Discussion Paper Series
2012-01
The Usefulness of Other Comprehensive Income
Items in Japan
Mioko Takahashi and Leon Wong

June 28, 2012

Discussion Papers can be downloaded:
http://www1.tcue.ac.jp/home1/c-gakkai/dp/dp12-01

The Usefulness of Other Comprehensive Income
Items in Japan
Mioko Takahashi
Faculty of Regional Policy
Takasaki City University of Economics
1300 Kaminamie-machi Takasaki
Gunma 370-0801 JAPAN
Email: miokotakahashi@tcue.ac.jp
Phone: +81 (27) 344-7605

Leon Wong
School of Accounting, University of New South WalesUNSW Sydney 2052, AUSTRALIA
Email: leon.wong@unsw.edu.au
Phone: +61 (2) 9385 5810

June 2012

We appreciate the comments of Tadashi Fukai.

The Usefulness of Other Comprehensive Income Items in Japan

Abstract
This paper investigates the usefulness of the disclosure of Other Comprehensive Income(OCI) items in Japan along the two dimensions of value relevance and predictability. We
consider whether the requirement for more transparent presentation of OCI items in theStatement of Changes of Equity (SCE) period have improved the usefulness of OCI. We findthat OCI is value relevant incrementally over net income in the current period both in total
OCI as well as for OCI component items, especially unrealized gains and losses on available
for sale securities, deferred gains and losses on hedging instruments and foreign currencytranslation adjustments. Furthermore, we also find that the current year net income is also
predicted by last year’s OCI, coming mainly from unrealized gains and losses on available
for sale securities and land revaluation excess. We also find that the usefulness (both value
relevance and predictability) of OCI has increased when it was required to be disclosed in theStatement of Changes in Equity (SCE), compared to the pre-SCE period. Our results havepolicy implications as to the usefulness of the disclosure of OCI items that are moretransparent and accessible to investors in the SCE and the Statement of Comprehensive
Income (SCI), than when investors derived them from the balance sheet and notes of thefinancial statements.

JEL Classification: M40, M48

Keywords: Japan, Other Comprehensive Income, Value Relevance, Predictability

The Usefulness of Other Comprehensive Income Items in Japan
1.

Introduction

The increasing convergence of global reporting, by the adoption of International Financial
Reporting Standards (IFRS) provides us with the context for this study. In particular, IFRS1
Presentation of Financial Statements, which mandates the disclosure of other comprehensive
income (OCI) as part of an extended income statement, i.e. the Statement of Comprehensive
Income (SCI), provides us with the motivation to explore the impact of the mandatory
disclosure of OCI, over and above that previously required in the financial statements andnotes to the accounts. Though IFRS is not yet adopted in Japan, the efforts of Japanese
Accounting Standards Board to minimize differences with IFRS and in particular the
introduction of the SCI for financial periods ending on or after March 31th, 2011, makes thequestion of its adoption and impact on investor decision making and firm value particularly
pertinent to users of financial statements of Japanese companies.
This paper investigates the usefulness of the disclosure of OCI items in Japan along the twodimensions of value relevance and predictability, and by studying a time period that covers
both the pre-Statement of Changes of Equity (SCE) and SCE disclosure periods, we consider
whether the requirement for more transparent presentation of OCI items in the SCE period
have improved the usefulness of OCI. This has policy implications as to the usefulness of thedisclosure of OCI items that are more transparent and accessible to investors in the SCE andthe Statement of Comprehensive Income (SCI), than when investors have to derive themfrom the balance sheet and notes to the financial statements.
We find that OCI is value relevant incrementally over net income in the current period bothin total OCI as well as for OCI component items, especially unrealized gains and losses onavailable for sale securities, deferred gains and losses on hedging instruments and foreign1

currency translation adjustments. Furthermore, we also find that the current year net income
is also predicted by last year’s OCI, coming mainly from unrealized gains and losses onavailable for sale securities and land revaluation excess. On the basis that financial statement
users find OCI to be value relevant in making investment decisions and that OCI helps topredict future net income, we also find that the usefulness (both value relevance andpredictability) of OCI has increased when it was required to be disclosed in the Statement of
Changes in Equity (SCE), compared to the pre-SCE period.
While prior Japanese evidence is mixed and covers the period before the introduction of the
SCE, our evidence from the pre-SCE period is generally consistent with the more recent
Japanese evidence (particularly evidence that covers the 2002 to 2009 period) that OCI items
are value relevant and help predict net income. More importantly, our evidence from the SCE
period shows that the usefulness (both value relevance and predictability) of OCI has
increased when it was required to be disclosed in the SCE, compared to the pre-SCE period.
On this basis, we argue that other comprehensive income disclosures would be useful toinvestors given that SCE disclosures were useful to investors. Further study would be needed
to answer whether SCI disclosures are incrementally useful over SCE disclosures.
The remainder of the paper is organized as follows. In the next section, we describe theinstitutional background and reporting requirements in Japan, and summarize the priorinternational and Japanese evidence on OCI. We then discuss our data and methodology andour empirical results in the following two sections, respectively. The last section concludes
our study.

