The Effect of Corporate Governance Mechanism on Comprehensive Income Reporting: A Proposed Model

Abstract

International Accounting Standard Board (IASB) and Financial Accounting Standards Board (FASB) require companies to mark-to-market certain financial assets and liabilities and to recognize related gains and losses as other comprehensive income. When an active market (quoted prices) for other comprehensive income items does not exist, valuation techniques that employ observable or unobservable input are used. Valuation techniques use in determining unobservable input and perhaps observable input requires management assumptions and judgments. Users’ concerns about managerial discretions in establishing fair value gains and losses on certain assets and liabilities relating to comprehensive income may pose questionable reliability that subsequently affect investors’ pricing of fair value gains and losses reported as dirty surplus flows. On the assumption of valuation theory and agency theory, this paper offers a theoretical explanation on the implication of corporate governance mechanisms (ameliorate reliability issues) on investors’ pricing of comprehensive income and other comprehensive income.