The relationship between company risk and comprehensive income volatility

Master's Thesis in Accounting

Decision making is one of the issues that humans have always faced. Decision making requires information. Managers and investors are among the people who always face this problem. Among the various information that managers and decision makers need to make their decisions, financial and accounting information has a special place. Accounting is one of the service activities whose role is to provide qualitative and financial information about institutions in order to use that information in economic decisions. Financial statements are a means by which financial information is grouped and accumulated in accounting networks, and is made available to actual users (mainly owners of institutions and creditors) at certain times during financial reports. The results of economic activities of institutions are reported through accounting methods, collection, analysis, recording, classification, summarization and then in financial statements. The main purpose of financial reporting is to express the financial status and performance of the business unit for people outside the organization to help them make financial decisions. The main tool for transferring information to the aforementioned persons is the basic financial statements, accompanying notes and supplementary reports, which are considered the final product of the accounting and financial reporting process. Since the users of these reports did not play a role in their preparation, government assemblies and scientific institutions and accounting professions in each country oblige the reporting units to comply with the principles and standards so that the users can use this type of information and reports for decision-making with full confidence. Therefore, the accounting standards in each country were developed by the standard-setting authorities in response to this need.

But today, the development of transportation and communication has brought different parts of the world closer in a way that the term "global village[1]" is applied to. Since the end of World War II, there has been such a growth in international trade and other forms of mutual dependence between countries that it has had a significant impact on various aspects of human life. In business, certain situations have emerged that have brought to mind the uniformity of accounting standards in different countries.

Uniformity refers to the degree of coordination or similarity between different sets of national accounting standards and the methods and form of financial reporting (Shabahang, 2011). In general, the existence of different accounting methods for the same type of transactions and events has faced many problems in the analysis and comparison of financial statements. Therefore, a major reason and logic for harmonization is that it increases the comparability of financial statements of companies and makes it easier to use it across the countries of the world. This issue shows why there is a growing support for the development of international accounting standards.

However, the effort to harmonize accounting standards at the international level will be successful when there is the necessary certainty regarding its acceptance and implementation. This certainty is only possible by knowing the international accounting standards and the effect of their adoption on the domestic stock market. Therefore, before accepting international accounting standards, it is necessary to carefully study them and determine their differences with national accounting standards. Certainly, by determining the existing differences between national and international accounting standards, the act of harmonizing standards will be done with more knowledge and speed.

However, among various accounting standards, the standard related to the method of "comprehensive profit reporting" has a special place because profit is considered one of the most important criteria for evaluating the company's performance and management and investors' decisions. The reason for emphasizing the comprehensive profit is that it includes all the non-proprietary changes in the rights of the capital owners during a period and therefore shows the performance of the company better than other profit measurement methods. International Accounting Standard No. 1 entitled "How to present financial statements" and Iranian Accounting Standard No. 6 entitled "Financial Performance Report" are the standards that address this issue.

It should also be noted that the term comprehensive profit is used to describe all its components, i.e. net profit and other components of comprehensive profit.. Other components of comprehensive income refers to income, expenses, profits and losses that are excluded from net profit due to their temporary and unusual nature and are shown under a separate section called other components of comprehensive income in the statement of financial performance (IAS [2] 1, paragraph 7). But the point that should be noted is that in relation to other components of comprehensive income, there is a question that needs to be answered before preparing financial statements, and that is, in which part of the financial statements should these items be reported? According to IAS1, to present these items, companies are allowed to use both of the following methods, but this standard encourages companies to use the first method and considers it superior.

Reporting Other comprehensive profit components at the end of the profit (loss) statement of the period (the approach of presenting a single financial performance statement),

Reporting the other comprehensive profit components in a separate financial performance statement (the approach of presenting two separate financial performance statements).

In Iran, only the approach of presenting two separate financial performance statements is accepted. Comprehensive profit reporting in a single operating statement is a controversial issue. Opponents of this reporting approach believe that the presentation of "other components of comprehensive income" along with the main business results, misleads users of financial statements and leads to significant misinterpretations of a company's performance (IASB [3], 2009, paragraph 40). In fact, the main concern of the opponents of comprehensive profit reporting in a single operating statement is about the effects that these misrepresentations can have on the company's risk and, as a result, on the stock price. Therefore, with the knowledge that profit fluctuations are an element of the company's risk that causes its share price to decrease, and with the motivation of evaluating comments against comprehensive profit reporting in a single performance statement and with the desire to help facilitate the process of coordinating the method of comprehensive profit reporting in Iran and at the international level, we investigate the relationship between company risk and comprehensive profit fluctuations. It is one of the issues that humans have always faced. Decision making requires information. Among the various information that managers and decision makers need to make their decisions, financial and accounting information has a special place. The profit statement (loss) is one of the basic financial statements that shows the financial performance of an accounting entity (reporting entity) during the financial period and is considered as a basis for investment decisions and other decisions.

Measuring the financial period profit of a business unit has always been one of the challenges faced by the compilers of accounting standards and the main concern of users of accounting information. In the last two decades, innovations in financial management have emerged in the field of complex business transactions to create value for companies. But the compilers of accounting standards have not kept up with these developments. In addition, in financial statements based on historical values, due to the fact that it is allowed that many items that are potentially related to value are not reflected in the profit (loss) statement and are directly reflected in the equity section of the balance sheet or are not even measured and identified, the financial statements have less transparency and have always been criticized. Failure to report important changes in the value of the company in the profit (loss) statement and its direct reflection in the equity section reduces the quality of profit and harms its role as an important input in valuation. In this regard, managers are encouraged to manage profits and make users of financial information face misleading inferences (Watts and Zimmerman [4], 1986). The compilers of accounting standards in many countries in order to respond to these criticisms and the need to increase the level of transparency and relevance of financial statements to the value of the company have taken steps towards accepting the approach of comprehensive profit (comprehensive profit).

In 1978, FASB [5] in statement number one entitled "Financial reporting objectives of business entities" used the term comprehensive profit for the concept of earnings (profit before deducting the accumulated effects of changes in accounting principles). This term was officially defined for the first time in FASB Concepts Statement No. 3 entitled "Elements of Financial Statements of Business Entities" which was later replaced by FASB Concepts Statement No. 6 with the title "Elements of Financial Statements".