(PRWEB) March 07, 2013
The Financial Accounting Standards Board’s (“FASB”) initial guidance for reporting changes in other comprehensive income (“OCI”), included in the June 2011 Accounting Standards Update (“ASU”) 2011-05, was not a smash hit. When the FASB received numerous comments opposing the update’s new reclassification adjustment requirements, that portion of the update was deferred and it was back to the drawing board for the FASB. In February 2013, the FASB issued its take two, ASU 2013-02, Comprehensive Income. Johnson Lambert explains that the wait is over for preparers who had been left guessing how the FASB would address comments on the original standard update related to the presentation of reclassification adjustments out of accumulated OCI and provides a summary of the FASB's take two on comprehensive income.
Highlighted among the concerns were comments addressing the cost and feasibility of tracking and presenting items reclassified out of OCI, which are initially capitalized and later amortized to the income statement. As a result of the comments raised by the test-screening, the FASB was tasked with developing a standard to increase users’ understanding of changes in OCI, without forcing preparers to crowd the face of the financial statements or potentially distract users by overemphasizing OCI. In short, the FASB needed to portray OCI with depth and clarity, but without drama. The FASB’s new standard endeavors to provide its audience with greater transparency into how changes in accumulated OCI relate to amounts in net income. While, current standards require disclosure of only the net fluctuation in each component of OCI, this update will require disclosure of how much of the change by component pertains to reclassifications out of OCI into components of net income. The disclosures will also spotlight which income statement line items are affected by these reclassifications and by how much.
Audiences preparing for this standard’s debut should note that ASU 2013-02 is effective prospectively and applies to both public and non-public companies. Public companies must comply with ASU 2013-12 for fiscal years and interim periods within those years beginning after December 15, 2012. Non-public companies are permitted to adopt the standard early, but must be compliant for fiscal periods beginning after December 15, 2013.
The requirements of ASU 2013-12 can be met by one of two methods. The first method would be presentation on the face of the financial statement, alongside net income. To address the critics concerns, this method may only be used by entities whose OCI reclassifications are all directly into net income. In other words, an entity with even one capitalized reclassification may not present any of its reclassifications on the face of the income statement. To comply with this presentation method, an entity must present parenthetically, by component of OCI, the effect of reclassifications on each applicable income statement line item. On the income tax benefit or expense line item, preparers must parenthetically present the aggregate tax effect of all of the reclassifications.
For those who don’t welcome an OCI cameo on the income statement itself, the second presentation option is to include a separate disclosure in the notes to the financial statements. This note would present the significant amounts reclassified by component of OCI and the income statement line item affected by the reclassification. The disclosure can be reported either before-tax or net-of-tax. If the full amount of a particular reclassification is not required to be transferred to a net income line item in that same reporting period, the OCI note should cross-reference to the footnote in which further information about the effect of the reclassification is disclosed. For instance, amounts reclassified out of OCI due to the amortization of a defined benefit pension plan are not required to be reclassified to net income in their entirety at once, but rather are reclassified to net periodic pension cost. In this example, the OCI footnote should make reference to the relevant pension cost footnote disclosure.
Examples of both of the disclosures described above can be found within ASU 2013-02 on FASB’s website(http://www.fasb.org). As a result of ASU 2013-02’s flexibility with respect to these two presentation methods and its prospective application, audiences will find this requirement significantly easier to implement than the its prequel.
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About the Authors:
Josh Partlow, CPA is a Partner and Kia Bickel, CPA is a Senior Associate with Johnson Lambert. Johnson Lambert is North America’s largest insurance-focused audit and tax firm, and has served the insurance industry for more than 25 years. Since our inception in 1986, we have focused on distinct industry niches where we have distinguished ourselves as technical experts with a unique depth of experience specifically relevant to our clients’ needs. We serve a national and selectively international client base including over 400 insurance and insurance services entities from our offices in Florida, Georgia, Illinois, New Jersey, North Carolina, South Carolina, Vermont and Virginia. We also service associations and other non-profit organizations as well as employee benefit plans. For more information about Johnson Lambert LLP, visit http://www.johnsonlambert.com.