A Critical Perspective on Comprehensive Income
David Alexander
University
of Birmingham
England
d.j.a.alexander@bham.ac.uk
Clelia Fiondella
Università degli Studi di
Napoli Federico II
Italy
clelia.fiondella@unina.it
Marco Maffei
Università degli Studi di
Napoli Federico II
Italy
marco.maffei@unina.it
1
Rosanna Spanò
Università degli Studi di
Catanzaro Magna Grecia
Italy
rosanna.spano@unina.it
Abstract
Although the IASB desired a conceptually robust accounting standard related to a statement of
comprehensive income, agreement has not yet been reached. Indeed, the current version of IAS 1,
among other requirements, still specifies that entities should present all income and expenses in a
single statement of comprehensive income or in two statements, separately from changes in equity
arising from transactions with owners. The IFRS allow a deviation from a clean surplus accounting,
creating an issue about the disclosure of some relevant items. Further complexity derives from the
fact that IFRSs are a mixture of transaction based historical cost accounting and fair value
accounting.
We use a normative theory to examine the whole IASB comprehensive income project. The route to
follow is via alternative concepts of capital and capital maintenance, considered in the context of
users and users’ needs (especially equity versus debt, probably linked with entity theory versus
proprietary theory). We refer to the Italian traditional theory Economia Aziendale to take part in a
debate on comprehensive income. Economia Aziendale is a normative theory supporting the idea
that accounting is useful for firms to analyse their economic and financial equilibriums. The belief
is that the Italian focus could be useful for the development of the current project on comprehensive
income and for future IFRSs.
Keywords: comprehensive income, Economia Aziendale, conceptual framework, IFRS.
A Critical Perspective on Comprehensive Income
1. Introduction
This paper examines the comprehensive income under international financial reporting standards
(IFRS) and it proposes a critical understanding of the current approach of performance reporting.
This topic is relevant since this debate is still in progress (Patrick Finnegan, Performance
Reporting: Back to the Future, 31 January 2012, IASB Foundation source):
«There is one project, however, that respondents to the [first public] agenda consultation [on the IASB’s future
work plan] believe should be a high priority. It cuts across the conceptual framework and many of our existing
and, increasingly, new standards. The project would define “Other Comprehensive Income” (OCI) and provide
expanded guidance on performance presentation».
The choice between a one-income statement format or a two-income statement format does not
change the information but only its location in the report. Indeed, the main relevant aspect is related
to the decision-usefulness of the income statement(s). The current International Accounting
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Standard Board’s Conceptual Framework (IASB, 2010) is capital providers based, and the decisionusefulness approach implies current or forward-looking information (Page, Spira, 1999).We assume
that the decision-usefulness of financial information for different kinds of users depends on the
coherence of the information provided in the financial reports. Coherence implies that accounting
standards have to be consistent with the Conceptual Framework and the Conceptual Framework has
to be consistent with itself and theory.
Newberry (2003) suggests to analyse comprehensive income by using traditional accounting
theoretical approach. In this paper, the reference is to the Economia Aziendale theory, because its
main principles allow the provisions of coherent information in the financial statements which
might be suitable both for internal purposes and for the capital providers and other external users. It
is worth noting that when IFRS were introduced in the Italian legal system, criticisms were raised
over the differences between the “host” and the “guest” accounting principles, and it was claimed
the evident in-coherence between the Economia Aziendale theory and the existing IASB’s
conceptual framework and deriving standards (Dezzani, 2006). A significant point of our study is
that the debate on comprehensive income is far from over, and there is room for improvement and
discussion, and from the Italian theoretical perspective, it is worthy to evaluate merits of adding
this potential item in the IASB’s agenda (as hypothesised by Sir David Tweedie, press release of 16
June 2011). Indeed, Economia Aziendale might suggest to the IASB how to improve the Conceptual
Framework and the derived accounting standards, by eliminating their internal incoherence. This
should encourage the adoption of IFRS in those countries presenting similar characteristics to Italy.
Our research questions follow.
 What are the concepts of income and comprehensive income under the IASB’s conceptual
framework and current IFRS?
 What is the position of Economia Aziendale on comprehensive income? What does Economia
Aziendale suggest for improving the reporting of comprehensive income and upcoming IFRS?
The measurement of comprehensive income requires the justifications of several conceptual
options. Behind the base of the reasoning there are various perspectives on income connected to an
all-inclusive performance view and its theoretical deviations. Under an all-inclusive or clean surplus
accounting, any change in book value is either due to income or dividends net of capital
contributions from owners (Paton, Littleton, 1940). On the contrary, under a dirty surplus
accounting, remeasurement are not included in net income, but they are registered in equity/other
comprehensive income. The IASB allows deviations from a clean surplus accounting, and an
analysis might require many issues to investigate and solve. The route to follow is via three
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alternative strands.
The first strand requires analysing the concepts of capital and capital maintenance, considered in
the context of users and users’ needs. The topic has to be examined even recalling the earlier debate
on performance (Chambers, 1975), and reviewing the notion of income as a measure of the
performance of an entity and its management versus the notion of income as an enhancement of
investors' wealth.
The second strand is related to the discussion between realized income versus unrealized income.
As Whittington (2005) states, the most important reason to develop a statement of performance
comes from the increasing use of fair value in accounting standards. The choice of either onestatement format or two-statement format depends also on the information to provide about holding
gains and losses. Indeed, the accounting treatment of fair value changes is not the same in every
standard, since some changes in value go through the income statement, while other ones have to be
reported in other comprehensive income.
The third strand concerns the atavistic debate on the concept of ordinary income versus
extraordinary income. The all-inclusive income provides information on the survival and expansion
opportunities of the firm, including accounting adjustments and all non-owner changes in equity.
On the contrary, dirty surplus income influences decisions to take in the near/long future, and it
excludes extraordinary gains and losses (Bedford, 1965).