2

2.

Background and Literature Review

2.1.

Institutional Background in Japan

As part of an effort toward the convergence with International Financial Reporting Standards,
The Accounting Standards Board of Japan (ASBJ) has deliberated the establishment of an
accounting standard for the presentation of comprehensive income. In April 2008, The ASBJ
set up the Technical Committee for the Financial Statement Presentation to address
discussions with IASB and FASB. In July 2009, The ASBJ released a Discussion Paper on
Financial Statement Presentation. This was followed by a release of the Exposure Draft ofAccounting Standard for Presentation of Comprehensive Income (Exposure Draft ofStatement No.35) in December 2009. In June 2010, ASBJ released an Accounting Standard
for Presentation of Comprehensive Income (ASBJ Statement No.25). This is applied toconsolidated financial statements ending on or after March 31, 2011. In Statement No.25,
comprehensive income and other comprehensive income are defined as follows:
Comprehensive income is the change in net assets that is recognized in an entity’s
financial statements for a period, other than those changes resulting from directtransactions with equity holders in the entity’s net assets. Equity holders in theentity’s net assets include shareholders of the equity, holders of the share warrants
issued by the entity and, for the purpose of consolidated financial statements, minority
shareholders of subsidiaries of the entity (para.4).
Other comprehensive income is a portion of comprehensive income that is notincluded in net income for the period or minority interest’s share in it (para.5).
Statement No.25 also states that calculation of comprehensive income shall be presented asfollows (para.6):(a) For non-consolidated financial statements, net income and additions or deductionsof components of other comprehensive income;(b) For consolidated financial statements, net income before adjusting minority
interest and additions or deductions of components of other comprehensive income;3

An important point to mention is that calculation and presentation of comprehensive income
is based on traditional net income which remains in the statement. Our concern is thatwhether the OCI items are useful and whether it changed after the requirement for
presentation of OCI items in Statement of Changes in Equity (SCE). Components of othercomprehensive income stated in Statement no.25 are unrealized gains or losses on available
for sale securities, deferred gains or losses on hedging instruments, and foreign currencytranslation adjustments.
Prior to the requirement for full comprehensive income reporting, there was a requirement for
OCI items to be presented in the Statement of Changes of Equity (SCE) for financial periods
ending on or after May 1st, 2006. Prior to the requirement for SCE, companies, if any,presented deferred hedge gains and losses which were required to present in the balance sheet
as asset or liability. Unrealized gains and losses on other marketable securities and foreign
currency translation adjustment were both required to present as net assets from financial
periods starting from April 1st, 2001 and 2000 respectively. Before then, unrealized gains andlosses on securities available for sale was presented in the footnote and foreign currencytranslation adjustment was presented in the balance sheet as asset or liability. As apreliminary study regarding the possible usefulness of comprehensive income reporting, weinvestigate whether the same items were useful when required to be disclosed under different
presentation requirements, i.e. in the period where OCI items were required to be presented
in the SCE, and in the period prior to the requirement for SCE reporting, when OCI items had
to be derived from balance sheet items.
Some explanation is needed about Revaluation Excess Money for Land (land revaluation
excess). This item was admitted to record as net assets under the “Act on Revaluation ofLand”. The purpose of the act was to help financial institutions and operating companies to4

re-capitalize their net assets. This Act was a temporary legislation which became effectivefrom March 31st, 1998 to March 31st, 2002. Under this act, listed companies were admitted
once to evaluate the amount of land for business purposes at market value. As this item will
not be reduced unless the land is sold or in cases where impairment occurs, it remains in thebalance sheet of companies that applied this Act in the past. In Statement No.25 revaluation
excess money for land is not considered as components of other comprehensive income
because this item was admitted only once under the temporary registration that is now noteffective.

2.2.

International Evidence

Comprehensive income, which is composed of net income and OCI, is different from thetraditional concept of income which is that earned over a time period from an economic
activity. OCI represents that change in wealth that is not earned but arises from changes inequity, other than transactions with owners as owners. This would include gains or losses
from asset revaluation or foreign currency translation. To some extent this distinction is
obfuscated, as conservatism in accounting often includes such losses in traditional income but
not the gains.
Even though the disclosure of OCI has only recently been mandated in IFRS1 to be part of an
extended income statement, the disclosure of OCI items has been available albeit in a lessconvenient package or presentation. Prior to the requirement for OCI to be appended to an
extended income statement in the Statement of Comprehensive Income as part of total
comprehensive income, there was a requirement for the presentation of a Statement of
Changes in Equity (SCE). Prior to the SCE, individual OCI items were often required to bedisclosed separately in the notes to the accounts for each reserve account.

