ACCA F7 (INT) Financial Reporting - Study text - 2010

Подождите немного. Документ загружается.

Chapter 5: The financial statements of a single company

Structure and content of the statement of comprehensive income

 A single statement or two statements

 Information to be presented on the face of the statement of comprehensive

income

 Analysis of expenses

 Analysis of expenses by their nature

 Analysis of expenses by their function

 Preparing a statement of financial position or statement of comprehensive

income

3 Structure and content of the statement of

comprehensive income

3.1 A single statement or two statements

IAS1 requires an entity to present all items of income and expense during a period

in either:

 a single statement of comprehensive income, or

 in two statements, an income statement followed by a statement of

comprehensive income: these two separate statements should include all the

information that would otherwise be included in the single statement of

comprehensive income.

For the purpose of explanation, it might be useful to think of the presentation of the

information in two separate statements:

 An income statement shows the components of profit or loss. It begins with

‘Revenue’ and ends with ‘Profit (or Loss)’ for the period after tax.

 If the income statement is shown separately, the statement of comprehensive

income shows ‘other comprehensive income’ during the period, including any

related tax.

(A single statement of comprehensive income simply combines these two

statements into one.

If an examination question asks you to prepare a statement of comprehensive

income, you should prepare a single statement, combining the income statement

elements and the other comprehensive income.

If an examination question asks you to prepare an income statement, this will

mean the statement from ‘revenue’ to ‘profit or loss for the year’.)

Paper F7: Financial reporting (International)

86 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Examples of other comprehensive income

There are several examples of ‘other comprehensive income’ but two that might be

relevant for your examination are:

 changes in the revaluation surplus (revaluation reserve) on the revaluation of a

non-current asset, in accordance with IAS16 and IAS38

 gains or losses on the revaluation of financial assets classified as ‘available for

sale’.

Definition of total comprehensive income

Total comprehensive income during a period is the sum of:

 the profit or loss for the period and

 other comprehensive income.

3.2 Information to be presented on the face of the statement of

comprehensive income

As a minimum, IAS1 requires that the statement of comprehensive income should

include line items showing the following amounts for the financial period:

(a) revenue

(b) finance costs (for example, interest costs)

‘equity method’

(d) tax expense

(e) an amount related to the profit or loss from discontinued operations (IFRS5)

(f) profit or loss

(g) each component of ‘other comprehensive income’, excluding amounts in (h)

(h) share of the ‘other comprehensive income’ of associates (and joint ventures

accounted for by the ‘equity method’)

(i) total comprehensive income.

For a consolidated statement of comprehensive income for a group of companies,

the following items should also be shown on the face of the statement as allocations

of profit or income in the period:

 profit or loss for the period attributable to non-controlling interests (also called

minority interests)

 profit or loss attributable to the owners (equity holders) of the parent entity

 total comprehensive income attributable to non-controlling interests

 total comprehensive income attributable to the owners of the parent entity.

When an entity presents an income statement separately from the statement of

comprehensive income, the income statement must include the items listed above

as (a) to (f) (and also, in a consolidated income statement for a group of companies,

Chapter 5: The financial statements of a single company

the profit or loss attributable to non-controlling interests and the owners of the

parent company).

Additional line items should be presented on the face of the income statement or

the statement of comprehensive income when it is relevant to an understanding of

the entity’s financial performance.

Discontinued operations are operations carried on by the entity at the beginning of

the year, but discontinued at some time during the year. The profit or loss from the

discontinued operation includes both:

 the profit or loss (after tax) that it made in the year up to the time of

discontinuation, plus

 the gain or loss (after tax) on the disposal of the assets in the discontinued

operation.

Recognition in profit or loss

With the introduction of a requirement to present a statement of comprehensive

income, it is important to distinguish between:

 items that should be included in the section of the statement between ‘revenue’

and ‘profit’, and

 other comprehensive income.

A useful way of making this distinction is that if an item is included in the statement

of comprehensive income, between ‘revenue’ and ‘profit’, the item is ‘recognised

within profit or loss’. This term is now used in accounting standards.

Reclassification adjustments

A reclassification adjustment occurs when an item that has been recognised as

‘other comprehensive income’ in the statement of comprehensive income is

subsequently re-classified as profit or loss.

 For example, a company might hold some ‘available for sale’ shares in another

company as an investment, which it re-values upwards by $500,000 in one year.

If the shares are still held by the company at the year-end, the unrealised gain

would be reported as ‘other comprehensive income’. If the shares are then

disposed of in the next year for a gain of $500,000, the previously unrealised gain

in other comprehensive income becomes a realised gain in profit or loss.

 When this happens, a reclassification adjustment is required. The realised gain is

reported as part of profit for the period. However to avoid double-counting the

income, the previously reported unrealised gain in other comprehensive income

must be reversed, and deducted from other comprehensive income.

