The Accounting Standards Board of Japan (ASBJ) proposed a new set of endorsed International Financial Reporting Standards in June 2015. ASBJ claims that non-recycling of other comprehensive income (OCI) items decreases the information usefulness of earnings in a proposed comprehensive income standard. There has been no existing empirical evidence which supports the ASBJ’s statement and the purpose of the study is to test whether OCI recycling improves information usefulness of net income from six perspectives: relative and incremental value relevance, persistence, variability, operating cash flow and net income predictive power.
This paper is an empirical work using a listed Japanese firms sample of 5,385 firm-years from fiscal year 2012-2014.
The results challenge the ASBJ’s claim that recycling improves the general information usefulness characteristics of net income. The empirical results show that OCI recycling improves net income’s relative value relevance characteristic of financial firms. However, recycling information by itself does not improve the incremental value relevance, and the predictive power of operating cash flow and net income. The authors also find that the inclusion of recycling decreases the persistence and increases the variability of net income.
This paper has two research limitations. First, this study is constrained to analyze a limited OCI recycling data that is recently disclosed by listed Japanese firms. Second, the results of this study have limited external validity to capital markets with OCI reclassification standards that deviate from Japanese GAAP.
This study provides initial empirical evidence that examines information usefulness of OCI recycling in Japan. The findings of this study are relevant for accounting standards setters aiming to increase the information usefulness of earnings for capital market investors.
The authors would like to especially thank Gabriel Donleavy and Motohiro Tazawa (their paper’s discussants), Haiyan Zhou, Lihong Liang, Akihiro Noguchi, Noriyuki Tsunogaya, Kevin Lam, Vedran Capkun, Victoria Clout, anonymous referees, and participants at the Asian Review of Accounting International Accounting Symposium 2016 held in Zhengzhou University of Aeronautics, the 137th Chubu Regional Meeting of Japan Accounting Association hosted by Tokai Gakuen University, the 10th Conference of Culture and Accounting Association held in Nagoya University and the 39th European Accounting Association (EAA) Annual Congress 2016 in Maastricht for all their helpful comments and suggestions to improve previous versions of this paper.
Frendy, and Semba, H.D. (2017), "Does recycling improve information usefulness of income? The case of Japan", Asian Review of Accounting, Vol. 25 No. 3, pp. 376-403. https://doi.org/10.1108/ARA-11-2015-0111Download as .RIS
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