The remainder of the paper is structured as follows. In section 2 an insight on the development of
IASB’s debate on comprehensive income is provided. In section 3 there is an analysis of the
Economia Aziendale theory. In section 4 there is the examination of the coherence theory in
accounting. In section 5 the concept of comprehensive income is analysed from three perspectives:
capital maintenance versus no capital maintenance, realized income versus unrealized income and
ordinary income versus extraordinary income. The IASB solutions and the Economia Aziendale
position are also analysed. Section 6 discusses the results of the analysis and highlights the main
conclusions.
2. The “incoherent” development of the debate on comprehensive income
The International Accounting Standards Board (IASB) has long been involved in reviewing the
reporting format of performance, due to some inconsistencies in the income measurement and
performance display. Although the IASB would have desired to lead to a “conceptually robust
accounting standard related to a statement of comprehensive income” (IASB, 2002), agreement has
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not yet been reached (IASB/FASB meeting Nov 2010, Staff Paper, Major Issues from respondents
to the ED/2010/5 Presentation of Items of Other Comprehensive Income).
The debate on comprehensive income dates back to 1996, when the IASC (International Accounting
Standards Committee) issued the ED 53 Proposed International Accounting Standard –
Presentation of Financial Statements (then IAS 1 revised 1997). We quote a sub-section of the
Invitation to Comment section:
«The Exposure Draft proposes a requirement for a new primary financial statement to be called the “Statement
of Non-owner Movements in Equity”. The aim of this statement is to highlight more prominently gains and
losses, such as those arising from revaluations and deferred exchange differences, which are not, under existing
Standards, reported in the income statement.
Both IASC and other standard-setters are developing projects to deal with complex areas, including financial
instruments, agriculture and retirement benefit costs which may identify other gains and losses which should
not be recognised in the income statement but which should be displayed prominently in an enterprise’s
financial statement. The new statement will provide an appropriate place for such gains and losses to be
recognised».
However, sixteen years have passed, and “recognised gains and losses” are still moving in the
financial statements and the IASB is still looking for an appropriate place for them. Indeed, it is
worth noting here that the IASB has periodically amended IAS 1 and the debate on comprehensive
income is far from over.
Particularly, the IASB has been working hard on a project concerning the Financial Statement
Presentation, since 2001, with the aim to improve the harmonization process. The Board worked on
this project on its own from 2001 to 2004. The title of the project during that period was
Performance Reporting (July, 2001), and later, Reporting Comprehensive Income (July, 2003). In
the same period, the Financial Accounting Standard Board (FASB) worked on a similar project, and
since April 2004 the Boards agreed that, in the interest of convergence, a project on this topic
should be conducted in cooperation. The joint project addresses mostly the issues related to the
display and presentation in the financial statements of all recognized changes in assets and liabilities
from transactions or other events except those related to transactions with owners as owners. The
Boards’ goal was to improve the usefulness of the financial information provided by entities in their
financial statements, to support the management to communicate more clearly and transparently its
financial information, and to facilitate the users’ decision-making.
At the very beginning, motivations for the project included, for example the following points (IASB
press release 22 November 2004): i) absence of common definitions of the elements of financial
performance and practice regarding the presentation of financial performance and financial position
is inconsistent; ii) increased use of pro-forma reporting and decreased use of and reliance on current
subtotals and totals (such as net income) as indicators of performance; iii) the effects on the
presentation of financial performance and financial position of the mixed-attribute model, where
5
certain transactions and events are recorded at historical cost while others are recorded at fair value;
iv) inconsistent classifications of information among the financial statements; v) insufficient
disaggregation of certain financial information.
The project quickly gathered much attention from academics due to the fact that, given the high
status of the income notion, it may seem surprising that its determination and presentation was still
remaining to be settled by the world’s two main accounting bodies (Van Cauwenberge and De
Beelde, 2007). According to Newberry (2003) the IASB expected that its project on reporting
performance would have led to a ‘conceptually robust’ accounting standard which addresses
disclosure issues in the statement of comprehensive income but she wonders how the Conceptual
Framework’s conceptual incoherence could assist in achieving such an outcome. According to this
view the key problem for accounting standard setters is the Conceptual Framework’s incoherence,
at least partly because it conceals a long-standing and still unsettled battle over concepts of income
(Barker, 2004), and that it is no longer clear that standard setters are fully aware of this battle
(Newberry, 2003).
Currently, the whole project has been divided in three main phases.
Phase A addressed narrow differences between US GAAP and International Financial Reporting
Standards related to what constitutes a complete set of financial statements and requirements to
present comparative information (Financial Statement Presentation Project A, Joint Project of the
FASB and IASB Phase A: Summary as of September 30, 2007). On March 2006, the IASB issued
an Exposure Draft of proposed amendments to IAS 1 Presentation of Financial Statements: a
Revised Presentation, with the aim to bring IAS 1 largely into line with the equivalent US standard.
In its exposure draft, the IASB said it would permit companies the choice of reporting items of
other comprehensive income in one statement or two. In the comment letters the choice between
one or two statements is strongly criticized. We quote verbatim Prof. Ian Langfield - Smith (CL 4,
Monash University comment on the Exposure Draft of Amendments to IAS 1 Presentation of
financial statements: a revised presentation, 2006):
«I do not believe that it is appropriate to give entities the choice. Since period profit or loss is only a partial measure
of the aggregate of all items of income and expense recognised in a reporting period, to allow some items of income
and expense to be reported in a separate statement is potentially misleading».
Ernest &Young in its comment letter (CL 16 comment on the Exposure Draft of Amendments to
IAS 1 Presentation of financial statements: a revised presentation, 2006) strongly disagrees with
the approach of the IASB and suggests that the IASB should not devote any more time to this
segment of the project. In particular, it is argued that the Board has yet to resolve what distinguishes
profit from other income and expenses, that the list provided in the ED of other recognised income
6
and expenses is not complete and that this makes very stark the fact that there is no underlying
principle governing which gains and losses should be excluded from the measurement of profit. It is
also highlighted that the choice between one or two statement is completely meaningless.
