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 the Statement of
Changes of Equity (SCE) period have improved the usefulness of OCI. We find 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, deferredgains 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 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 the Statement of Changes in Equity(SCE), compared to the pre-SCE period. Our results have policy implications as to the usefulnessof the disclosure of OCI items that are more transparent and accessible to investors in the SCE
and the Statement of Comprehensive Income (SCI), than when investors derived them from thebalance sheet and notes of the financial 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 disclosureof OCI, over and above that previously required in the financial statements and notes to theaccounts. 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 the question of its adoption andimpact 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 boththe 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 the disclosure of OCI
items that are more transparent and accessible to investors in the SCE and the Statement ofComprehensive Income (SCI), than when investors have to derive them from the balance sheet
and notes to the financial statements.

1

We find that OCI is value relevant incrementally over net income in the current period both intotal 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 isalso predicted by last year’s OCI, coming mainly from unrealized gains and losses on available
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 to predict future net
income, we also find that the usefulness (both value relevance and predictability) 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 Japaneseevidence (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 periodshows 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 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 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 and ourempirical 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 withIASB 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 of Accounting Standard for
Presentation of Comprehensive Income (Exposure Draft of Statement 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 to consolidated 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 the entity’s
net assets include shareholders of the equity, holders of the share warrants issued by theentity and, for the purpose of consolidated financial statements, minority shareholders ofsubsidiaries of the entity (para.4).
Other comprehensive income is a portion of comprehensive income that is not included 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 deductions ofcomponents of other comprehensive income;3

(b) For consolidated financial statements, net income before adjusting minority interest
and additions or deductions of components of other comprehensive income;An important point to mention is that calculation and presentation of comprehensive income isbased on traditional net income which remains in the statement. Our concern is that whether 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 other comprehensive income stated inStatement No.25 are unrealized gains or losses on available for sale securities, deferred gains orlosses on hedging instruments, and foreign currency translation 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, presenteddeferred 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 currencytranslation adjustment were both required to be presented as net assets from financial periods
starting from April 1st, 2001 and 2000 respectively. Before then, unrealized gains and losses on
securities available for sale was presented in the footnote and foreign currency translation
adjustment was presented in the balance sheet as asset or liability. As a preliminary study
regarding the possible usefulness of comprehensive income reporting, we investigate whether thesame items were useful when required to be disclosed under different presentation requirements.
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.

4

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 of Land”. The
purpose of the act was to help financial institutions and operating companies to re-capitalize their
net assets. This Act was a temporary legislation which became effective from March 31st, 1998
to March 31st, 2002. Under this act, listed companies were admitted once to evaluate the amountof land for business purposes at market value. As this item will not be reduced unless the land issold or in cases where impairment occurs, it remains in the balance sheet of companies thatapplied this Act in the past. In Statement No.25 revaluation excess money for land is notconsidered as components of other comprehensive income because this item was admitted only
once under the temporary registration that is now not effective.

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 in equity, otherthan 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, asconservatism 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

5

in Equity (SCE). Prior to the SCE, individual OCI items were often required to be disclosed
separately in the notes to the accounts for each reserve account.
Several prior researchers have examined the usefulness of comprehensive income disclosures by
examining their contemporaneous value-relevance. Cheng and Cheung (1993) examined therelation between abnormal returns and three measures of income: operating income, net income,and comprehensive income. Comparing the adjusted R2s for the three models, their findings
support two alternative scenarios- (a) net income and/or operating income are superior tocomprehensive 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, andTrezevant (1999) compared the adjusted R2s for several models of returns on items of othercomprehensive income. They document that the only component of comprehensive income that
improves the earnings-return relation is the marketable securities adjustment, i.e., gains andlosses on available-for-sale securities. Further analysis shows that this result is primarily due tofirms in the financial sector, thus providing evidence that comprehensive 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 todisclose the information in the statement of comprehensive income or the statement of changes
6

in equity, they find evidence that OCI is priced where it is disclosed in the statement of changes
in equity. In a behavioral study Bamber, Jiang, Petroni, and Wang (2010) find that managers act
as if the location of disclosure matters, i.e. whether it is in the statement of comprehensive
income or statement of changes in equity.
Studies using international data have also found mixed evidence in support of the usefulness ofcomprehensive 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 for such disclosuresfor New Zealand firms. However, Kanagaretnam, Mathieu, and Shehata (2009) using a sample
of Canadian cross-listed firms with OCI disclosure, find some evidence that OCI are associatedwith price and market returns, though net income is still a better predictor of future net income
relative to comprehensive income. Lin (2006) find that the voluntary disclosure by UK firms ofother comprehensive income items to be value relevant.

