

0.046 (2.77)***
7.73***
0.228

0.469 (0.79)
0.000 (0.01)

0.050 (3.01)***
7.22***
0.215

(4)

(5)

1.012 (9.00)***

0.425 (0.74)

0.973 (8.96)***

0.373 (0.64)

Panel D: Regression results of beta on accounting risk measures

(1)
Intercept
rNI
rCI
rACI
rCI
rNI
rACI
rNI
DTE
CTL
F-value
Adjusted R2

0.968 (8.97)***

0.421 (0.73)

0.056 (0.45)

0.148 (3.25)***
3.58**
0.078

(2)
1.008 (8.98)***

0.634 (1.22)

0.060 (0.49)

0.150 (3.41)***
3.93**
0.088

(3)
0.978 (9.12)***

0.468 (0.90)
0.057 (0.46)

0.150 (3.32)***
3.68**
0.081

1.654 (1.32)
0.043 (0.35)

0.138 (3.02)***
3.14**
0.086

1.039 (0.64)
0.052 (0.41)

0.148 (3.25)***
2.77**
0.072

This table presents descriptive statistics, correlations and regression results for hypothesis H2.
Panel A reports descriptive statistics for market and accounting measures of risk: rSR is
return volatility, Beta is the market model beta, DTE is debt-to-equity ratio and CTL is the
cash ow-to-current liability ratio. The volatility of income measures rNI, rCI and rACI is
reported in Panel A of Table 3. Panel B reports correlations between volatility measures.
Panel C reports the regression of stock return volatility on accounting risk measures. *, **
and *** indicate signicance at 10, 5 and 1 percent (two tailed), respectively.

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coecient of BVE equal to 1 and a positive coecient for AE indicating that

the market prices abnormal earnings.
To examine whether the capital market prices the income volatility, we
interact abnormal earnings with earning volatility:
P k0 k1 BVE k2 AE k3 IVOL  AE e

We predict negative coecients for the interaction term suggesting that

income volatility measures capture elements of risk that are priced by the
capital market. To examine whether the incremental volatility of CI or ACI is
priced, we estimate:
P x0 x1 BVE x2 AE x3 rNI  AE x4 INCVOL  AE e

If the incremental volatility of CI or ACI is priced, we expect the coecient

for x4 to be signicantly negative. We also include interactions of AE with
other accounting risk measures (DTE and CTL) as controls.
Table 5 (Panel A) provides descriptive statistics for the regression variables.
In Panel B, we report the regression coecients from equations (4) and (5). As
predicted, the coecients for BVE and AE are signicant and positive in all
models. The coecients of the income volatility measures interacted with
abnormal earnings (i.e. rNI 9 AE, rCI 9 AE and rACI 9 AE) are signicant
and negative in models 2, 3 and 4. This indicates that the volatility of these
income measures is price. The incremental volatility of CI in model 5 is
signicant and positive. This is most likely due to the revaluation increases
being positively priced because in model 6, the incremental volatility-adjusted
comprehensive income (i.e. the volatility without asset revaluations) is not
signicant.
The interaction of the debt-to-equity ratio with abnormal earnings (i.e.
DTE 9 AE) is positive, which is inconsistent with expectations. The interaction
of the operating cash ow-to-current liabilities ratio (i.e. CF 9 AE) with
abnormal earnings is insignicant. The results for models with interaction
terms are robust to the inclusion of main eects variables.17
3.6. Components of OCI
The focus of this study is on the volatility of comprehensive income relative
to net income, rather than the components of OCI. We focus on total
17

In Table 5, we report the Hodder et al. (2006) model, which excludes the main eects
variables. We note that the accounting volatility measures do not feature in the original
model and hence are only included as moderating variables. However, it is common to
include main eects when interaction terms are introduced. We re-estimate the
regressions and included main eects. The results (not tabulated) are not qualitatively
dierent from those reported in Table 5.
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Table 5
Association between stock price, book value, abnormal earnings and accounting volatility
Panel A: Descriptive statistics for regression variables

P
BVE
AE
DTE 9 AE
CF 9 AE
NI 9 AE
CI 9 AE
ACI 9 AE

Mean

SD

Min.

25%

Median

75%

Max.

