2. 4 Reporting Financial Performance
After studying this chapter, you should be able to:
Understand how firms create value and manage performance.
Understand how users use information about performance to make decisions.
Understand the concept of and be able to assess quality of earnings/information.
Understand the differing perspectives on how to measure income.
Measure and report results of discontinued operations.
Measure income and prepare the income statement and the statement of comprehensive income using various formats.
Prepare the statement of retained earnings and the statement of changes in equity.
Understand how disclosures and analysis help users of financial statements assess performance.
Identify differences in accounting between IFRS and ASPE and potential changes.

3. Reporting Financial Performance
Business models and industries
Communicating information about performance
Quality of earnings / information
Statement of Income / Comprehensive Income
Measurement
Discontinued Operations
Presentation
Statement of Retained Earnings / Changes in Equity
Presentation of statement of retained earnings
Presentation of statement of changes in equity
Disclosure and Analysis
Disclosures
Analysis
IFRS/ASPE Comparison
A comparison of IFRS and ASPE
Looking ahead

4. Business Models Business Model identifies three activities:
Financing
Obtaining cash funding
Investing
Use of funding to buy assets and invest in people
Operating
Use of assets and people to generate profits
Financial statements should capture these fundamental business activities
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5. Overview of the Business Model
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6. Communicating Information About Performance
Income Statement helps users:
Evaluate past performance and profitability
Assist in predicting future performance
Assess potential risk or uncertainty in achieving future net cash inflows
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7. Limitations of Income Statement
Statement of income/comprehensive income has the following limitations:
Items are excluded if they cannot be measured reliably
Amounts reported are affected by accounting methods used
Use of estimates in measuring income
Financial reporting bias
GAAP shortcomings
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8. Quality of Earnings
Quality of earnings refers to how solid earnings numbers are
Two main aspects to consider:
Content
Integrity of information
Sustainability of earnings
Presentation
Earnings presentation is clear and concise
Easy to use and understandable
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9. Quality of Earnings Characteristics of high quality earnings:
Nature of Content
Unbiased and determined objectively
Represents economic reality
Reflects earnings from on-going core activities
Can be correlated with cash flows from operations
Based on sound business strategy/model
Presentation
Does not disguise or mislead (transparent)
Understandable
Also, information is clear and concise
Earnings management decreases quality of earnings
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10. Comprehensive vs. Net Income
Key question: how do we measure income?
IFRS generally supports the all-inclusive approach to measuring income
This results in “comprehensive income”
Comprehensive income includes any non-shareholder transactions that causes a change in equity
Example: unrealized gains/losses on revaluation of property, plant, and equipment under the revaluation model
Comprehensive Income = Net Income +/- Other Comprehensive Income (OCI)
OCI is closed to a balance sheet account called Accumulated Other Comprehensive Income (AOCI)
ASPE continues to focus on net income as the measure of income
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11. Discontinued Operations
Discontinued operations includes components that have been disposed of or are held for sale
Components can include:
Under ASPE: an operating segment, reporting unit, subsidiary, asset group, or operations without assets
Under IFRS: separate major line of business or geographical area of operations, or a business qualifying as “held for sale” upon acquisition
IFRS is more restrictive
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12. Discontinued Operations
A distinction made between:
The component’s results of operations
Disposal of the component’s assets
The key is that the component generates its own cash flows and has its own distinct operations
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13. Discontinued Operations- Asset Held for Sale
Component is held for sale if the following criteria are met:
Authorized plan to sell exists
Asset available for immediate sale
Active search for a buyer
Sale is probable within a year
Asset is reasonably priced and marketed
Unlikely that plan to sell will change
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14. Discontinued Operations Measurement & Presentation
Depreciation is not recognized for held for sale assets
Remeasured at lower of carrying value and fair value net of cost to sell
Once asset is written down, subsequent gains can be recognized only up to the amount of original loss
Presented separately on balance sheet
Under ASPE, held for sale asset retains original classification as current or non-current
Under IFRS, held for sale assets generally classified as current
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15. Discontinued Operations– Statement Presentation
Income from continuing operations (net of tax) $xx,xxx
Discontinued Operations:
Income (Loss) from operations (net of tax) $xx,xxx
Gain (Loss) on disposal (net of tax) xx,xxx xx,xxx
Net Income $xx,xxx
Earnings per share from continuing operations $ x
Earnings per share from discontinued operations x
Earnings per share on net income $ x
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16. Presentation of Performance
Under IFRS, the statement of comprehensive income can be presented either:
as a single combined statement, or
as two separate statements
Companies can present income using either
Single-step income statement, or
Multiple-step income statement
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17. Comprehensive Income Statement
Example of a combined income and comprehensive income statement:
Sales ,000
Cost of goods sold ,000
Gross profit ,000
Operating expenses 90,000
Net income ,000
Other comprehensive income
Unrealized holding gain, net of tax 30,000
Comprehensive income 140,000
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18. Single-Step Income Statement
Presents only two groupings before Income before Discontinued Operations:
Revenues (includes gains)
Expenses (includes losses)
Income tax expense often reported separate from expenses as the last line item in determining net income
Advantages:
Simplicity
Eliminates classification problems for revenues and expenses
Disadvantage:
Oversimplification
Less detail (e.g. operating and non-operating activities reported together and cannot be distinguished)
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19. Single-Step Income Statement
Revenues
Net Sales
Other Revenues
(e.g. Dividend, Rental)
Revenues –
Expenses
Cost of Goods Sold
Selling Expenses
Administrative Expenses
Interest Expense
Income Tax Expense
Expenses =
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Net Income
Any Gains/Losses from
Discontinued Operations must be
disclosed separately from
Continuing Operations
Earnings per
Share