5

Several prior researchers have examined the usefulness of comprehensive income disclosuresby examining their contemporaneous value-relevance. Cheng and Cheung (1993) examined
the relation between abnormal returns and three measures of income: operating income, net
income, and comprehensive income. Comparing the adjusted R2s for the three models, theirfindings support two alternative scenarios- (a) net income and/or operating income aresuperior to comprehensive income as a measure of performance, or (b) that investors are"fixated" on net income, thus ignoring comprehensive income. In a similar spirit, Dhaliwal,
Subramanyam, and Trezevant (1999) compared the adjusted R2s for several models of returns
on items of other comprehensive income. They document that the only component ofcomprehensive income that improves the earnings-return relation is the marketable securities
adjustment, i.e., gains and losses on available-for-sale securities. Further analysis shows that
this result is primarily due to firms in the financial sector, thus providing evidence thatcomprehensive income is not very useful for explaining returns.
More recent evidence tends to be supportive of the usefulness of comprehensive income
disclosure. Biddle and Choi (2006) find evidence that SFAS130 comprehensive income
dominates both traditional net income and fully comprehensive income in explaining equity
returns, but in predictive ability, no definition clearly dominates. Chambers, Linsmeier,
Shakespeare, and Sougiannis (2007), using a significantly smaller sample over the post-SFAS
No. 130 period, provides evidence that total other comprehensive income is value-relevant in
the period after it is mandatory to be disclosed post SFAS130. As SFAS130 allows the option
to disclose the information in the statement of comprehensive income or the statement ofchanges in equity, they find evidence that OCI is priced where it is disclosed in the statementof changes in equity. In a behavioral study Bamber, Jiang, Petroni, and Wang (2010) find thatmanagers act as if the location of disclosure matters, i.e. whether it is in the statement ofcomprehensive income or statement of changes in equity.

6

Studies using international data have also found mixed evidence in support of the usefulnessof comprehensive income disclosures. O'Hanlon and Pope (1999) find "little evidence that
U.K. dirty surplus accounting flows contain value relevant items." Cahan, Courtenay,
Gronewoller, and Upton (2000) did not find any evidence of incremental value relevance forsuch disclosures for New Zealand firms. However, Kanagaretnam, Mathieu, and Shehata(2009) using a sample of Canadian cross-listed firms with OCI disclosure, find someevidence that OCI are associated with price and market returns, though net income is still abetter predictor of future net income relative to comprehensive income. Lin (2006) find thatthe voluntary disclosure by UK firms of other comprehensive income items to be value
relevant.

2.3.

Japanese Evidence

Prior Japanese evidence has been mixed. Wakabayashi (2002) investigated the value
relevance of net income and one OCI item (i.e. the changes in unrealized gains and losses on
securities available for sale presented in the footnote) in the pre-SCE period (1992-1999) for
6,655 firm-year observations of non-financial firms on the Tokyo Stock Exchange First
Section. She finds that this OCI item has no incremental informational value over net income.
For the period 2002 to 2004 and 1,826 firm-years of firms listed on the Tokyo Stock
Exchange First Section, Ide (2006) investigated the value relevance of two OCI items (i.e.
changes in foreign currency translation adjustments and unrealized gains and losses on
securities available for sale). He finds that foreign currency translation adjustments havevalue relevance. By using Japanese US cross-listed firms which were subject to SFAS
No.130, Kubota and Takehara (2005) studied a sample of 130 firm-years between 1998 and2004. They investigated the value relevance of three OCI items (i.e. foreign currencytranslation adjustment, unrealized gains and losses on securities available for sale, and7

minimum pension liability adjustment) and find some statistical significance for the last twoitems. Suda (2007) considers the value relevance of a more complete list of OCI items (i.e.
unrealized gains and losses on securities available for sale, foreign currency translation
adjustment and land revaluation excess) for the current year and for the previous year. He
finds evidence that all three items are statistically significant, though the signs of thecoefficients for unrealized gains and losses on securities available for sale in the previous
period and land revaluation excess in the current period are in the opposite direction. His
sample consists of 5,241 firm-years for the period 1999 to 2004 of firms listed on the Tokyo
Stock Exchange First Section.
Wakabayashi (2010) updated her research with a more recent sample period of 2002-2009.
Four OCI items are included (i.e. unrealized gains and losses on available for sales securities,
deferred gains and losses on hedging instruments, foreign currency translation adjustments
and land revaluation excess), but tested as an aggregate figure instead of in components. In
value relevance tests with 15,493 firm-year observations, she finds that OCI has incremental
information content over net income. Wakabayashi (2009) considered the predictability of
OCI with 8,465 firm-year sample, finding that when predicting one year ahead net income thepredictability of net income is superior to that of CI. However, when CI is separated into net
income and OCI, OCI helps to predict net income.
The mixed results shown in these studies may be due to different sample period, different
OCI items being investigated (without controlling for the other items). Indeed, all of thesestudies were of the pre-SCE period, when the OCI items had to be derived from balance sheet
and notes from the financial statements, except for Wakabayashi (2010) in which the last four
year of her sample period overlap with that of the SCE period. By studying a time period thatcovers both the pre-SCE and SCE disclosure periods, we reconsider whether the requirement8

