Audit and Enterprise Risk Services

Presentation of Comprehensive Income: Application of ASU 2011-05 and ASU 2011-12 to Interim Financial Statements

Financial Reporting Alert 12-2

April 5, 2012

This alert applies to public and nonpublic entities with interim financial statements that report items of comprehensive income in any of the periods presented.

Background

Issued last June, ASU 2011-05¹ revised the manner in which entities present comprehensive income in their financial statements. The main provisions of ASU 2011-05 eliminated the option for entities to present the components of other comprehensive income (OCI) in a statement of stockholders’ equity. Instead, entities must present the components of net income and the components of OCI in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements.

ASU 2011-05 also changed the reporting requirements for interim financial information. Previously, ASC 220² required the presentation of only a total for comprehensive income in condensed interim financial statements. ASU 2011-05 initially expanded this guidance to also require the reporting of “the components of net income and other comprehensive income” in interim periods; however, this additional requirement was subsequently removed by ASU 2011-12.³ Issued last December, ASU 2011-12 also deferred certain provisions of ASU 2011-05 pertaining to the presentation of reclassification adjustments (i.e., amounts reclassified out of accumulated OCI, such as realized gains and losses on a derivative instrument designated as a cash flow hedge).

Observation: Among the multiple concerns and questions constituents raised about the reclassification adjustment provisions in ASU 2011-05 was the application of those provisions to interim periods. Some constituents questioned the usefulness of presenting information about reclassification adjustments when only condensed financial statements are provided. Accordingly, the FASB decided to further deliberate the presentation requirements for reclassification adjustments, including their application to interim periods. This decision, as well as the Board’s corresponding decision to reinstate the original interim guidance in ASC 220, will prevent preparers from having to adopt the interim period guidance in ASU 2011-05 and then apply any new requirements in a subsequent period shortly thereafter. Such a change would most likely not be cost-effective for preparers and could create confusion for financial statement users and investors.

Interim Period Presentation

ASC 220-10-45-18, as amended by ASU 2011-12, states that an “entity shall report a total for comprehensive income in condensed financial statements of interim periods in a single continuous statement or in two consecutive statements.” Thus, an entity must present a total for comprehensive income in its interim statements but is not required to present the individual components of OCI as it would for annual reporting purposes. The guidance on interim periods in ASU 2011-12 is not intended to change current practice with respect to the level of information included within the financial statements; therefore, an entity that has previously displayed the components of OCI for interim periods (i.e., within a full statement as with annual periods) may continue to do so in either a single continuous statement or in two consecutive statements.

In addition, entities that elect to use a two-statement approach in their annual financial statements may consider using a single-statement approach in their condensed interim financial statements. Such an approach would avoid the presentation of a separate statement of comprehensive income that contains only one line item for total comprehensive income.

Effective Date and Transition

ASU 2011-12 and ASU 2011-05 are effective for public entities, for fiscal years and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the effective date is for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The new guidance must be applied retrospectively, with early adoption permitted.

Next Steps

The FASB is expected to redeliberate the accounting for reclassification adjustments (for both interim and annual periods) later this year. We encourage entities to closely monitor and actively participate in the standard-setting process as the FASB progresses with the project.

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1 FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income.

2 FASB Accounting Standards Codification (ASC) Topic 220, Comprehensive Income.

3 FASB Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.