ACCN08B. Module 3 - Statement of Comprehensive Income

MODULE 3
Intermediate Accounting 3

SESSION TOPIC 3: Statement of Profit or Loss and Other Comprehensive Income

LEARNING OUTCOMES:
The following specific learning objectives are expected to be realized at the end of the session:
1. Understand the nature and usefulness of the income statement
2. Understand the concept of comprehensive income, profit and loss and other comprehensive
income.
3. Identify the components of other comprehensive income
4. Prepare the income statement following the functional and natural presentation

KEY POINTS

Statement of Comprehensive Income Revenue and Expenses
Elements of Comprehensive Income Other Income

CORE CONTENT
Introduction:
This module covers the discussion of statement of comprehensive income,
its concepts, elements, and the requirements for the presentation of the statement of comprehensive
income.

IN-TEXT ACTIVITY
Definition
The Statement of Comprehensive Income provides a summary of a company’s net assets over a given
period of time. In other words, the statement highlights the adjustments on equity during a given
timeframe. A statement of comprehensive income contains two main things: the net income and other
comprehensive income (OCI). The net income is the result obtained by preparing an income statement.
On the other hand, OCI consists of all the other items that are excluded from the income statement.

Profit or loss is defined as "the total of income less expenses, excluding the components of other
comprehensive income". Other comprehensive income is defined as comprising "items of income and
expense (including reclassification adjustments) that are not recognized in profit or loss as required or
permitted by other PFRSs". Total comprehensive income is defined as "the change in equity during a
period resulting from transactions and other events, other than those changes resulting from transactions
with owners in their capacity as owners". [PAS 1.7]
All items of income and expense recognized in a period must be included in profit or loss unless a
Standard or an Interpretation requires otherwise. [PAS 1.88] Some PFRSs require or permit that some
components to be excluded from profit or loss and instead to be included in other comprehensive income.
Examples of items recognized outside of profit or loss

1. Changes in revaluation surplus where the revaluation method is used under PAS 16 Property,
Plant and Equipment, and PAS 38 Intangible Assets.
2. Remeasurements of a net defined liability or asset recognized in accordance with PAS19R
Employee Benefits.
3. Gains and losses on remeasuring available-for-sale financial assets in accordance with PAS 39
Financial Instruments: Recognition and Measurement.
4. The effective portion of gains and losses on hedging instruments in a cash flow hedge under PAS
39 or PFRS 9 Financial Instruments.
5. Gains and losses on remeasuring an investment in equity instruments where the entity has
elected to present them in other comprehensive income in accordance with PFRS 9.
6. The effects of changes in the credit risk of a financial liability designated as at fair value through
profit and loss under PFRS 9.
In addition, PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the
correction of errors and the effect of changes in accounting policies to be recognized outside profit or loss
for the current period. [PAS 1.89]
Uses of a Statement of Comprehensive Income

1. Detailed revenue information. The primary purpose of an income statement is to provide
information on how a company is raising its revenue and the costs incurred in doing so. The
income statement is very thorough in highlighting these details. Not only does it explain the cost
of goods sold, which relate to the operating activities, but it also includes other unrelated costs
such as taxes. Similarly, the income statement captures other sources of revenue which are not
associated with the main operations of a company. This entails items such as the accrued
interest from business investments.
2. Analysis tool for investors. The SCI, as well as the income statement, are financial reports that
investors are interested in evaluating before they decide to invest in a company. The statements
show the earnings per share or the net profit and how it’s distributed across the outstanding
shares. The higher the earnings for each share, the more profitable it is to invest in that business.
Components of Statement of Comprehensive Income

 Revenue – It is the income generated from normal business operations and includes discounts
and deductions for returned merchandise. It is the top line or gross income figure from which costs
are subtracted to determine net income.
 Expenses – It is the cost of operations that a company incurs to generate revenue.
 Other Income – It is the income that does not come from a company's main business, such as
interest.
 Net Income – It reflects the total residual income that remains after accounting for all cash flows,
both positive and negative. In other words, from revenue, which is called the top-line number, all
income, expenses, and costs are deducted to arrive at net income.

