Very few groups have opted for this system given the complexity of implementing it. Portugal Telecom is an exception. This option should be distinguished from the option allowed at the time of the shift to IFRS, where, for example, Publicis revalued its building at the top of the Champs-Elysées (13,500 sqm of offices and shops), from €5m to €164m in 2004, resulting in a latent gross capital gain of €159m, which was booked under shareholders’ equity. The building has now been amortised on this basis, as the historical value was simply revalued in 2004 and has not been revalued since.
We believe that a group that resorts to this option sets itself apart by sending out a signal or confirming the fact that its financial situation is less than stellar as it has had to externalise latent capital gains.
2/ Changes in fair value of intangible fixed assets
The same principle applies as for tangible fixed assets.
3/ Changes in the value of pension fund commitments resulting from changes in assumptions
Currently, under IFRS, pension fund commitments can be entered on the income statement or under “Other comprehensive income”, or they can be booked using the corridor method(1). With the new version of IFRS, which will apply from 2013, all changes in value resulting from a change in assumption with regard to mortality, turnover rates, retirement dates, and increases in salaries or pensions, must be booked as "Other comprehensive income”. However, differences between the expected rates of return on pension fund assets and the rates actually achieved every year, should be booked on the income statement itself.
What is the informative content of these change for the analyst? Insignificant in our view. At the very most, they will draw the analyst’s attention to the assumptions that were made and that are no longer valid, possibly indicating a form of accounting aggressiveness on the part of management.
4/ Currency translation differences resulting from the consolidation of subsidiaries that present their financial statements in a currency other than that of its parent company
On this very standard point, the same principle has applied for a long time under French GAAP. The informative content of these items is insignificant for the analyst since these currency translation differences only trigger a change in the book amount of the share in shareholders’ equity of the consolidated subsidiaries that is owing to the parent company as a result of variations in foreign exchange.
5/ Changes in fair value of financial assets classified as available for sale
They are revalued on the balance sheet, the unrealised capital gains are not externalised on the income statement but booked as "Other comprehensive income", and accordingly as shareholders' equity. On the day on which the asset is sold, the additional value obtained compared with the last revalued value on the balance sheet, plus all past capital gains and "Other comprehensive income”, will be entered on the income statement to make up the pre-tax capital gains, the difference between the sale price and the historical cost price.
When a loss in value has to be booked as an impairment of the available-for-sale financial asset, it is booked on the income statement.
6/ The efficient part of a financial risk hedge
Remember that as it currently stands, the standard covering financial instruments (IAS 39), provides that variations in fair value of the part of the cash flow hedge deemed to be inefficient, are booked on the income statement. Variations in fair value of the part of the hedge deemed to be efficient are booked as “Other comprehensive income" and as shareholders’ equity. More specifically, this only applies to cash flow hedges (for example, interest on a debt at a variable rate) and not to fair value hedges (for example, the value of a debt at a fixed rate).
When the hedged transaction takes place, the items previously booked as “Other comprehensive income” are then transferred to the income statement in order to neutralise the gain or the loss in value on the hedged item, since the hedging had been deemed to be efficient.
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Accordingly, “Other comprehensive income” corresponds to all of the items that change shareholders' equity, with the exception of net loss/income, transactions involving shareholders (dividends, share issues, share cancellations), and the effects of corrections of errors and changes in accounting methods.
Both IFRS and US GAAP stipulate that firms should classify “Other comprehensive income”, either as:
• items that could subsequently be transferred to the income statement;
• items that will not subsequently be transferred to the income statement.
Among the latter, we draw attention mainly to the changes in the fair value of assets that were depreciated in the past. We could also add the currency translation differences involving subsidiaries that will never be sold, in as far as we can use the term “never” in this area. But since that is not the case, they are booked with the first group.
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A study of 41 European groups in the banking, mass market and telecoms sector show that items seem to be arbitrarily allocated to “Other comprehensive income”, with each sector having its own specificities. Banks show a predominance of changes in fair value on available-for-sale financial assets, with more foreign exchange effects for industrial groups.