for more transparent presentation of OCI items in the SCE period have improved theusefulness of OCI.

3.

Data and Method

Our initial sample consists of non-financial sector companies listed on all Japanese stock
exchanges from 1998 to 2010, for firm-year observations from 2000 to 2010. Financial
statement data are obtained from the Nikkei NEEDS (DVD) database, and stock price data are
obtained from the Nikkei NEEDS-FinancialQUEST database.1 Starting with 44,298 firm-year
observations of financial statement data over the 11 year sample period, we have a final
sample of 24,949 firm-year observations of 2,938 unique firms. We partitioned the sample
period into pre-SCE period (for financial periods ending prior to May 1st, 2006) and SCE
period (for financial periods ending on or after May 1st, 2006) into approximately equal
number of years in each sub-period.
Following Chambers et al. (2007), Lin (2006) and Lin, Ramond, and Casta (2008) and
Kanagaretnam et al. (2009), we use the following model to estimate the incremental value
relevance of OCI over net income:

BHRt   0  1

NI t
NI t 1
NI t 2
OCIt
OCIt 1
OCIt 2
 2
 3
 4
 5
 6
  t (1)
MVEt 1
MVEt 2
MVEt 3
MVEt 1
MVEt 2
MVEt 3

where:BHR

1= Buy-and-hold return from three months after the end of the previous financial
year to three months after the end of the current financial year, adjusted forcapitalization changes and dividend reinvestment, calculated from last tradedclosing price in the month (Daily Close type B adj. (incl. ex-dividend):

http://www.nikkei.co.jp/digitalmedia/service/needs.html

9

STOCK'XBCLOSE).
NI= Current income (NFINANCIAL'FC058) , in million yen.

OCI

= Other comprehensive income total and component items (in million yen).
From difference in balance sheet data items, between the current financial period
and previous financial period for financial periods ending beginning January 2000
to that before May 2006:
SEC= Unrealised profit & loss from Securities Revaluation(NFINANCIAL'FB140)

FOR

Foreign Currency Conversion(NFINANCIAL'FB142)

Adjustment

AmountLAND

Revaluation Excess Money for Land (NFINANCIAL'FB130)

OCI

Sum of above items

For financial periods ending on or after May 1st, 2006 to March 2010 wecollected data items from the Statement of Changes in Equity:
SEC= Unrealised gains & losses on Other Marketable Securities - Netchange during Period (NFINANCIAL'FG152)

HED= Deferred Hedge Gains & Losses - Net change during Period(NFINANCIAL'FG155)

FOR

Foreign Currency Translation Adjustment - Net change during
Period (NFINANCIAL'FG158)

LAND

Land Revaluation Excess, Total - Net change during Period(NFINANCIAL'FG161)

OCI

Unrealised Gain & Loss, Total - Net change during Period(NFINANCIAL'FG164)

Consistent with value relevance studies (Easton and Sommers 2003; Francis and Schipper
1999), the independent variables are scaled by beginning period market value of equity(MVE). This is defined as the market value of equity (in million yen) three months after atthe end of the previous financial year, calculated from daily stock close (STOCK'CLOSE)
multiplied by number of shares issued of parent company at the end of the financial period(NFINANCIAL'FE032).

10

Following Biddle and Choi (2006) we use the following model to test the predictive power of
OCI items:

NI t   0  1

NI t 1NI
OCI t 1
OCI t 2
  2 t 2   3
 4
 t
TAt 1
TAt 2TAt 1
TAt 2(2)

Consistent with studies of predictability and persistence (Sloan 1996), and that in archival
financial accounting generally, the financial statement independent variables are scaled byaverage total assets (NFINANCIAL'FB067) (in million yen), instead of by market value ofequity.

4.

Results

4.1.