Choice in presentation and basic requirements
An entity has a choice of presenting:
1. a single statement of profit or loss and other comprehensive income, with profit or loss and other
comprehensive income presented in two sections, or
2. two statements:
a. a separate statement of profit or loss
b. a statement of comprehensive income, immediately following the statement of profit or
loss and beginning with profit or loss. [PAS 1.10A]
The statement(s) must present: [PAS 1.81A]

 profit or loss
 total comprehensive income
 comprehensive income for the period
 an allocation of profit or loss and comprehensive income for the period between non-controlling
interests and owners of the parent.
Profit or loss section or statement

The following minimum line items must be presented in the profit or loss section (or separate statement of
profit or loss, if presented): [PAS 1.82-82A]
 revenue
 gains and losses from the derecognition of financial assets measured at amortized cost
 finance costs
 share of the profit or loss of associates and joint ventures accounted for using the equity method
 certain gains or losses associated with the reclassification of financial assets tax expense
 a single amount for the total of discontinued items
Expenses recognized in profit or loss should be analyzed either by nature (raw materials, staffing costs,
depreciation, etc.) or by function (cost of sales, selling, administrative, etc.). [PAS 1.99] If an entity
categorizes by function, then additional information on the nature of expenses – at a minimum
depreciation, amortization and employee benefits expense – must be disclosed. [PAS 1.104]

Other comprehensive income section
The other comprehensive income section is required to present line items which are classified by their
nature and grouped between those items that will or will not be reclassified to profit and loss in
subsequent periods. [PAS 1.82A]
An entity's share of OCI of equity-accounted associates and joint ventures is presented in aggregate as
single line items based on whether or not it will subsequently be reclassified to profit or loss. [PAS 1.82A]
When an entity presents subtotals, those subtotals shall be comprised of line items made up of amounts
recognized and measured in accordance with PFRS; be presented and labelled in a clear and
understandable manner; be consistent from period to period; not be displayed with more prominence than
the required subtotals and totals; and reconciled with the subtotals or totals required in PFRS. [PAS
1.85A-85B]

Other requirements
Additional line items may be needed to fairly present the entity's results of operations. [PAS 1.85]
Items cannot be presented as 'extraordinary items' in the financial statements or in the notes. [PAS 1.87]
Certain items must be disclosed separately either in the statement of comprehensive income or in the
notes, if material, including: [PAS 1.98]
 write-downs of inventories to net realizable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs
 restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring
 disposals of items of property, plant, and equipment
 disposal of investments
 discontinuing operations
 litigation settlements
 other reversals of provisions
FUNCTIONAL-FORM PRESENTATION OF INCOME STATEMENT
Net Sales Pxxx

Cost of Sales _xxx
Gross Profit Pxxx
Other Income xxx
Distribution Costs/Selling Expenses (xxx)
Admin and General Expenses (xxx)
Other Expenses (xxx)
Finance Costs (xxx)
Net Profit Pxxx
NATURAL-FORM PRESENTATION OF INCOME STATEMENT
Revenues
Sales Pxxx
Less: Sales Discounts Pxxx
Sales Returns and allowances _xxx _xxx
Net Sales Pxxx
Cost of Goods Sold

Beginning inventory Pxxx
Add: Purchases Pxxx
Freight-in _xxx
xxx
Less: Purchase Discounts Pxxx
Purchase Returns and allowances _xxx _xxx
Net Purchases _xxx
Goods available for sale Pxxx
Less: Ending inventory _xxx
Cost of Goods Sold Pxxx
Gross Profit Pxxx
Selling Expenses
Advertising Pxxx
Freight-out xxx
Depreciation xxx
Utilities xxx
Salaries _xxx Pxxx
General and Administrative Expenses

Salaries Pxxx
Rent xxx
Depreciation xxx
Utilities xxx
Insurance _xxx Pxxx
Other
Loss on Sale of Land Pxxx
Interest Expense _xxx Pxxx Pxxx
Income Before Tax Pxxx

Income Tax Expense _xxx
Net Income Pxxx

SESSION SUMMARY
The Statement of Comprehensive Income provides a summary of a company’s net assets over a given
period of time. In other words, the statement highlights the adjustments on equity during a given
timeframe. PAS 1 sets out the overall requirements for the presentation of statement of comprehensive
income, guidelines for their structure and minimum requirements for their content. Entities may elect
whether to use the natural-form or the functional-form in presenting their statement of comprehensive
income.

SELF-ASSESSMENT
Assignment: Prepare a pro-forma income statement, both natural-form and functional-form for the
following types of businesses:
 Merchandising Business
 Manufacturing Business

Quiz: MCQ and Problems for Income Statement

REFERENCES
Refer to the references listed in the syllabus of the subject.

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MODULE 3

Examples of items recognized outside of profit or loss

Uses of a Statement of Comprehensive Income

Components of Statement of Comprehensive Income

The statement(s) must present: [PAS 1.81A]

Profit or loss section or statement

Net Sales Pxxx

Cost of Goods Sold

Gross Profit Pxxx

General and Administrative Expenses

Income Before Tax Pxxx

Net Income Pxxx

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