2.3.

Japanese Evidence

Prior Japanese evidence has been mixed. Wakabayashi (2002) investigated the value relevanceof 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 firmyear observations of non-financial firms on the Tokyo Stock Exchange First Section. She findsthat 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 currencytranslation adjustments and unrealized gains and losses on securities available for sale). He finds

7that foreign currency translation adjustments have value relevance. By using Japanese US crosslisted firms which were subject to SFAS No.130, Kubota and Takehara (2005) studied a sample
of 130 firm-years between 1998 and 2004. They investigate the value relevance of three OCI
items (i.e. foreign currency translation adjustment, unrealized gains and losses on securities
available for sale, and minimum pension liability adjustment) and find some statisticalsignificance for the last two items. 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 theprevious year. He finds evidence that all three items are statistically significant, though the signsof the coefficients 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. FourOCI items are included (i.e. unrealized gains and losses on available for sales securities, deferredgains 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 for 2002-2006, finding that when predicting one year ahead net
income the predictability 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.

8

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 these studies
were of the pre-SCE period, when the OCI items had to be derived from balance sheet and notesfrom 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 that covers boththe pre-SCE and SCE disclosure periods, we reconsider whether the requirement for moretransparent presentation of OCI items in the SCE period have improved the usefulness 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 observationsof 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 subperiod (six and five years, respectively).

1

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

9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

NIt
NIt 1
NIt 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= 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):
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)

10

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 isdefined as the market value of equity (in million yen) three months after at the end of theprevious financial year, calculated from daily stock close (STOCK'CLOSE) multiplied bynumber of shares issued of parent company at the end of the financial period(NFINANCIAL'FE032).
Following Biddle and Choi (2006) we use the following model to test the predictive power of
OCI items:

NIt   0  1

NIt 1NI
OCIt 1
OCIt 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.

11

4.

Results

4.1.

Descriptive Statistics

Table 1 presents the descriptive statistics. The lag variables have almost identical value to that of
the current period variables, as they are created from the lag of the current variable. There is anannual BHR mean of 2.9%. Net income (NI) is marginally positive, though total OCI ismarginally negative. With respect to the OCI items, unrealized security gains (SEC) are positive
whereas deferred hedge gains (HED) are zero on average, but negative for foreign exchangetranslations (FOR) and land revaluations (LAND).
The correlation statistics are set out in Table 2. NIt (0.2084), OCIt (0.1795) and SECt (0.2866) arecorrelated 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 not particularly correlated with eachother.

4.2.

Value Relevance

Table 3 presents the base value relevance results. In order the 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 andyear are that NIt-2 loses statistical significance for the full and pre-SCE period, as does OCIt-2 forthe pre-SCE period.

12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 for clustering. For
the full period NIt is statistically significant (Column 4, coefficient=0.5252, p<0.01) with themagnitude for the pre-SCE period (Column 5, coefficient=0.6008, p<0.01) being higher than thatof 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 a negative sign (coefficients=−0.1359, −0.1154, −0.1773, respectively), reflecting some possible reversal of accruals from theprior period. In the SCE period, NIt-2 is also statistically significant (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

magnitudeofthecoefficient

for

the

SCE

period(coefficient=0.7917) being higher than that for the pre-SCE period (coefficient=0.5902). Withthe value of the difference being about 0.2000 (similar to that for NIt but in the reverse) it may bethat 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 the periods at the 1%
level. However, for the pre-SCE level the coefficient (0.0014) is in magnitude only 3% of thatfor 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 with return statistically but noteconomically significant. The negative sign for the SCE period may also indicate a reversal ofthe 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 not13

disclosed until the SCE period. The results for NI are consistent with that in Table 3. For the preSCE 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 statistically significant (−1.3090 and−0.9729, respectively). LAND is not statistically significant for either 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, especiallyunrealized gains and losses on available for sale securities, deferred gains and losses on hedging
instruments and foreign currency translation adjustments. With respect to the 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) and Suda (2007) who generally findthat unrealized gains and losses on available for sale securities of the current period to be value
relevant.