Descriptive Statistics

Table 1 presents the descriptive statistics. The lag variables have almost identical value tothat of the current period variables, as they are created from the lag of the current variable.
There is an annual BHR mean of 2.9%. Net income (NI) is marginally positive, though total
OCI is marginally negative. With respect to the OCI items, unrealized security gains (SEC)
are positive whereas deferred hedge gains (HED) are zero on average, but negative forforeign exchange translations (FOR) and land revaluations (LAND).
The correlation statistics are set out in Table 2. NIt (0.2084), OCIt (0.1795) and SECt (0.2866)
are correlated with BHR. And NI is correlated with NI of the previous period, as may be
expected. SECt, FORt and LANDt are correlated with OCIt, reflecting their relative
contribution to total OCI for the period. Other than these items, the variables are notparticularly correlated with each other.

11

4.2.

Value Relevance

Table 3 presents the base value relevance results. In order to compare our results with priorJapanese evidence, columns (1) to (3) show the p-values after adjusting for robust standard
errors. The main difference between the results before and after adjusting for clustering on
firm and year are that NIt-2 loses statistical significance for the full and pre-SCE period, as
does OCIt-2 for the pre-SCE period.
Columns (4) to (6) and all subsequent tables, show the p-values after adjusting for clustering
on firm and year. The results are generally consistent with that without adjusting forclustering. For the full period NIt is statistically significant (Column 4, coefficient=0.5252,
p<0.01) with the magnitude for the pre-SCE period (Column 5, coefficient=0.6008, p<0.01)
being higher than that of the SCE period (Column 6, coefficient=0.4010, p<0.01). NIt-1 is also
statistically significant at the 5% level (or better) for the full and two sub-periods but with anegative sign (coefficients= −0.1359, −0.1154, −0.1773, respectively), reflecting somepossible reversal of accruals from the prior period. In the SCE period, NIt-2 is also statisticallysignificant (coefficient=0.1176, p=0.017), but not in the pre-SCE and full period.
Turning to total OCI, OCIt is statistically significant at the 1% level for the full(coefficient=1.0290), with the magnitude of the coefficient for the SCE period(coefficient=0.7917) being higher than that for the pre-SCE period (coefficient=0.5902).
With the value of the difference being about 0.2000 (similar to that for NIt but in the reverse)
it may be that investors are giving greater weight to OCI items relative to NI items in the SCE
period compared to the pre-SCE period. OCIt-1 is also statistically significant across theperiods at the 1% level. However, for the pre-SCE level the coefficient (0.0014) is inmagnitude only 3% of that for the SCE period (−0.4670), and the sign reverses in the SCE
period. This may indicate that in the pre-SCE period, the association of prior period OCI with12

return statistically but not economically significant. The negative sign for the SCE period
may also indicate a reversal of the market reaction to OCI in the prior period. OCIt-2 items are
not significant across the all periods.
Table 4 presents the value relevance results for individual OCI items, partitioned into the two
sub-periods. The full period is not presented because deferred hedge gains and losses were
not disclosed until the SCE period. The results for NI are consistent with that in Table 3. For
the pre-SCE period, NIt is statistically significant and with a positive sign (Column 1,
coefficient=0.5607, p<0.01), NIt-1 is statistically significant but with a negative sign
(coefficient= −0.1131, p<0.01) but NIt-2 is not significant. For the SCE period, as in Table 3,NIt has a positive sign (Column 2, coefficient=0.3983, p<0.01), NIt-1 a negative sign
(coefficient= −0.1601, p<0.01) and NIt-2 a positive sign (coefficient=0.1050, p<0.01).
With respect to the OCI items, for the pre-SCE period, only SECt (coefficient=2.8539, p<0.01)
and FORt (coefficient= −3.3786, p<0.01) are statistically significant. For the SCE period,
SECt (coefficient=0.8852, p<0.01), HEDt (coefficient=1.1443, p<0.01) and FORt
(coefficient=0.5769, p<0.01), but FORt-1 and FORt-2 have negative signs and are statisticallysignificant (−1.3090 and −0.9729, respectively). LAND is not statistically significant foreither period and for all time lags.
Overall, we conclude that net income is value relevant in the current period, but with somereversal for the prior period net income. And that OCI is value relevant incrementally over
net income in the current period both in total OCI as well as for OCI component items,
especially unrealized gains and losses on available for sale securities, deferred gains andlosses on hedging instruments and foreign currency translation adjustments. With respect tothe pre-SCE period, our evidence is consistent with Wakabayashi (2010) who find that
aggregate OCI items are value relevant, and with Kubota and Takehara (2005), Ide (2006)

13and Suda (2007) who generally find that unrealized gains and losses on available for salesecurities of the current period to be value relevant.

4.3.