The European Financial Reporting Advisory Group (EFRAG) believed that the characterisation of
the proposal was not a fair one and that the income statement might have been downgraded (CL
105, comment on the Exposure Draft of Amendments to IAS 1 Presentation of financial statements:
a revised presentation, 2006).
«(...) we object to effective suppression of the current ‘income statement’, and therefore, introduction of the
‘statement of recognised income and expense’ as the only primary financial statement with an option of
splitting it into two».
EFRAG also did not agree with the option to present two statements as result of a split of a single
statement in two (CL 105, comment on the Exposure Draft of Amendments to IAS 1 Presentation
of financial statements: a revised presentation, 2006).
«(...) in our view the correct way to view things at this stage of the project is to characterise the presentation
of a single statement as combining the two statements».
Also the Consiglio Nazionale dei Dottori Commercialisti e dei Ragionieri (CNDC-CNR) – today
Organismo italiano di Contabilità (OIC)- (CL 60, comment on the Exposure Draft of Amendments
to IAS 1 Presentation of financial statements: a revised presentation, 2006) disagreed with the
option between one or two statement declaring that:
«(...) a unique way to present components of recognised income and expense will improve the comparability
of the financial statements».
Moreover, Zeff (2007) described this kind of choice as the result of European companies’ pressures
on the IASB, a step backward from convergence and comparability. According to his opinion
comparability would be achieved if all companies were to present only one statement, which was
the initial IASB’s preference. The option of one presentation versus the other is not one that reflects
dissimilar conditions among companies, but only an example of self-interested lobbying that
currently tackles the IASB.
As completion of the Phase A, the IASB published a revised version of IAS 1 Presentation of
Financial Statements in early September 2007 (FASB decided not to issue an exposure draft based
on Phase A but, rather, to consider the IASB's conclusions from Phase A in FASB’s exposure draft
on Phase B). With reference to comprehensive income, and despite the criticisms in the comment
letters, the revised IAS 1 required that entities have to:
 present all non-owner changes in equity (that is, “comprehensive income”) either in one
statement of comprehensive income or in two statements (a separate income statement and a
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statement of comprehensive income) (components of comprehensive income may not be
presented in the statement of changes in equity);
 present a statement of financial position (balance sheet) as at the beginning of the earliest
comparative period in a complete set of financial statements when the entity applies an
accounting policy retrospectively or makes a retrospective restatement;
 disclose income tax relating to each component of other comprehensive income;
 disclose reclassification adjustments relating to components of other comprehensive income.
Phase B, still in progress, addressed more fundamental issues for presentation of information in the
financial statements. Specific issues in Phase B include the following points. First of all, it is
considered the opportunity to replace IAS 1 and IAS 7, with special reference to the development of
principles for aggregating and disaggregating information in each financial statement, the definition
of the totals and subtotals to be reported in each financial statement, the decision concerning
whether components of other comprehensive income/other recognised income and expense should
be recycled to profit or loss and, if so, the characteristics of the transactions and events that should
be recycled and when recycling should occur, the presentation of the cash flow statement, including
whether to require the use of the direct or indirect method. A discussion paper Preliminary Views
on Financial Statement Presentation was published in October 2008. In June 2010 the Boards
decided to undertake additional outreach activities before completing and publishing an exposure
draft. Subsequently, the Boards decided to post a staff draft of proposed standards that reflects
decisions taken so far, as a starting point for extended stakeholders outreach activities. Then, it has
been considered the opportunity to develop a common definition of discontinued operations and
requiring common disclosures related to disposals of components of an entity. An exposure draft of
proposed amendments to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
was published in September 2008. In June 2010 the Boards jointly issued a Progress Report on
Commitment to Convergence of Accounting Standards and a Single Set of High Quality Global
Accounting Standards, June 2010, which stated that they have decided to align the project timetable
for discontinued operations with the main financial statement presentation project. At the moment
the two sub-projects have been stopped and if and how they will be continued, will be decided after
the completion of the IASB's agenda consultation.
In May 2010, the IASB published the exposure draft of proposed amendments to IAS 1
Presentation of Items of Other Comprehensive Income. The proposal was designed to make it easier
for users of an entity’s financial statements to understand all non-owner changes in equity and to
help users to assess the relevance of individual income and expense items presented in OCI and to
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assess the potential effects that some OCI items may have on profit or loss. Differently from the
previous version of IAS 1 (option to choose either a statement of comprehensive income or two
separate statements of profit or loss and other comprehensive income), the exposure draft proposed
to require a statement of profit or loss and other comprehensive income containing two distinct
sections – profit or loss and items of other comprehensive income. The exposure draft also proposed
a new presentation approach for items of OCI. Indeed, the Board was proposing to require that
items that will never be recognised in profit or loss should be presented separately from those that
are subject to subsequent reclassification (recycling).
Many respondents (CL 10, IDW, CL 10 Prof. Bradbury, Massey University, CL 14, ASB, CL 15,
CEA, comment letters on IASB Exposure Draft Presentation of Items of Other Comprehensive
Income, 2010) raised the issue of the lack of a conceptual framework for OCI and the need for a
convergent conceptual framework to identify which items should be recognized in OCI as opposed
to net income, and what items should be recycled from OCI to net income.
In the draft comment letter to the ED/2010/5, the EFRAG alerts that:
«One may argue instead that the objective of financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making
decisions in their capacity as capital providers (...)».
«(...) different users of financial statements currently have different interpretations as to what constitutes
“performance”. There are many aspects of an entity’s performance that are given different weight by different
people. We believe that, as first step in the debate, it would therefore be important to identify principles as to
what constitutes performance. Such principles then could be used to determine the content of performance
statement(s), and the question of the number of statements would follow».
From the Italian perspective, it is also relevant to consider the position of the Italian standard setter
Organismo Italiano di Contabilià (OIC) criticising the project. We quote verbatim the English
language original (OIC comment letter on IASB Exposure Draft Presentation of Items of Other
Comprehensive Income, 2010):
«(...) the IASB should give a higher priority to some fundamental issues underlying performance reporting,
which would affect also financial statement presentation. (...) we do believe that the IASB should try to resolve
the fundamental issue of the definition of the concept of performance within the current project on Conceptual
Framework and then in the projects on financial statement presentation».