2.011
1.327
0.103
0.189
0.073
0.026
0.028
0.027

1.759
1.280
0.161
1.410
0.114
0.143
0.144
0.143

0.020

0.004
0.009

0.005

0.098
0.000
0.000
0.000

0.611
0.393
0.016
0.003
0.004
0.001
0.002
0.001

1.516
0.989
0.046
0.015
0.035
0.003
0.004
0.003

3.159
1.811
0.110
0.045
0.010
0.006
0.009
0.007

7.594
5.407
1.060
13.543
0.549
1.301
1.317
1.301

Panel B: Regression results

Intercept
BVE
AE

(1)

(2)

0.536
(3.19)***
0.932
(9.50)***
2.327
(2.98)***

0.510
(3.32)***
0.823
(8.75)***
4.964
(3.66)***

12.556
(4.30)***

rNI 9 AE
rCI 9 AE

(3)
0.506
(3.26)***
0.844
(8.97)***
4.865
(3.54)***

0.506
(3.29)***
0.827
(8.83)***
5.141
(3.73)***

(5)

(6)

0.543
(3.58)***
0.711
(6.73)***
4.658
(3.48)***

11.875
(4.13)***

0.502
(3.23)***
0.833
(8.64)***
5.317
(3.48)***

12.917
(4.28)***

12.095
(4.09)***

rACI 9 AE

12.769
(4.33)***

(rCI
rNI) 9
AE
(rACI
rNI) 9
AE
DTE 9 AE

77.37
(2.15)**

CF 9 AE
F-Value
Adjusted R2

(4)

72.21***
0.610

1.034
(3.86)***
0.455
(0.29)
38.50***
0.673

1.006
(3.67)***
0.460
(0.29)
37.53***
0.667

1.051
(3.90)***
0.299
(0.19)
38.62***
0.703

0.899
(3.33)***
0.756
(0.48)
34.19***
0.686

27.32
(0.51)
1.061
(3.87)***
0.131
(0.08)
31.85***
0.670

This table reports the results for hypothesis H3. Panel A reports descriptive statistics of
regression variables: P is price per share, BVE is book value of equity per share, AE is
abnormal earnings, and interaction terms of abnormal earnings of accounting risk measures.
Panel B reports the regression of price on book value, abnormal earnings and interaction
terms. *, ** and *** indicate signicance at 10, 5 and 1 percent (two tailed), respectively.

comprehensive income because opponents of the proposal to have a single

statement of performance do not argue that components of OCI (or specic
industries) cause the excess volatility. Rather, most respondents to the IASB
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17

performance reporting documents complain about the lack of theory for

reporting items in OCI (IASB, 2009, 2010a,b, 2011). Nevertheless, to be
informative, in this section, we provide descriptive data on the relative volatility
of OCI components.
Table 6 is an analysis of income volatility for components of OCI. We
develop six measures of comprehensive income one for each major
component of OCI. Each component of OCI is added to net income, and the
standard deviation of the aggregated amount is estimated.18 The volatility ratio
is then estimated.
The mean income volatility measure related to asset revaluations is 1.938,
the maximum is 22.379 and the minimum is 0.678.19 Forty-six percent of
rms revalued assets, and 39.1 percent of these resulted in an increase in
volatility relative to net income and 7.6 percent resulted in a decrease in
volatility. The last four columns in Table 6 report the frequency of OCI
items. 6.5 percent of rms (N = 92) reported an asset revaluation in each of
the 8 years (20032010), 9.8 percent more than half years, 30.4 percent less
than half the years (but at least once) and 53.3 percent did not revalue
through OCI.
While asset revaluations are not the most frequent component of OCI, they
have the greatest impact on the volatility of comprehensive income. Foreign
currency translation is the most frequent items of OCI, with 45.8 percent of
rms have an adjustment in more than half the period. Of rms these items,
32.6 percent increase volatility of comprehensive income relative to net income,
and 21.7 percent of items reduce volatility. Similarly, cash ow hedges and
other items have positive and negative eects of income volatility. OCI
adjustments relating to available-for-sale securities and dened benet plans
are infrequent and have little impact on income volatility.
3.7. Additional tests
The reported results are robust to a number of additional tests. First, we scale
variables by total assets and book equity in addition to market equity. Second,
we increase the number of years to measure volatility from eight to 10 years.
This reduces the number of rms 9271. Our conclusions are unchanged by
these additional tests.
During the sample period (i.e. for periods beginning on or after 1 January,
2007), NZ adopted international accounting standards. We test whether this
18
The weakness of examining OCI components on an individual basis is that it ignores
the covariance of components which can either increase or reduce the volatility of
comprehensive income.
19
The eight largest volatility measures are either in the energy or transport
infrastructure sectors. If these rms are removed, the mean volatility ratio is 1.134
and is still the largest OCI component that gives rise to volatility.

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+
+
+
+
+
+

NI
NI
NI
NI
NI
NI

Max.

