Over the years the Financial Accounting Standards Board created a problem by allowing a variety of items to bypass the income statement, a result of te FASB's bias toward the balance sheet. In other words, FASB focused on reporting assets and liabilities of the business enterprise, but did not worry too much about the impact on the income statement. Included within the comprehensive income statement were foreign currency translation adjustments under the all-current method, holding gains and losses for investments under the available-for-sale category, gains and losses on derivatives if they are considered cash flow hedges, and losses if necessary to establish a minimum pension liability. If these things make sense to include on the balance sheet, surely their income statement effects are meaningful as well.

The board sometimes justified this approach by claiming that these items had less reliability than other events and transactions included in the income statement. But, this argument loses water in today's world. Surely if the fair value changes recently booked in the accounts of financial institutions are reliable, then these other measurements are equally reliable. This follows because the fair value changes recently recognized are the result not of changes in market values but in changes in model estimates.

Consider last year's 10-K for Merrill Lynch. The firm did not have a particularly good year, as witnessed by its 7.7 billion dollar loss. If the items in other comprehensive income are incorporated as well, the loss grows to almost 9 billion dollars.

The foreign currently translation loss, net of taxes, is a mere 11 million dollar loss. Nonetheless, it is a real economic loss to shareholders and should be recognized as such.

Merrill Lynch had losses on its investment securities considered available for sale of 2.5 billion dollars. Again, this is net of income taxes. As these securities reflect certain real changes of value, they too would be better displayed on the income statement.

Merrill Lynch also shows deferred net gains of 81 million dollars on its cash flow hedges. Similarly, it would be more informative to users if they are reported in income.

Finally, Merrill Lynch shows 240 million dollars of net actuarial gains and prior service costs. They too signify real economic flows and, therefore, they belong part of earnings.

In 2007 we have reported losses of $7.7 billion versus comprehensive losses of $8.9 billion. In 2006 the two measures are the same, revealing an income of $7.5 billion. In 2005, however, the two measures have some differences as in 2007: net income is $5.1 billion while comprehensive net income is $4.7 billion.

So why doesn't FASB scrap the comprehensive income statement? Surely the reliability of these items is as good as the reliability of the mark-to-model numbers that have recently hit the financials of corporate America. The more likely real reason for the comprehensive income concept is that it is a bargaining chip when creating new accounting policy. FASB gets what it wants, at least to some extent, on the balance sheet; in return, the compromise allows reporting entities not to announce lower incomes (or bigger losses) and it allows them to have less volatility in their annual earnings.

Creditors and investors would be better served with a more accurate income statement. Let's renounce the reliability argument and show some political muscle. Scrap the notion of comprehensive income and strengthen the income statement.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.

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J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals. He also has edited Accounting Ethics, a four-volume set that explores ethical thought in accounting since the Great Depression and across several countries. He is the co-author of a monograph, Fair Value Measurements: Valuation Principles and Auditing Techniques (with Mark Zyla, Managing Director, Acuitas, Inc.) to be published by BNA.