«a) the lack of a general principle that sets out clearly the features that an item included in OCI should have in
contrast to the items of profit or loss, in order to define an unambiguous classification criterion; and
b) the lack of a general principle that defines the recycling rules for items of OCI that have to be reclassified
subsequently to profit or loss (why, when, how and for which components of OCI); clearly this lack is the
result of the previous point».
Preparers of financial statements strongly oppose the presentation of a continuous statement of
comprehensive income, while the investor group support this requirement (Staff Paper Presentation
of Items of Other Comprehensive Income, Comment letter analysis, October 2010). Frequent
9
reasons for opposition are the lack of a conceptual framework for OCI, the lack of user demand for
a single statement, the confusion among users due to the proximity of two separate measures of
income with differing characteristics, the reconsideration of the importance of net income. Even
though the Staffs agreed with respondents’ comments, they encourage the Boards to consider in
their future agenda the issues related to the development of a conceptual framework for OCI and a
principle for recycling. They believe that is more important to address the presentation issue in the
short term and suggest that the Boards continue with the project as planned. This recommendation
derives from the fact that the project is limited to the presentation of comprehensive income, and
from the belief that it would take several years for the standard setters to define a conceptual
framework.
On June 2011 the IASB issued the amendments to IAS 1 Presentation of Financial Statements,
which requires companies preparing financial statements in accordance with IFRSs to group
together items within OCI that may be reclassified to the profit or loss section of the income
statement. The amendments also reaffirm existing requirements that items in OCI and profit or loss
should be presented as either a single statement or two consecutive statements. Moreover, in the
Project Summary and Feedback Statement on Presentation of Items of Other Comprehensive
Income (Amendments to IAS 1), June 2011, the IASB explicitly declare that the items presented in
profit or loss and OCI provide important information about the financial performance of an entity,
however the conceptual questions are still remaining unresolved. We quote verbatim:
«The lack of distinction between different items in OCI reflects the absence of agreement among users and
preparers about which items should be presented in OCI and which should be part of profit or loss. For
instance, a common misunderstanding is that the split between profit or loss and OCI is on the basis of realised
versus unrealised gains. This is not, and has never been, the case. This lack of a consistent basis for
determining how items should be presented has led to the somewhat inconsistent use of OCI in IFRSs.
Feedback suggests that it would be difficult to develop a more consistent basis for identifying when an item
should be presented in OCI. However, the IASB agreed with users’ requests for greater clarity in the
presentation of OCI items as expressed by many respondents to the discussion paper on financial statement
presentation. To address this issue within this limited scope project, the IASB proposed to group items
presented in OCI on the basis of whether they might at some point be reclassified (‘recycled’) from OCI to
profit. By requiring items of OCI to be grouped on this basis their potential effect on profit or loss in future
periods will be clearer.
Whether the IASB will address the more fundamental issues relating to OCI in a future project will also depend
on the views it receives on its forthcoming consultation on the IASB’s future work programme..».
The third phase, the so-called Phase C, has not started yet, and it will consider the presentation and
display of interim financial information in US generally accepted accounting principles.
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3. The Economia Aziendale theory
The Economia Aziendale is a normative entity theory that dates back to 1926 and emanates from Gino
Zappa. This theory studies the economic activity of entities, which deal with the acquisition of
factors, the production and the exchange or consumption of goods and services.
Originally the azienda is defined in the following way (Zappa, 1957, personal translation):
«An economic institution aimed at enduring, which, in order to satisfy the human needs, carries on in
uninterrupted coordination the production or the acquisition and the consumption of wealth».
The analysis of the azienda assumes that its processes and activities are coordinated to reach an
aim. Analytically, the azienda can be observed from three main strands: management, organization
and accounting. In the Anglo-Saxon literature there are not coordinated studies of management,
organization and accounting, since they are perceived as autonomous disciplines. Instead, the
Economia Aziendale encourages the observation of the interconnections among these processes.
 The first distinctive point of the Economia Aziendale is that the main unit of investigation of
this theory – the azienda – is perceived as a system (Amaduzzi, 1947). (However, the analysis
of the azienda’s subsystems is also possible, even though they are perceived as inseparable.)
Not every entity is an azienda, and it can be variably classified e.g. distinguishing business and
public administrations. (The azienda is the economic soul of an entity, and it coincides neither with
the juridical concept of company or corporation, nor with the owner, capital suppliers and workers.)
According with the Economia Aziendale the purpose of every kind of azienda is to create value for
the azienda itself and for the internal and external stakeholders involved and socially recognised
(Sidrea, 2009). Therefore, every kind of azienda has to be durable over time and autonomous by a
systematic use of support interventions (Airoldi et al., 2005).
The value creation process requires that an azienda has to work in such a way as to reach and
maintain economic, financial and strategic durable equilibriums. The respect of the conditions
underlying the above mentioned equilibriums allows the azienda to preserve and improve its level
of functionality over times. Since the azienda plays its activity in an economic environment, the
azienda has to create and maintain relationships with stakeholders and to join the efforts to quest for
value (Cavalieri, 2010). From an operative perspective, the Italian theoretical framework implies
that every azienda has to respect the conditions to reach and maintain the above mentioned
equilibriums. Thus, the Economia Aziendale helps to identify alternative ways to manage, organize
and account for the economic activity, and it suggests the most suitable instruments useful to
undertake decisions. The whole analysis also requires the examination of the causal relationships
between the identified alternatives and the economic performance.
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 The second distinctive point of the Economia Aziendale is that it has a high level of generality,
in such a way to allow the development of an unitary theory examining the conditions of
existence and functioning of every kind of azienda.
The Economia Aziendale supports the axiom that accounting is useful to analyse the economic and
financial equilibriums of any azienda, and income measurement aims to provide an internal cognitive
perspective to verify the respect of conditions useful to create value.