Extraordinary items are not permitted

IAS1 states that there should be no extraordinary items of income or expense in the

statement of comprehensive income or the income statement (if presented

Paper F7: Financial reporting (International)

88 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

separately), either on the face of the statement itself or in a note to the financial

statements.

(Note: An ‘extraordinary item’ is not the same as a ‘material item’ of income or

expense, which should be disclosed – see below.)

Information to be shown on the face of the statement of comprehensive

income (or the income statement, if separate) or in the notes

The following information may be shown either on the face of the statement of

comprehensive income or in a note to the financial statements:

 material items of income and expense

 an analysis of expenses, providing either:

− expenses analysed by their nature, or

− expenses analysed by the function that has incurred them.

IAS1 encourages entities to show this analysis of expenses on the face of the

statement of comprehensive income (or income statement), rather than in a note to

the accounts.

Material items that might be disclosed separately include:

 a write-down of inventories from cost to net realisable value, or a write-down of

items of property, plant and equipment to recoverable amount

 the cost of a restructuring of activities

 disposals of items of property, plant and equipment

 discontinued operations

 litigation settlements

 a reversal of a provision.

3.3 Analysis of expenses

Expenses should be analysed. Either of two methods of analysis may be used:

 according to the nature of expenses

 according to the function of the expense.

Entities should choose the method that provides the more relevant or reliable

information.

3.4 Analysis of expenses by their nature

When expenses are analysed according to their nature, the categories of expenses

will vary according to the nature of the business.

In a manufacturing business, expenses would probably be classified as:

 raw materials and consumables used

Chapter 5: The financial statements of a single company

 staff costs (‘employee benefits costs’)

 depreciation.

Items of expense that on their own are immaterial are presented as ‘other expenses’.

There will also be an adjustment for the increase or decrease in inventories of

finished goods and work-in-progress during the period.

Other entities (non-manufacturing entities) may present other expenses that are

material to their business.

An example of an income statement, showing expenses by their nature, is shown

below, with illustrative figures included.



$m $m

Revenue7,200

Otherincome300



–

–––––

7,500

Changesininventoriesoffinishedgoodsand

work‐in‐progress(reduction=expense,increase=

negativeexpense)

90

Rawmaterialsandconsumablesused 1,200

Staffcosts(employeebenefitsexpense) 2,000

Depreciationandamortisationexpense 1,000

Otherexpenses 2,300

Financecosts(interestcost) 60

6,650



–

–––––

Profitbeforetax850

Incometaxexpense250



–

–––––

Profitfortheperiod600



–

–––––

3.5 Analysis of expenses by their function

When expenses are analysed according to their function, the functions are

commonly ‘cost of sales’, ‘distribution costs’, ‘administrative expenses’ and ‘other

expenses’. This method of analysis is also called the ‘cost of sales method’.

In practice, most entities use this method.

An example of an income statement, showing expenses by function (cost of sales,

distribution costs, administrative expenses) is as follows.

Paper F7: Financial reporting (International)

90 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

ABCD Entity

Income statement for the year ended 31 December 20XX

Revenue 7,200

Cost of sales (2,700)

–

–––––

Gross profit 4,500

Other income 300

Distribution costs (2,100)

Administrative expenses (1,400)

Other expenses (390)

Finance costs (60)

–

–––––

Profit before tax 850

Income tax expense (250)

–

–––––

Profit for the period 600

–

–––––

This method of presentation has some disadvantages:

 The classification of expenses as cost of sales, distribution costs or administrative

expenses is often based on the judgement of management. This is because

management decide how to allocate costs to each function, and how to share

joint costs between two or more functions.

 This method of analysis does not show the amount of some important expenses.

IAS1 therefore requires that if the analysis by function method is used, additional

information about expenses must be included in the notes to the accounts, showing:

 depreciation and amortisation expense, and

 employee benefits expense (staff costs).

Exercise 1

The following is an extract from the accounts of Entity Red for the year to 30 June

20X5, after the year-end adjustments had been made:

Debit

Credit

$000

Cost of sales 6,214

Distribution costs 3,693

Revenue

14,823

Other expenses 248

Administrative expenses 3,901

Other income

Required

Show the first part of an income statement of the entity using the ‘cost of sales’

analysis method.

Chapter 5: The financial statements of a single company

Exercise 2

The following is an alternative method of presenting the accounts of Entity Red.

$000

Increase in inventories of finished goods and work-in-progress 86

Revenue 14,823

Raw materials and consumables 5,565

Depreciation 1,533

Other income 22

Staff costs 4,926

Other operating expenses 2,118

Required

Show an income statement of the entity using the ‘nature of expenditure’ method,

down to the operating profit level.