20. Multiple-Step Income Statement
Operating and non-operating activities are separated
Advantages:
Highlighting regular and irregular activities allows for greater predictive value (assess future earnings) and feedback value (assess past earnings)
Provides better detail to compare companies
Allows for ratio analysis used to assess performance
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21. Multiple-Step Income Statement
Operating section
Nonoperating section
Income tax
Continuing Operations
Income/Loss from operations
Gain/Loss from disposition
Both reported net of taxes
Discontinued Operations
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Includes other gains/losses not included in net income
Other Comprehensive Income

22. Continuing Operations–Detail
Net Sales
Cost of Goods Sold
Selling Expenses
Administrative or General Expenses
Operating Section
Other Revenues and Gains
Other Expenses and Losses
Nonoperating Section
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Separate income tax section on Income from Continuing Operations only
Income Tax

23. Condensed Income Statement
Expenses are reported on the income statement in group totals
Details of the expense groups are included on supplementary schedules
Provides the advantage of a concise, understandable income statement
An example of trade-off between understandability and full disclosure
Reduces “information overload”
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24. Presenting Expenses: Nature versus Function
Under IFRS, analysis of expenses must be presented based on either:
Nature of expenses (e.g. purchase of materials, transportation costs, employee benefits, depreciation, etc.)
Function of expenses (e.g. cost of sales, administrative costs, etc.)
Choice should result in information that is more reliable and relevant
No similar guidance under ASPE
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25. Intraperiod Tax Allocation
Refers to the allocation of income taxes within a fiscal period
Certain irregular items on the income statement are reported net of tax
Specifically, income tax expense (or benefit) is calculated and presented separately for the following:
Income from continuing operations
Discontinued operations
Other comprehensive income
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26. Earnings per Share
Earnings per share (EPS) is considered one of the most significant business indicators
Indicates dollars earned per common share; it does not report the dollars paid (or to be paid) per common share
EPS based on earnings before discontinued operations and EPS based on net income must be shown on the face of the income statement
EPS based on discontinued operations may be disclosed in the notes to the financial statements
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27. Earnings Per Share Calculated as:
Net Income less Preferred Dividends
Weighted Average of Common Shares Outstanding
Earnings per share is subject to dilution (reduction) if issue of additional shares is possible in the future
For such situations, both Basic EPS and Diluted EPS are presented

28. Retained Earnings Statement
Retained earnings increases by net income and decreases by net loss and declared dividends (both cash and share dividends) for the year
Correction of errors in prior periods and effects to prior periods from accounting policy changes are treated as prior period adjustments
They adjust (net of tax) beginning retained earnings; also prior years’ financial statements are restated
Under IFRS, a Statement of Changes in Equity is presented in lieu of a retained earnings statement.
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29. Statement of Changes in Equity
This statement is required under IFRS and presents the following:
Total comprehensive income
For each component of equity, the effects of retrospective application/restatement
Reconciliation between the carrying amount of each component of equity at the beginning and end of the period.
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30. Looking Ahead
IASB and FASB are preparing a converged standard on “Financial Statement Presentation”
Working principles state that financial statements should:
Provide a cohesive financial picture of an entity
Provide information to help users assess the liquidity of an entity
Separate financing activities from other activities
Provide information about measurement of assets and liabilities, and
Disaggregate information and present subtotals and totals
IASB and FASB are also working on redefining the meaning of “component” for discontinued operations
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31. COPYRIGHT
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