At least to the origins of the Economia Aziendale, the main proprieties of the accounting require that the
display of items in the financial statements has to be coherent with the need to measure the above
mentioned equilibriums. In this regard, we quote Viganò (1996, pp. 266-7).
«The concern [entrepreneurship, azienda] is unitary, the income produced is unitary, in time and space. (…)
There are no single or specific costs to be compared to single or specific revenues. A single cost does not
produce a single revenue, but it contributes without distinction to produce all the revenue; a single revenue
does not derive from a single cost, but from the contribution of all the costs. The concern is a dynamic entity,
so what really exists are costs and revenues as elements of the income itself. (…) The only acceptable form
also for the profit and loss account is the T-format. This interpretation produces a specific recording method
(…). Hence: a) partial results, operational areas, profit centres, interim or segmental reports are not accepted
(…)».
 The third distinctive point of our study is that the Economia Aziendale only deals with an allinclusive income.
The accounting system is considered as a set of rules related to recording, measurement and
disclosure, and it was ideally perceived as a way to reflect the objectives of the azienda. Income
determination is finalized to measure the performance by the revenue-expense approach. From this
point of view, the decision-usefulness approach would privilege information needs on the survival
of the firm and the satisfaction of all stakeholders. Because events are considered as inseparable
over the entire life of the azienda, income is unitary and envisaged as a holistic notion. All
operations performed within the azienda are related to one another, with the impossibility to
distinguish the financial consequences of one activity from those of another. Indeed, the financial
statements are perceived in the same way (Viganò, 1996).
«The balance sheet with its assets and liabilities provides a good example. From the atomistic perspective, each
item has a value of its own, and net worth represents the sum of single, distinct value. From the systems view
no single element has value in itself; this rather derives from the coordination with the other elements».
Even the concept of net worth derives from the concept of income. Except for financial items, net
worth consists of deferred costs and revenues rather than assets and liabilities. The economic value
of the azienda is the present value of the (discounted) average future income. In the process of
estimation of the economic value, assets do not have an independent value, but their value depends
upon their contribution to the generation of income. From this perspective, the measurement of
income and capital depend on the future rather than on the past (Potito, 1988).
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In the Economia Aziendale it is relevant the concept of soggetto economico, translated by Zambon
and Zan (2000) as main economic actor (MEA). They explain this concept in the following way,
referring to Ardemani (1968):
«In general, the concept of MEA tends to identify those people who should not be considered as third
economies or third parties vis-à-vis the firm; i.e. those who should be considered as the bearers of primary
interests towards the firm in contrast to those that can be defined as external parties».
Conceptually, the MEA might coincide with the owner, the group of control or institutional interest
bearers, and accounting implications are possible, especially when discussing the residual nature of
the income. We avoid any historical explanation of the development of this relationship.
The Economia Aziendale has created a relationship between the double-entry method and the
bookkeeping system, even supporting the income-oriented accounting. From an accounting point of
view, operations are interdependent transactions and flow over time. These operations give rise to
positive and negative changes to the economy of entities; these changes contribute to the formation
of income, and accounting has to register the underlying events. Considering the current position to
analyse the main economic actor as institutional interest bearers (Cavalieri, Ferraris Franceschi,
2010; Airoldi et al., 2005), labour parties is not a third party, and the concept of surplus changes its
implicit meaning into a value add measure. Thus, the value of labour is a form of remuneration of
one subject of the MEA.
 The fourth distinctive point of the Economia Aziendale is that the disclosure of income is
regarded as the income of a main economic actor.
Originally, the financial statements were simply considered an internal instrument to provide an
efficiency judgment on the management. Relevant was the measurement of the consumable income,
while there was not any need to measure the achieved income. Although in the past the Italian
financial market was not developed and firms were not interested in the quality of the financial
statements, the current situation is different. The globalization of the economy has justified the
international standardization and harmonization of accounting, perpetuated by the European Union
and supported by the IASB. More attention is paid by entities to the communication to the financial
market, at least because it is mandatory. Since the azienda plays its activity in an economic
environment, the Economia Aziendale also studies both the operation of the economic environment
and the interactions between the azienda and further actors. From this perspective, the Economia
Aziendale can suggest the flow of information that any azienda has to address to the financial
market. Despite the introspective analysis of the Economia Aziendale, the azienda still remains the
main object of the accounting information to be produced, and its features are still relevant for the
development of general decision-useful principles.
13
 The fifth distinctive point of the Economia Aziendale is that the observation of the azienda with
a systemic approach, the generality and unity of the theory and the assumptions related to the
accounting system and income measurement ensure that the whole conceptual framework is
consistent with itself and the leading normative principles are consistent with the whole
conceptual framework.
4. The coherence principle in accounting
In this section we show what the coherence principle might look like and what it might imply for
the study of accounting theory1. Preliminary coherence might be defined as follows (Kirkham
1992):
«The term “coherence” as used by coherence theories has never been very precisely defined. The most we can
say by way of general definition is that a set of two or more beliefs are said to cohere if and only if (1) each
member of the set is consistent with any subset of the others and (2) each is implied (inductively if not
deductively) by all of the others taken as premises or, according to some coherence theories, each is implied by
each of the other individually».
In brief, we propose some lenses to use to explore the Economia Aziendale and IASB’s
frameworks. A primary formulation of truth might be the following one:
 A normative principle x is true if and only if it is part of a normative system and that system is
coherent.
This formulation is not satisfactory, since there are coherent systems wherein each sentence is a
part. Hence, there is the need to relativize truth to a system:
 A normative principle x is true in a normative system L if and only if x is part of L and L is
coherent.
This implies that any normative principle is going to be true in some normative system. However,
the relativization of truth is necessary, but not sufficient. Indeed, if the normative system is
incoherent, any normative principle is false. This problem might be avoided: even though a system
is not coherent, if it is reasonable to think that a principle x would be part of a system adjusted,
expanded and rid of incoherence, then it is true. Therefore:
 A normative principle x is true in a system L if and only if either the principle x is a member of
L and L is coherent, or x is a member of an adjusted, expanded and rid of incoherence
accounting system.