Predictability

In Table 5 we present the results of the predictability models for OCI totals. Across all
periods, NIt-1 is significant at the 1% level and with a coefficient value of about 0.40. NIt-2 isalso significant at the 1% level with a coefficient value of 0.0864 in the pre-SCE period and0.1253 in the SCE period. This year’s net income is also predicted by last year’s OCI, with
OCIt-1 but only in the SCE period (coefficient=0.2201, p=0.027).
Table 6 presents the results of the predictability models for OCI items. As with Table 5, NIt-1
is significant at the 1% level and with a coefficient value of about 0.40 for both periods, andNIt-2 is also significant at the 1% level with a coefficient value of 0.0885 in the pre-SCE
period and 0.1198 in the SCE period. The results decomposing OCI into its components
shows that the prior period OCI predictability is driven by unrealized gains and losses onavailable for sale securities (SECt-1 coefficient=0.0887, p=0.017) and land revaluation excess(LANDt-1 coefficient=0.0445, p=0.004). This may indicate that the unrealized gains andlosses on available for sale securities and land revaluation excess in the previous period isrealized in the current period. Unusually, FORt-2 is statistically significant and with a negative
sign (coefficient= −0.2234, p=0.006) but arguably consistent with the negative signs from thevalue relevance results in Table 4.
In summary, this year’s net income is predicted by last year’s net income and also that of theyear before. This year’s net income is also predicted by last year’s OCI, with the OCI
predictability driven by unrealized gains and losses on available for sale securities and land14

revaluation excess. With respect to the pre-SCE period, our evidence is also consistent with
Wakabayashi (2009) who find that aggregate OCI items help predict net income.

5.

Conclusions

As Japan debates the adoption of IFRS, and with the implementation of the Statement ofComprehensive Income for financial periods ending on or after May 1st, 2011, the usefulnessof the disclosure of OCI items in Japan is of importance to users of financial statements ofJapanese companies. This paper investigates the usefulness of the disclosure of OCI items inJapan along the two dimensions of value relevance and predictability, and by studying a time
period that covers both the pre-SCE and SCE disclosure periods, we consider whether therequirement for more transparent presentation of OCI items in the SCE period have improved
the usefulness of OCI. This has policy implications as to the usefulness of the disclosure of
OCI items that are more transparent and accessible to investors in the SCE and the SCI, thanwhen investors have to derived them from the balance sheet and notes to the financial
statements.
We find that OCI is value relevant incrementally over net income in the current period bothin total OCI as well as for OCI component items, especially unrealized gains and losses onavailable for sale securities, deferred gains and losses on hedging instruments and foreign
currency translation adjustments. Furthermore, we also find that the current year net income
is also predicted by last year’s OCI, coming mainly from unrealized gains and losses onavailable for sale securities and land revaluation excess. On the basis that financial statement
users find OCI to be value relevant in making investment decisions and that OCI helps topredict future net income. We also find that the usefulness (both value relevance andpredictability) of OCI has increased when it was required to be disclosed in the Statement of
Changes in Equity (SCE), compared to the pre-SCE period.

15

While prior Japanese evidence is mixed and covers the period before the introduction of the
SCE, our evidence from the pre-SCE period is generally consistent with the more recent
Japanese evidence (particularly evidence that covers the 2002 to 2009 period) that OCI items
are value relevant and help predict net income. More importantly, our evidence from the SCE
period shows that the usefulness (both value relevance and predictability) of OCI has
increased when it was required to be disclosed in the SCE, compared to the pre-SCE period.
On this basis, we argue that comprehensive income disclosures would be useful to investors
given that SCE disclosures were useful to investors. Further study would be needed to answer
whether SCI disclosures are incrementally useful over SCE disclosures.
The main limitation of this study is that it does not utilize the data from the SCI itself, relying
on data items from the pre-SCE and SCE period. Further extensions of this study from more
recent data for the financial periods ending on or after March 2011 would be useful.

16

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18

Table 1 Descriptive Statistics
N=24949
BHR
NIt
NIt-1
NIt-2
OCIt
OCIt-1
OCIt-2
SECt
SECt-1
SECt-2
HEDt
HEDt-1
HEDt-2FORt
FORt-1
FORt-2LANDt
LANDt-1
LANDt-2

Mean
0.02890.00970.00960.0097-0.0001-0.0001-0.0001
0.00180.00080.00180.00000.00000.0000-0.0011-0.0014-0.0011-0.0003-0.0003-0.0003

