Titan Networking became a public company through an IPO (initial public offering) two weeks ago. You are looking forward to the challenges of being assistant controller for a publicly-owned corporation. One such challenge came in the form of a memo in this morning’s in-box. “ We need to start reporting Comprehensive income in our financials,” the message from your boss said. “Do some research on that, will you? That concept didn’t exist when I went to school.” In response, you sought out the financial statements of Cisco Systems, the networking industry leader. The following is an excerpt from a disclosure note from Cisco’s 2004 annual report:
COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of tax, are as follows (in millions):
|
Years Ended |
July 31, 2004 |
July 26, 2003 |
July 27, 2002 |
| Net income (loss) | $4,401 | $3,578 | $1,893 |
| Other comprehensive income (loss): | |||
| Change in net unrealized gains and losses on investments | |||
| net of tax benefit (expense) of $42, $(150), and $9 | |||
| in fiscal 2004, 2003, and 2002, respectively | (77) | 352 | 224 |
|
Other |
19
|
29
|
24
|
| Other comprehensive income before minority interest | 4,443 | 3,959 | 2,141 |
| Less: Minority interest | (84) | --- | --- |
|
Total |
$4,259 | $3,959 | $2,141 |
Note: Minority interest represents a venture subsidiary's ownership share of a venture fund owned jointly by Cisco and Softbank Corporation. Softbank’s share of the change in unrealized gains of the venture fund (part of the net unrealized gains and losses on investments) was $84 million. This amount represents a reduction in Cisco's other comprehensive income for 2004 as well as in the accumulated other comprehensive income in Cisco's balance sheet.
Analysis
Use EdgarScan or another method to locate the financial statements of Cisco. Search the 2004 annual report for information about how Cisco accounts for comprehensive income. What does Cisco report in its balance sheet regarding comprehensive income?
What is comprehensive income? How does it differ from net income? Where is it reported in a balance sheet? Why does Cisco's 2004 balance sheet amount differ from the 2004 amount reported in the disclosure note? Explain.
Consult the FASB pronouncements. What authoritative literature does Cisco rely on when reporting comprehensive income? When did the requirement become effective?
Cisco reported the schedule of Comprehensive Income (Loss) shown above in a disclosure note. What are the two alternative locations within the financial statements where Cisco could have chosen to report this information instead?
The primary component of Other comprehensive income for Cisco is "Change in net unrealized gains on investments.” What does this mean? From the information Cisco's financial statements provide, determine how the company calculated the $212 million accumulated other comprehensive income in fiscal 2004.
What might be possible causes for the "Other" component of Cisco's Other comprehensive income?
Suppose Cisco had sold an investment during 2004 at a gain and that the gain had been recognized in other comprehensive income as an unrealized gain in 2003, while the security was held for sale according to SFAS No. 115. To avoid double-counting the gain in total comprehensive income (unrealized gain in 2003 and realized gain in 2004), how should Cisco treat the "reclassification adjustment" in 2004? Cite the specific authoritative guidance (Statement and paragraph numbers) that requires this adjustment.
Here is the solution to this case.