However, it is also relevant the relationship between principles to form a coherent normative
system. The connections have to consist in the capacity to be derived by other sentences in the
systems, displaying a relationship of mutual implication. Coherence has to satisfy two constrains: i)
1
For a deeper analysis see Doresy D., A coherence theory of truth in ethics, Philosophical Studies, 2006.
14
consistency, which implies the quality of achieving a level of performance which does not vary
greatly in quality over time; and ii) derivability, which implies that a principle is derivable from all
other sentences taken together, rather than each sentence individually. Thus:
 A normative system L is coherent if and only if, for all normative principles x, if x is a member
of L, x is consistent with all other principles of L and is derivable by a system of deductive logic
or inductive generalization with all other principles of L and any requisite non-normative
principles available as premises.
This general definition of coherence can be translated into an example in the following way, mainly
referring to the conservatism principle.
 An accounting conceptual framework is coherent if and only if, for all accounting principles, if
the conservatism principle is a member of the accounting conceptual framework, the
conservatism principle is consistent with all other accounting principles of the accounting
conceptual framework and is derivable by a system of deductive logic or inductive
generalization with all other principles of the accounting conceptual framework and any
requisite non-normative principles available as premises.
Regarding the coherence of Economia Aziendale, the theoretical answer appears from the final
bullet in section 3 above. The systemic approach outlined generally, and the explicit integration of
what in Anglo-Saxon terms are regarded as the three distinct disciplines of management,
organisation and accounting, force what we might define as at minimum a coherent working
compromise between the various elements, designed to achieve the 'uninterrupted coordination'
referred to at the beginning of section 3. However, this is not to say of course that it is necessarily
allowed to work in practice (See for example Alexander and Servalli (2011), and references therein,
for discussion about Italian accounting practice in the second half of the twentieth century being
incompatible with the logic of Economia Aziendale).
As regards the conceptual framework, it is surely clear that this lacks coherence as considered here
(see section 5 below for detailed explanation). Moreover, the original (1989) Framework made this
explicit by commenting on the tensions between relevance and reliability. It is not at all obvious
that the replacing of reliability by faithful representation in the current (and very incomplete)
revision of the Framework (2010) removes this tension. Nor does the removal of prudence as a
separate concept remove the inherent tensions and incoherency between 'playing it safe' on the one
hand, and 'telling it like it is' on the other. As strong circumstantial evidence, why is it taking so
long for the IASB/FASB joint project to fail to produce a full revised Framework? Again, these
arguments are essentially theoretical. Consideration of users is also important. It can be argued in
15
the IASB's defence that different users require different, certainly incompatible, and therefore in a
sense incoherent, information.... so is a coherent framework impossible by definition?
5. The “incoherencies” inside the conceptual framework and between the conceptual
framework and IFRS in relation to the comprehensive income
In this section we are going to stress the “incoherent” development of the debate on comprehensive
income, already discussed in 1996 in terms of presentation and still discussed in 2011 with the
identical issue despite comment letters having encouraged finding a solution of more important
aspects. The discussion departs from the idea that this incoherence is due to the Conceptual
Framework’s incoherence. Indeed, as we briefly outlined at the end of section 4, such incoherence
still exists at least partly because it conceals a long-standing and still unsettled battle over concepts
of income (Barker, 2004), and it is no longer clear that standard setters are fully aware of this battle
(Newberry, 2003).
The current conceptual framework and IFRS do not explain why some standards require to include
the changes of value in net income, while other standards require to include the changes of value in
other comprehensive income. Properly, some considerations come from the use of fair value. The
IASB permits or requires the use of fair value for the revaluation of property, plant and equipment
(IAS 16 Property, Plant and Equipment), the actuarial gains and losses of employee benefits (IAS
19 Employee Benefits) or remeasurements of a net defined benefit liability (asset) as now defined by
the exposure draft Defined Benefit Plans which proposes replacing the reference to ‘actuarial gains
(losses), the exchange differences on monetary items and on net investment in foreign operations
(IAS 21 The Effects of Changes in Foreign Exchange Rates), the revaluation of intangible assets
(IAS 38 Intangible Assets), the holding gains and losses of financial instruments (IAS 39 Financial
Instruments: Recognition and Measurement and upcoming IFRS 9 Financial Instruments), the gains
and losses of investment properties (IAS 40 Investment Property), the gains and losses of
agriculture items (IAS 41 Agriculture).
The OCI includes those elements not recognized in net profit or loss. Especially, this category
regards changes in revaluation surplus, gains and losses arising from translating the financial
statement of foreign operations, gains and losses on re-measuring available-for-sale financial assets,
the effective portion of gains and losses on hedging instruments in a cash flow hedge and,
eventually, actuarial gains and losses on defined benefit plans. There is no obvious principle that
drives these gains and losses out of earnings and into OCI. Indeed, they all reflect re-measurements
as a result of movements in price or valuation, but so do some items that are incontestably included
within earnings such as fair value gains and losses on derivatives held for trading and investment
16
properties. Even the AcSB (2004) recognised that there is little conceptual basis for excluding gains
and losses and value changes of financial instruments from net income.
It is also relevant to understand which items must be included in net income and which ones must
be excluded from net income. If the comprehensive income is an all-inclusive measure, less items
are included in net income, more items are labelled as the other recognized income and expense
category; vice versa, more items are included in net income, less items are labelled in the other
recognized income and expense category. Although this exemplification is based on the concept
that net income is contained in comprehensive income, we cannot disregard that the comprehensive
income amount may be smaller than the net income amount. This is possible when the other
recognized income and expense category contributes negatively to measurement of comprehensive
income. It is also possible that comprehensive income is negative and net income is positive. This
information may be neutral for financial statement users in case of one-statement adoption, because
the bottom line expresses the final result to take into consideration. However, it may appear
confusing to show two different amounts (negative and positive) of performance. If the two
statements have equal relevance, it may not be easy to accept that one statement includes reliable
and predictable amounts while the other one shows only less reliable and predictable amounts to
recycle when realized.