Std. Dev
0.38910.16340.16870.16340.06270.06270.06270.03290.03210.03290.00060.00040.00060.01350.01340.01350.00480.00480.0048Min-0.6771-0.9496-0.9993-0.9496-2.4634-2.4634-2.4634-0.1144-0.1140-0.1144-0.0040-0.0033-0.0040-0.0761-0.0786-0.0759-0.0364-0.0373-0.0364Max
1.6456
0.29240.34050.29241.43201.43201.43200.14580.14470.14580.00270.00130.00270.04320.04130.04320.01920.01920.0192This table presents descriptive statistics for regression variables for 24,949 firm-year observations of 2,938
unique firms listed on Japanese stock exchanges for the period between 2000 and 2010. The variables aredefined as follows, and are winsorized at the 1st and 99th percentiles:
BHR= Buy-and-hold return from three months after the end of the previous financial year to threemonths after the end of the current financial year, adjusted for capitalization changes anddividend reinvestment, calculated from last traded closing price in the month.
NI= Current income
OCI= Other comprehensive income total
HED= Deferred Hedge Gains & Losses
FOR= Foreign Currency Translation Adjustment
LAND= Land Revaluation
The financial variables are scaled by the market value of equity (three months after at the end of the previous
financial year, calculated from daily stock close multiplied by number of shares issued of parent company at theend of financial period.

19

Table 2 Correlation Statistics
BHR
NI t
NI t-1 NI t-2 OCI t OCI t-1 OCI t-2 SEC t SEC t-1 SEC t-2 HED t HED t-1 HED t-2 FOR t FOR t-1 FOR t-2 LAND t LAND t-1
BHR
1
NI t
0.2084
1
NI t-1-0.0050 0.2935
1
NI t-2-0.0170 0.1274 0.2418
1
OCI t
0.1795 0.0523 -0.0231 -0.0205
1
OCI t-1
0.0095 0.0017 -0.0116 0.0169 -0.0002
1
OCI t-2-0.0091 0.0198 0.0445 0.0523 -0.0186 0.0114
1
SEC t
0.2866 0.0422 -0.0221 -0.0382 0.6580 0.0001 0.0037
1
SEC t-1
0.0930 0.0833 0.0495 -0.0103 0.0299 0.0207 0.0112 0.0194
1
SEC t-2-0.0088 0.0431 0.0708 0.0423 -0.0112 0.0013 0.6580 -0.0238 0.0699
1
HED t
0.0471 0.0014 -0.0175 -0.0082 0.0561 -0.0003 -0.0363 0.0718 0.0122 -0.0567
1
HED t-1
0.0221 0.0191 0.0012 -0.0195 0.0452 0.0012 0.0260 0.0358 0.0920 0.0444 -0.1436
1
HED t-2 -0.0110 -0.0049 0.0214 0.0014 -0.0223 0.0044 0.0561 -0.0253 0.0354 0.0718 -0.0521 -0.0363
1
FOR t
0.0480 0.0387 -0.0155 -0.0088 0.3681 -0.0006 -0.0109 0.1091 0.1196 0.0777 0.0374 0.0723 -0.0094
1
FOR t-1-0.0611 0.0404 0.0380 -0.0044 -0.1114 0.0490 0.0707 -0.1574 0.0912 0.1313 -0.0417 0.0537 0.0624 -0.0317
1
FOR t-2-0.0341 -0.0134 0.0230 0.0385 -0.0860 0.0339 0.3679 -0.0356 -0.1099 0.1090 -0.0339 -0.0101 0.0374 -0.2306 0.0438
1
LAND t-0.0136 0.0213 0.0150 0.0129 0.2550 -0.0001 -0.0347 -0.0573 -0.0183 -0.0498 -0.0042 0.0007 -0.0025 -0.0147 0.0073 0.0007
1
LAND t-1 0.0022 0.0057 0.0180 0.0075 0.0384 0.0062 0.0178 0.0240 -0.0582 -0.0209 0.0145 -0.0060 0.0045 -0.0112 -0.0154 0.0079 0.0455
1
LAND t-2 0.0202 0.0067 0.0061 0.0213 0.0021 0.0006 0.2550 0.0275 0.0248 -0.0573 0.0123 0.0147 -0.0042 -0.0058 -0.0122 -0.0147 0.0249
0.0529This table reports the correlation between BHR and net income and comprehensive income items. The variables are defined in Table 1.

20

Table 3 Value Relevance of Net Income and Total Other Comprehensive Income

BHRt
NIt
NIt-1
NIt-2
OCIt
OCIt-1
OCIt-2

ConstantN
Adj. R2
F

(1)
(2)
(3)
Full
Pre-SCESCE
0.5252*** 0.6008*** 0.4010***(0.000)(0.000)(0.000)-0.1359*** -0.1154*** -0.1773***(0.000)(0.000)(0.000)-0.0649*** -0.0503** 0.1176***(0.001)(0.029)(0.000)1.0290*** 0.5902*** 0.7917***(0.000)(0.000)(0.000)0.0013*** 0.0014*** -0.4670***(0.000)(0.000)(0.000)-0.04020.1936***-0.1720(-1.060)(3.838)(-1.495)(0.289)(0.000)(0.135)0.0259*** 0.1274*** -0.1102***(0.000)(0.000)(0.000)
24949
13686
11263
0.07640.06180.0762
126.1
184.5
74.86