14

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 is alsosignificant at the 1% level with a coefficient value of 0.0864 in the pre-SCE period and 0.1253 in
the SCE period. This year’s net income is also predicted by last year’s OCI, with OCIt-1 but onlyin 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 issignificant at the 1% level and with a coefficient value of about 0.40 for both periods, and NIt-2 isalso significant at the 1% level with a coefficient value of 0.0885 in the pre-SCE period and0.1198 in the SCE period. The results decomposing OCI into its components shows that the priorperiod OCI predictability is driven by unrealized gains and losses on available 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 and losses on available for sale securities
and land revaluation excess in the previous period is realized 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 the value 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 land
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.

15

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 usefulness ofthe disclosure of OCI items in Japan is of importance to users of financial statements of Japanesecompanies. This paper investigates the usefulness of the disclosure of OCI items in Japan along
the two dimensions of value relevance and predictability, and by studying a time period thatcovers both the pre-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 the disclosure of OCI items that are
more transparent and accessible to investors in the SCE and the SCI, than when investors have toderived 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 both intotal 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 isalso predicted by last year’s OCI, coming mainly from unrealized gains and losses on available
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 to predict future net
income. We also find that the usefulness (both value relevance and predictability) 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.

16

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 Japaneseevidence (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 periodshows 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 ondata 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.

17

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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 uniquefirms listed on Japanese stock exchanges for the period between 2000 and 2010. The variables are defined asfollows, 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 three months
after the end of the current financial year, adjusted for capitalization changes and dividend
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 the endof financial period.

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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
BHR1
0.2084
1
NI t
NI t-1-0.0050 0.2935
1-0.0170 0.1274 0.2418
1
NI t-2
OCI t
0.1795 0.0523 -0.0231 -0.0205
1
0.0095 0.0017 -0.0116 0.0169 -0.0002
1
OCI t-1
OCI t-2-0.0091 0.0198 0.0445 0.0523 -0.0186 0.0114
1
0.2866 0.0422 -0.0221 -0.0382 0.6580 0.0001 0.0037
1
SEC t
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
0.0471 0.0014 -0.0175 -0.0082 0.0561 -0.0003 -0.0363 0.0718 0.0122 -0.0567
1
HED t
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
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
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
1-0.0611 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-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
1-0.0136 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 tLAND 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 0.0529
This table reports the correlation between BHR and net income and comprehensive income items. The variables are defined in Table 1.

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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)
Full
0.5252***(0.000)-0.1359***(0.000)-0.0649***(0.001)1.0290***(0.000)0.0013***(0.000)-0.0402(-1.060)(0.289)0.0259***(0.000)24949
0.0764
126.1(2)
Pre-SCE0.6008***(0.000)-0.1154***(0.000)-0.0503**(0.029)0.5902***(0.000)0.0014***(0.000)0.1936***(3.838)(0.000)0.1274***(0.000)13686
0.0618
184.5

(3)
SCE
0.4010***(0.000)-0.1773***(0.000)0.1176***(0.000)0.7917***(0.000)-0.4670***(0.000)-0.1720(-1.495)(0.135)-0.1102***(0.000)11263
0.0762
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)
Pre-SCE0.6008***(0.000)-0.1154**(0.011)-0.0503(0.529)0.5902***(0.003)0.0014***(0.000)0.1936(0.892)(0.372)0.1274**(0.047)13686
0.0618
477.0

(6)
SCE
0.4010***(0.000)-0.1773***(0.001)0.1176**(0.017)0.7917***(0.000)-0.4670***(0.001)-0.1720(-0.728)(0.467)-0.1102***(0.006)11263
0.0762232.1*** 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) and standard
errors clustered by firm and year (columns 4 to 6). The variables are defined in Table 1.

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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 4to 6). The variables are defined in Table 1.

23

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 4to 6). The variables are defined in Table 1.

24

Table 6 Predictability of Net Income and Comprehensive Income Items

NIt
NIt-1
NIt-2
SECt-1
SECt-2(1)
Pre-SCE0.4102***(0.000)0.0885***(0.002)0.0411(0.131)-0.0071(0.829)HEDt-1
HEDt-2FORt-1
FORt-2
LANDt-1
LANDt-2
ConstantN
Adj. R2F-0.0699(0.110)-0.0734(0.249)-0.0326(0.657)-0.0212(0.690)0.0092***(0.001)13686
0.2032
204.4

(2)
SCE
0.4518***(0.000)0.1198***(0.000)0.0887**(0.017)-0.0355(0.522)-0.0082(0.856)-0.0983(0.438)0.0232(0.125)-0.2234***(0.006)0.0445***(0.004)0.0315(0.237)0.0028(0.604)11263
0.266193.40*** 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 (columns 4to 6). The variables are defined in Table 1.

25