Since the accounting treatment of holding gains and losses is known to depend partially on the
concepts of capital and capital maintenance, there is the need of verifying the coherence between
profit and loss definition, included in the framework, and comprehensive income concept. The
framework states that incomes and expenses are respectively a form of inflow or enhancements of
assets or decreases of liabilities and a form of outflow or depletions of assets or incurrence of
liabilities. Walton (1981) distinguishes operating surplus from holding gains. The latter is composed
of two elements: on one hand, there are realized items, gains on assets which are then “consumed”
by being charged against sales revenue (“the gain is the difference between historical cost and
deprival value at the time of consumption”), and, on the other hand, there are items that are not
realised.
The main issue is related to the difference between provision for capital maintenance, to deduct
from the operating surplus (whose total ideally represents income available for interests and
distribution), and the revaluation on asset, to add to the operating surplus. However, there is no
agreement on the best way of measuring and disclosing those changes. Proponents of financial
capital maintenance assert that changes in recorded number of assets and liabilities are holding
gains or losses. Advocates of physical capital argue that increases in the price of items, that a firm
17
must have if it is to continue in business, are not elements of net income, but a capital maintenance
to be placed directly in owner’s equity. Under the capital maintenance approach, net income is
defined as the difference between the net assets at the beginning of a period and net assets at the end
of the period, excluding owners’ contributions and distributions during the period. The capital
maintenance approach captures all recorded changes in the value of the enterprise during a period,
regardless of whether the change resulted from a transaction. Net income is the result of normal
operations, abnormal transactions and capital gains and losses resulting from unexpected value
changes (Hendriksen, 1970). Moreover, under current value accounting, income includes both
realized gains and losses and unrealized holding gain and losses (Edwards, Bell, 1961); under basic
current purchasing power, only the increment and decrement of non-monetary items go directly to
equity instead of income (Mathews, Grant, 1958); under comprehensive current purchasing power,
the increment and decrement of both monetary and non-monetary items are considered a component
of equity (Gynther, 1966; Barton, 1977).
Although these definitions support the identifications of elements of profit and loss, the previous
cited definitions of income and expense do not support any specification on the recognition criteria
(Alexander-Britton-Jorissen, 2011) and it is clear enough that the exposure draft of proposed
amendments to IAS 1 is not going to change the requirements for recognition and measurement.
Consequently, there are some inconsistencies in the accounting treatment of these changes in the
value of assets and liabilities. In the following part of this section we give a brief example of this
inconsistency with particular reference to tangible assets and financial instruments.
According to IAS 16 (and to IAS 38), if a revaluation results in an increase in value, it should be
credited to other comprehensive income and accumulated in equity under the heading "revaluation
surplus" unless it represents the reversal of a revaluation decrease of the same asset previously
recognised as an expense, in which case it should be recognised as income. Conversely, a decrease
arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds
any amount previously credited to the revaluation surplus relating to the same asset. When a
revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained
earnings should not be made through the income statement (that is, no "recycling" through profit or
loss). An identical asset may receive another accounting treatment under IAS 40 “Investment
property”, where both the increment and the decrement of fair value go through profit and loss. IAS
19 specifies that if the accumulated unrecognised actuarial gains and losses exceed 10% of the
greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or
18
loss is required to be recognised immediately as income or expense. The portion recognised is the
excess divided by the expected average remaining working lives of the participating employees.
Actuarial gains and losses that do not breach the 10% limits described above (the “corridor”) need
not be recognised – although the entity may choose to do so. In December 2004, the IASB issued an
amendment to IAS 19 to allow the option of recognising actuarial gains and losses in full in the
period in which they occur, outside profit or loss, in a statement of comprehensive income.
Exchange differences arising when monetary items according to IAS 21 are settled or when
monetary items are translated at rates different from those at which they were translated when
initially recognised or in previous financial statements are reported in profit or loss in the period,
with one exception. The exception is that exchange differences arising on monetary items that form
part of the reporting entity’s net investment in a foreign operation are recognised, in the
consolidated financial statements that include the foreign operation, in other comprehensive
income; they will be recognised in profit or loss on disposal of the net investment.
Along with IAS 39, when a firm revalues a security classified as available for sale, both the
increment and the decrement should be credited/debited to other comprehensive income and
accumulated in equity, and the cumulative gain or loss that was recognised in equity is recognised
in profit or loss only when an available-for-sale financial asset is derecognised. On the contrary, the
same holding gains and losses must be treated differently if the security is classified as for trading –
actually, both the increment and the decrement go through profit and loss.
In other words, the application of the reliability concept should weigh both re-measurements arisen
from changes of current prices (i.e. on marketable securities carried at fair value) and estimations on
future business development. Thus, items with low predictive value have to be reported in equity
(Barker, 2004) and only when these measures become more reliable and predictable, the amounts
have to be placed in the profit and loss account.
In respect of this consideration, it may be possible to explain the revaluation surplus of tangible
assets. In line with IAS 16, the investment is considered to be recovered by the production, and thus
the revaluation surplus goes through other comprehensive income despite the use of fair value. On
the other hand, the decrement of value is presented in the profit and loss because the depletion
incorporates a revision of the future capacity of recovering the investment, too. On the contrary,
under IAS 40, both the increment and decrement of value are reported in net income because the
recoverability of the investment is not subject to the internal production of the company but it is
essentially dependent on external variables. Differently, this justification cannot be extended to
financial instruments. Along with IAS 39, the changes in fair value of financial instruments
19
classified as for trading go through profit and loss because there is a higher possibility of converting
the investment into cash. After all, the changes in fair value of financial instruments classified as
available for sale are always reported in equity (apart from impaired values), despite the recognition
being essentially based on the same level of reliability of the financial instruments classified as for
trading. It seems that financial instruments classified as available for sale lack predictability, despite
the dependence of their fair value on external dynamics. Nonetheless, those elements classified as
other recognized income and expense must be reclassified in the profit and loss when realized.