(4)
Full
0.5252***(0.000)-0.1359***(0.002)-0.0649(0.422)
1.0290***(0.000)0.0013***(0.000)-0.0402(-0.197)(0.844)0.0259(0.622)24949
0.0764
108.1

(5)
(6)
Pre-SCE
SCE
0.6008*** 0.4010***(0.000)(0.000)-0.1154** -0.1773***(0.011)(0.001)-0.05030.1176**(0.529)(0.017)0.5902*** 0.7917***(0.003)(0.000)0.0014*** -0.4670***(0.000)(0.001)0.1936-0.1720(0.892)(-0.728)(0.372)(0.467)0.1274** -0.1102***(0.047)(0.006)13686
11263
0.06180.0762477.0
232.1*** indicates significance at p<0.01, ** p<0.05, and *p<0.1 two-tailed.
The coefficient values and p-values reported are adjusted for robust standard errors (columns 1 to 3) andstandard errors clustered by firm and year (columns 4 to 6). The variables are defined in Table 1.

21

Table 4 Value Relevance of Net Income and Comprehensive Income Items
N=24949
BHRt
NIt
NIt-1
NIt-2
SECt
SECt-1
SECt-2(1)
Pre-SCE
0.5607***(0.000)-0.1131***(0.001)-0.0279(0.669)2.8539***(0.000)0.4062(0.415)-0.1962(0.626)

HEDt
HEDt-1
HEDt-2FORt
FORt-1
FORt-2LANDt
LANDt-1
LANDt-2
ConstantN
Adj. R2F-3.3786**(0.032)-0.6729(0.352)0.9838(0.337)-0.0621(0.900)-0.5207(0.201)0.4396(0.575)0.1052*(0.054)13686
0.1177
542.1

(2)
SCE
0.3983***(0.000)-0.1601***(0.005)0.1050**(0.037)0.8852***(0.000)-0.1840(0.418)-0.0130(0.978)1.1443***(0.001)-0.6223(0.260)-0.9006(0.193)0.5769***(0.001)-1.3090***(0.000)-0.9729*(0.055)0.0423(0.354)0.0875(0.281)-0.2095(0.142)-0.1083***(0.008)11263
0.08684.029*** indicates significance at p<0.01, ** p<0.05, and *p<0.1 two-tailed.
The coefficient values and p-values reported are adjusted for standard errors clustered by firm and year
(columns 4 to 6). The variables are defined in Table 1.

22

Table 5 Predictability of Net Income and Total Other Comprehensive Income

NIt
NIt-1
NIt-2
OCIt-1
OCIt-2
ConstantN
Adj. R2
F(1)
Full
0.4331***(0.000)0.0983***(0.000)0.1988**(0.025)-0.0100(0.845)0.0065**(0.025)24949
0.2354460.7(2)Pre-SCE
0.4123***(0.000)0.0864***(0.003)0.0415(0.450)-0.0277(0.631)0.0096***(0.000)13686
0.2020
198.7

(3)
SCE
0.4475***(0.000)0.1253***(0.000)0.2201**(0.027)-0.0876(0.373)0.0030(0.560)11263
0.2649180.4*** indicates significance at p<0.01, ** p<0.05, and *p<0.1 two-tailed.
The coefficient values and p-values reported are adjusted for standard errors clustered by firm and year
(columns 4 to 6). The variables are defined in Table 1.

23

Table 6 Predictability of Net Income and Comprehensive Income Items
(1)
(2)
NIt
Pre-SCESCE
NIt-1
0.4102***0.4518***(0.000)(0.000)NIt-2
0.0885***0.1198***(0.002)(0.000)
SECt-1
0.04110.0887**(0.131)(0.017)
SECt-2-0.0071-0.0355(0.829)(0.522)
HEDt-1-0.0082(0.856)
HEDt-2-0.0983(0.438)FORt-1-0.0699
0.0232(0.110)(0.125)
FORt-2-0.0734-0.2234***(0.249)(0.006)
LANDt-1-0.0326
0.0445***(0.657)(0.004)
LANDt-2-0.02120.0315(0.690)(0.237)
Constant
0.0092***0.0028(0.001)(0.604)
N
13686
11263
Adj. R2
0.20320.2661
F
204.4
93.40
*** indicates significance at p<0.01, ** p<0.05, and *p<0.1 two-tailed.
The coefficient values and p-values reported are adjusted for standard errors clustered by firm and year. The
variables are defined in Table 1.

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