DOES THE COMPREHENSIVE INCOME MATRIX MAKE UNSOPHISTICATED USERS OVEREMPHASISE FAIR VALUE INCOME

This paper reports on an experiment that was conducted to investigate the degree of significance that unsophisticated users attach to fair value income (FVI) for valuation-relevant tasks, given that the matrix of comprehensive income applies. The prominent display of FVI therein is at odds with the limited significance of FVI for valuation. Specifically for unsophisticated users, who rely on financial reports to signal the importance and meaning of financial items, a concern exists that FVI might be overemphasised. This paper investigates this issue and formulates and tests two suggestions, intended to keep unsophisticated users from overemphasising FVI: 1) education about the irrelevance of FVI for valuation; and 2) a two-column matrix that does not display a separate column for total comprehensive income. Participants were provided with the financial reports of two fictitious manufacturing companies, and performed valuation-relevant tasks: income prediction, risk assessment, and management evaluation. The financial reports were devised in such a way that they allowed to infer the significance participants attached to FVI. For income prediction and risk assessments, participants did not attach significance to FVI. However, for management evaluation, FVI was taken into account, however this occurred to a lesser extent when total comprehensive income was not displayed.