Example: statement of comprehensive income of an individual entity

IAS1 does not specify what the exact format of the statement of comprehensive

income should be, but the example below is based on a suggested presentation

included in the Guidance to implementing IAS1. In this example, expenses are

classified by function. Illustrative figures are included.

XYZEntity

Statementofcomprehensiveincomefortheyearended31December20XX

 $000

Revenue

678

Costofsales 250



–

–––

Grossprofit 428

Otherincome 12

Distributioncosts (98)

Administrativeexpenses (111)

Otherexpenses (18)

Financecosts (24)

Shareofprofitofassociate 32



–

–––

Profitbeforetax

271

Taxation (50)



–

–––

Profitfortheyearfromcontinuingoperations 221

Lossfortheyearfromdiscontinuedoperations (15)



–

–––

PROFITFORTHEYEAR

206



–

–––

Othercomprehensiveincome



Gainsonpropertyrevaluation 24

Shareofothercomprehensiveincomeofassociate 5

Availableforsalefinancialassets 17



–

–––

Othercomprehensiveincomefortheyear(netoftax) 46



–

–––

TOTALCOMPREHENSIVEINCOMEFORTHEYEAR

252

Paper F7: Financial reporting (International)

92 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

3.7 Preparing a statement of financial position or statement of

comprehensive income

If you are required in your examination to prepare a statement of financial position,

a statement of comprehensive income or an income statement in a format suitable

for publication in accordance with IAS1, you need to know the appropriate format.

If you are preparing an income statement in the ‘cost of sales’ or ‘expenses by

function’ method, you might need to separate total costs for items such as employee

benefits costs and depreciation charges into cost of sales, distribution costs and

administrative charges. The basis for separating these costs between the functions

would be given in the question.

It might be useful to construct a workings table for analysing the functional costs.

For example:

Total cost

Cost of sales

Distribution

costs

Administrative

expenses

$ $ $ $

Staff costs

Depreciation

Raw materials

Other costs

Chapter 5: The financial statements of a single company

Statement of changes in equity (SOCIE)

 The contents of a statement of changes in equity

 Retrospective adjustments

4 Statement of changes in equity (SOCIE)

4.1 The contents of a statement of changes in equity

A set of financial statements must include a statement of changes in equity (SOCIE).

For each component of equity, a SOCIE shows the amount at the beginning of the

period for that component of equity, changes during the period, and its amount at

the end of the period.

Components of equity include:

 share capital

 share premium

 retained earnings

 revaluation reserve.

In a SOCIE for a group of companies, the amounts attributable to owners of the

parent entity and the amounts attributable to the minority interest (non-controlling

interest) should be shown separately.

For each component of equity, the SOCIE should show changes resulting from:

 profit or loss for the period

 each item of other comprehensive income (e.g. a property revaluation)

 ‘transactions with owners in their capacity as owners’.

Transactions with owners in their capacity as owners include:

 new issues of shares

 payments of dividends

 repurchases and cancellation of its own shares by the company.

4.2 Retrospective adjustments

IAS8 requires that when an entity introduces a change of accounting policy or re-

states amounts in the financial statements to correct errors, the adjustments should

be made retrospectively (to the extent that this is practicable).

Retrospective adjustments result in changes in the reported amount of an equity

component, usually retained earnings. Retrospective adjustments and re-statements

Paper F7: Financial reporting (International)

are not changes in equity, but they are adjustments to the opening balance of

retained earnings (or other component of equity).

Where retrospective adjustments are made, the SOCIE must show for each

component of equity (usually retained earnings) the effect of the retrospective

adjustment. This is shown first, as an adjustment to the opening balance, before the

changes in equity are reported.

Example: statement of changes in equity

An example of a statement of changes in equity for a single entity is shown below.

PQR Entity

Statement of changes in equity for the year ended 31 December 20X9

capital

premium

Revaluation

reserve

Retained

earnings

Total

$000

Balance at 31

December 20X8

200

510

860

Change in

accounting policy

(60)

–

–––

–

–––

–

–––

–

–––

–

–––

Re-stated balance 200

450

800

–

–––

–

–––

–

–––

–

–––

–

–––

Changes in equity

for 20X9

Issue of share capital 80

100

180

Dividend payments

(90)

Profit for the year

155

Other

comprehensive

income for the year

–

–––

–

–––

–

–––

–

–––

–

Balance at 31

December 20X9

280

170

515

1,057

–

–––

–

–––

–

–––

––

–

––

–

Notes

The SOCIE shows the changes during the year for each component of equity, having

first made a retrospective adjustment for the effects of a change in accounting

policy.

Changes in each component of equity are shown, with separate disclosure of

changes resulting from profit or loss, other comprehensive income, and

‘transactions with owners in their capacity as owners’ – new share issues and

dividend payments are shown here.

The SOCIE therefore reconciles, for each component of equity, the balance at the

beginning and end of the period.

ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing

Подождите немного. Документ загружается.