COMPREHENSIVE INCOME IN EUROPE:
          VALUATION, PREDICTION AND CONSERVATIVE ISSUES

                             Igor Goncharov, Assistant Professor PhD
                             University of Amsterdam, The Netherlands
                                          i.goncharov@uva.nl

                                  Allan Hodgson, Professor PhD
                             University of Amsterdam, The Netherlands
                                            A.C.Hodgson@uva.nl


ABSTRACT: The IASB comprehensive income project extends the ‘fair value’ measurement concept
from the balance sheet into the income statement. This article extends prior research, primarily
based on Anglo-Saxon countries, by using a comprehensive data set of 56,700 European firm years
over sixteen countries. We find that other comprehensive income provides incremental information
to investors – due to unrealised available-for-sale securities component – and affects analysts’
decision to revise price estimates. On the other hand, traditional operating net income dominates
aggregated comprehensive income as a valuation metric and in predicting cash flows. Results are
robust to pooled and country specific regressions, controls for non-linearities, impact of reporting
incentives, and the underlying accounting framework (local GAAP, US GAAP, IFRS). We also find
that aggregated comprehensive income switches the conservative attributes of income towards a
more timely recognition of good news over bad news, reducing the conservative agency contracting
role. One possible explanation is the mixing of different concepts of operating capital increments
with unrealised gains and realised historic net income. An agenda item for the IASB is how income
reporting should be disaggregated with a clear delineation on capital increments, conservative
operating income, and unrealised financial gains. This is especially important in Continental
Europe which relies to a greater extent on debt capital and has an under-developed corpus of
equity financial analysts.

Keywords: comprehensive income, value relevance, analyst forecast revisions, European IFRS, accounting
conservatism

JEL Codes: M41, G12