Review of Accounting Studies, 4, 163–167 (1999)
1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Discussion of “On Transitory Earnings”
WILLIAM H. BEAVER
I wish to thank the editors of the Review of Accounting Studies for the opportunity to discuss
Jim Ohlson’s paper. I am always informed by his analyses and this paper is no exception.
I will attempt to articulate where I see this analysis ﬁtting into a broader literature and to
identify what I see as the important lessons. My remarks will discuss the prior history of
transitory earnings, major examples of empirical research where transitory earnings is a
key issue, how this analysis compares with prior models of Ohlson, key implications of the
analysis, and opportunities for future research.
History of Transitory Earnings
The concept of transitory earnings has a rich history in ﬁnancial statement analysis. In their
classic 1934 treatise, Graham and Dodd state in the chapter “Signiﬁcance of the Earnings
The concept of earning power has a deﬁnite and important place in investment
theory. It combines a history of actual earnings, shown over a period of years,
with a reasonable expectation that these will be approximated in the future, unless
extraordinary conditions supervene. (429, emphasis added)
After highlighting the importance of extraordinary events, they then proceed to describe
the variety of ways to extrapolate from past earnings history to expectations about future
earnings and toillustrate the importance ofremovingunusual items from the earnings record
that are not likely to be present in future earnings. We can see this philosophy reﬂected in
analysts’ reports that remove special items when displaying the earnings history of a ﬁrm.
The Financial Accounting Standards Board (FASB) has long been concerned with the
concept of comprehensive income and the proper treatment and display of certain income
items, such as gains and losses on investment securities and gains and losses on foreign
currency translation. In SFAS No. 130, the FASB states:
Some users of ﬁnancial statement information expressed concerns about the in-
creasing number of comprehensive income items that bypass the income statement.
Currently, an enterprise is required to report the accumulated balance of those items
in equity. However, because of the considerable diversity as to how those balances
and changes in them are present in ﬁnancial statement, some of those users urged
to Board to implement the concept of comprehensive income ...