Those reclassification adjustments do not arise on change in revaluation surplus. Actually, it is not
reclassified into profit or loss in subsequent periods but transferred to retained earnings as the asset
is used or derecognized.
An interesting question pertains to IAS 41, where fair value gains on unsold e.g. lambs/calves are
definitely operating items – physical capital maintenance is fully achieved by retaining the mother
animals subject to wear and tear, so the unrealised gains on the young are operating, and
economically distributable at once. Perhaps if the mothers are fair valued too, the gain on them does
need to be retained (even if realised). So the fair value gain on the lambs (or the grapes on the vine)
goes immediately into income, and the gains on the parents (or the vine itself) go into OCI and stay
there.
6. Future remarks
The paper is still in progress, and further deep development is needed. Specially, we aim to deeply
examine the philosophical concept of coherence and to explain its relevance for the IASB’s
conceptual framework and financial reporting standards. Then, we need to improve the explanation
of the coherence guaranteed by the Economia Aziendale theory.
From this position, we are going to stress the “incoherent” development of the debate on
comprehensive income, already discussed in 1996 in terms of presentation and still discussed in
2011 with the identical issue despite comment letters having encouraged to find a solution of more
important aspects. Thus, we have to develop the reasoning related on the three strands of our
analysis (capital maintenance versus no capital maintenance, realized income versus unrealized
income and ordinary income versus extraordinary income) marginally examined in section 5. Here
we just try to analyse the answers to our research questions.
 What are the concepts of income and comprehensive income under the IASB’s conceptual
framework and current IFRS?
20
The IASB has not declared which is the concept of comprehensive income under the framework
and great confusion arises from the reading of IFRSs. Moreover, the project on comprehensive
income in its first phase has been conducted separately from the FASB, which has provided in the
past a specific definition of income and comprehensive income. The most important reason to
develop a statement of performance, according to the purpose of the joint project between IASB and
FASB, is to improve the ability of users to understand the financial reporting of all non-owner
changes in equity. Hence it is important not to forget that the issue of fair value measurement is
closely related to the above discussion. Indeed, fair value is a fundamental means for assessing
financial performance because it overcomes some of the shortcomings of historical cost accounting,
in which reported values are often seen as not representative of economic reality.
 What is the position of Economia Aziendale on comprehensive income? What does Economia
Aziendale suggest for improving the reporting of comprehensive income and upcoming IFRS?
The Economia Aziendale theory has a different concern from a consideration of a transparent
picture of the causes of change in net assets and liabilities. The focus is on transactions from which
flow costs and revenues – and consequently deferred costs and revenue. In such a way, the income
statement shows the respect of the long-term profitability conditions and it allows the accountability
function for directors. In principle it is not necessary to choose the cost when it is lower than the
presumable realization value – suffice that asset values could not exceed the presumable realization
one – which avoids the accounting recognition of unrealized profit and allows the accounting
treatment of expected losses. A capital maintenance approach by current values does not mean
integrity of the purchasing power – it simply guarantees the application of the going concern
principle according to the attitude of the enterprise to generate income at every change of the
current prices. Moreover, there is not any distinction between ordinary and extraordinary items, thus
the profit and loss statement is “nature-based”.
The Economia Aziendale and the developing IASB’s conceptual framework share a common focus
on the maintenance of the long-run operating capability of an entity, ensuring its capacity to replace
all consumed resources (capital maintenance) and to continue in operation (going concern). A clear
implication is that a simple historical cost/ nominal capital maintenance approach is not adequate.
Reporting mechanisms and formats focused on such information, and on the accountability of
management for the successful achievement of these philosophies, need to be in place. In this sense
the failure so far of the IASB to complete its reporting comprehensive income project in a manner
fully articulated with its balance sheet valuation policies, leading in turn to a consistent and
rationalised approach across the whole set of Standards, is unfortunate and reprehensible. The
21
Economia Aziendale tradition has a real contribution to make in such respects.
Economia Aziendale has not discussed about fair value accounting until recent days, although it was
accepted that the maximum value of assets – not to be exceeded or not to be reached due to the
uncertainty of its calculation – is the direct or indirect presumable realization value (Ferrero, 1988).
However, it is now accepted that income could be also measured in accordance to the logic of the
“achieved” income – in application of the fair value – instead of the logic of the “realized” income –
in application of the prudence principle (Cavalieri, Ferraris Franceschi, 2008). As far as estimation
criterion are regarded, in the past some questions were raised in relation to the inflation accounting.
Both general indexation and the current cost approach were rejected, since they are too pragmatic
(Masini, 1963). It was instead supported general restatement of annual values based on revaluation
techniques, in such a way past values might be presented together with new values based on
changes in profit expectations.
Additional considerations to examine follow.
If it is accepted to report two different figures – net income and comprehensive income – it is
important to understand when components of comprehensive income should be recognized in the
financial statements; how those items should be measured; which kind of items must be included in
net income and which other ones outside net income; how to avoid to report twice gains and losses
(when recognized and, subsequently, when realized). The one statement format is available when
there is no-recycling of holding gains and losses when realized. Actually, it is possible to accept the
criticism that it is self-contradictory to create one statement of comprehensive income that does not
change the current recognition requirements and that allows to withhold some items from the
income statement until recycled in the net income (Whittington, 2005). On the contrary, two
primary statements are more useful when there is the need of distinguishing net income from
comprehensive income; moreover, this solution is advised when holding gains and losses are
reclassified in net income when realized.
As far as the relation with the notions of income and capital maintenance is regarded, perhaps
anything which is economically distributable (not legally, which is irrelevant) should go in the
income statement. Anything not economically distributable goes in OCI. This means for example
that under physical operating capital maintenance, holding gains are never distributable (even if
realised) and never go into income, but under historical cost accounting they are distributable (even
if unrealised, in strict economic terms, but this is debatable because of protection of non-equity
stakeholders).
We, the IASB and their advisers, have much thinking still to do.
22
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