22.279
2.762
1.987
3.860
1.729
1.097

Mean

1.938
1.055
1.053
1.032
1.003
1.001

0.678
0.820
0.620
0.534
0.579
0.992

Min.
39.1
32.6
33.7
35.9
10.9
1.1

7.6
21.7
20.7
19.6
5.4
1.1

rNI + C/rNI
> 1 (%)
6.5
22.8
0.0
1.1
0.0
0.0

=8 years
9.8
13.0
7.6
5.4
0.0
1.1

8 > 9 > 3 years

Frequency of items (%) of OCI

30.4
18.5
46.7
48.9
16.3
1.1

4 > 9 > 0 years

53.3
45.7
45.7
44.6
83.7
97.8

=0 years

This table reports descriptive statistics of income volatility measures for the components of OCI. Each component of OCI is added to net income
(rNI+C). Then, rm-specic standard deviations measured over the period 20012010, and the income volatility ratio is measured. The following
components are examined: asset revaluation (AR), foreign currency translation (FTC), cash ow hedge (CFH), other (Other), available-for-sale
securities (AFSS) and dened benets plans (DBP). The last four columns report the percentage of rms (n = 92) that report a particular
component of OCI in various frequencies over the 8-year period (20032010).

AR
FCT
CFH
Other
AFSS
DBP

+ C

rNI

rNI + C/rNI
> 1 (%)

Table 6
Analyses of income volatility for components of OCI descriptive statistics of rm-specic measures

18
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S. Khan, M. E. Bradbury/Accounting and Finance

19

event has an impact on comprehensive income volatility. The sample is divided

into two periods of 4 years: 20032006 and 20072010. Income volatility is
calculated over each period and then compared using the t-test. The results
show no signicant dierences in the means of the two groups.20
4. Conclusion
A recent Discussion Paper proposes the reporting of comprehensive income
in a single statement of nancial performance (IASB, 2008). The major
concerns of this proposal, voiced by nancial statement preparers, are that
comprehensive income will replace net income as the summary measure of
performance and, due to the nature of items in OCI, the volatility of
(comprehensive income) performance will increase the perception of risk.
Similar concerns are noted in IASBs conceptual framework project (IASB,
2013). In this study, we provide evidence on the volatility of comprehensive
income.
For a sample of 92 New Zealand nonnancial rms over the period 2003
2010, we analyse the incremental volatility of comprehensive income relative to
net income and the risk associated with it. As asset revaluations are voluntary
under IFRS, we provide evidence on the volatility of comprehensive income
with and without revaluations. We show that this sample diers from US data,
both in terms of the nature and magnitude of items in OCI. Our sample is
therefore likely to be more representative of the diversity of IASB constituents
(Tokar, 2005). Nevertheless, interpreting the results for other jurisdictions that
are considering adopting IFRS is limited by the sample characteristics. In our
data, the main adjustments in OCI are asset revaluations, foreign currency
translations and cash ow hedges. We have few adjustments for available-forsale securities and employee pension benets.
For 57.6 percent of rms, comprehensive income (excluding asset revaluations) is more volatile than net income. This is much lower than in the USA
(e.g. 78 percent in Bamber et al., 2010 and 74.1 percent in Khan and Bradbury,
2014). We also observe that foreign currency translation, cash ow hedges and
available-for-sale securities can reduce volatility of comprehensive income
relative to net income.
All three measures of income volatility exhibit strong positive correlation
with volatility of stock returns. The incremental volatility of comprehensive
income and adjusted comprehensive income (over the volatility of net income)
is not signicantly associated with market risk. All three income volatility
measures are associated with the entitys market price. Furthermore, the
incremental volatility of comprehensive income over net income is priced.
20
This analysis is only an approximate estimation as early (voluntary) adoption was
allowed in NZ for scal year beginning on or after 1 January 2005. However, Stent et al.
(2010) note there are only 48 early adopting rms in their sample of 161 rms.

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S. Khan, M. E. Bradbury/Accounting and Finance

However, this is due to asset revaluation increases being priced. The

incremental volatility of comprehensive income when asset revaluations are
excluded is not priced.
Our ndings have important policy implications for the IASB. First, asset
revaluation is the major component of OCI that makes comprehensive
income more volatile than net income. However, it is unreasonable for
lobbyists to complain about the volatility of comprehensive income if that
volatility is caused by the voluntary act of revaluation. Second, the evidence
supports the claims of nancial statement preparers that comprehensive
income is, on average, more volatile than net income. However, there is no
evidence that the market is confused or is misled by the incremental
volatility of items of other comprehensive income. This supports the view
for a single statement of comprehensive income. Future research will need to
consider which subtotals of comprehensive income are irrelevant. The
Discussion Paper (IASB, 2013) makes proposals for items that could be
included in or excluded from other comprehensive income and raises the
issue of recycling of items of OCI into prot. While research on these issues
is beyond the scope of this study, the descriptive evidence is provided on the
frequency and magnitude of OCI components might be useful background
information.21
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