1. ACTG 6580
Chapters 4 and 5 – Income Statement, Statement of Financial Position, and Statement of Cash Flows

2. Components of Financial Statements
A complete set of financial statements comprises:
Statement of Profit or Loss and Other Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash flows
Notes
(IAS 1 para 10)

3. General Features of Financial Statements
As per IAS 1, the following considerations must be followed in the presentation of a financial report:
Fair presentation and compliance with IFRSs
Going concern
Accrual basis of accounting
Materiality and aggregation
Offsetting
Frequency of reporting
Comparative information
Consistency of presentation

4. General Features of Financial Statements
Fair presentation & compliance with IFRSs (IAS 1 para 15-19)
A set of financial statements are required to present fairly an entity’s financial performance, financial position and cash flows
Applying IFRSs (with additional disclosures where necessary) is presumed to result in a fair presentation
Going concern (IAS 1 Para 25)
There is an assumption that all entities adopt the going concern basis of accounting
Exception applies where management intends to liquidate or cease trading
Accrual basis of accounting
Except for cash flow information, the financial statements are required to be presented using the accruals basis of accounting

5. General Features of Financial Statements
Materiality and aggregation
Each material class of similar items must be presented separately
Items of a dissimilar nature or function must be presented separately, unless they are immaterial
(IAS 1 para 7)
Offsetting
Assets & liabilities and income & expenses are not to be offset, unless required or permitted by another accounting standard
Offsetting detracts from the ability of the users to understand the entity’s transactions
Offsetting is appropriate when netting any income with related expenses arising from the same transaction
(IAS 1 para 32, 34-35)

6. Frequency of Reporting
Financial statements should normally be presented at least annually.
An entity which presents statements for a different period must disclose the reasons and state that its statements are not comparative.

7. General Features of Financial Statements
Comparative information
Comparative information for the immediately preceding reporting period must be disclosed for all amounts
(IAS 1 para 38)
Consistency of presentation
Financial information must be consistently presented from one period to the next unless:
There has been a significant change in the entity’s operations
A change in presentation or classification will provide more relevant information
An IFRS requires a change in presentation
(IAS 1 para 45)

8. Statement of Profit or Loss & Other Comprehensive Income
A prime source of information about an entity’s performance
Income, expenses and other comprehensive income are included
Total comprehensive income has two components:
Profit or loss (P&L)
Other comprehensive income (OCI)
Can be provided in one statement or two separate statements

9. FORMAT OF THE INCOME STATEMENT
Elements of the Income Statement
INCOME includes both revenues and gains.
Revenues - ordinary activities of a company
Gains - may or may not arise from ordinary activities.
Revenue Accounts
Gain Accounts
Sales revenue
Fee revenue
Interest revenue
Dividend revenue
Rent revenue
Gains on the sale of long-term assets
Unrealized gains on trading securities.
LO 2

10. FORMAT OF THE INCOME STATEMENT
Elements of the Income Statement
EXPENSES include both expenses and losses.
Expenses - ordinary activities of a company
Losses - may or may not arise from ordinary activities.
Expense Accounts
Loss Accounts
Cost of goods sold
Depreciation expense
Interest expense
Rent expense
Salary expense
Losses on restructuring charges
Losses on the sale of long-term assets
Unrealized losses on trading securities.
LO 2

11. INCOME FROM OPERATIONS
Expense Classification
Nature
Function
Cost of materials used
Direct labor incurred
Delivery expense
Advertising expense
Employee benefits
Depreciation expense
Amortization expense
Investments in securities are classified into three categories. These categories are (1) trading securities, (2) held-to-maturity securities, and (3) available-for-sale securities.
■ Trading securities are debt (bonds, notes, etc.) or equity (stock) investments purchased and expected to be sold within the near term through active trading. These securities generate income or losses on a day-to-day basis through changes in their prices.
LO 4

12. INCOME FROM OPERATIONS
Expense Classification
Nature
Function
Cost of goods sold
Selling expenses
Administrative expenses
Investments in securities are classified into three categories. These categories are (1) trading securities, (2) held-to-maturity securities, and (3) available-for-sale securities.
■ Trading securities are debt (bonds, notes, etc.) or equity (stock) investments purchased and expected to be sold within the near term through active trading. These securities generate income or losses on a day-to-day basis through changes in their prices.
LO 4

13. A single amount comprising the total of:
Minimum Information
The minimum information to be presented on the income statement as defined by IAS 1.82:
Revenue
Finance costs
Share of profit or loss of associates and joint ventures accounted for using the equity method
A single amount comprising the total of:
The post-tax profit or loss of discontinued operations
The post-tax gain or loss recognized on the measurement of fair value less costs to sell or on the disposal of assets or disposal group(s) constituting the discontinued operations
Tax expense
Profit or loss

14. INCOME STATEMENT REPORTING
Discontinued Operations
A component of an entity that either has been disposed of, or is classified as held-for-sale, and:
Represents a major line of business or geographical area of operations, or
Is part of a single, co-coordinated plan to dispose of a major line of business or geographical area of operations, or
Is a subsidiary acquired exclusively with a view to resell.
LO 5

15. INCOME STATEMENT REPORTING
Discontinued Operations
Companies report as discontinued operations
(in a separate income statement category) the gain or loss from disposal of a component of a business.
The results of operations of a component that has been or will be disposed of separately from continuing operations.
The effects of discontinued operations net of tax as a separate category, after continuing operations.
LO 5

16. DISCONTINUED OPERATIONS
Illustration: Multiplex Inc., a highly diversified company, decides to discontinue its electronics division. During the current year, the electronics division lost £300,000 (net of tax). Multiplex sold the division at the end of the year at a loss of £500,000 (net of tax).
Income from continuing operations £20,000,000
Discontinued operations:
Loss from operations, net of tax 300,000
Loss on disposal, net of tax 500,000
Total loss on discontinued operations 800,000
Net income £19,200,000
ILLUSTRATION 4-11
Income Statement Presentation of Discontinued Operations
LO 5

17. Income Statement Presentation Extraordinary items
US GAAP
Extraordinary items are reported separately on the income statement.
IFRS
Prohibits extraordinary items, but major revenue and expense items are disclosed in the income statement or notes.
Convergence
In January, 2015, the FASB issued an ASU, Income Statement—Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This eliminates the concept of extraordinary items from GAAP; therefore, no items would be presented or disclosed as an extraordinary item. This would converge presentation with IFRS. This is effective for periods beginning after December 15, 2015.

18. Statement of Profit or Loss & Other Comprehensive Income
Other Comprehensive Income (OCI)
OCI comprises items of income and expense that are not recognized in profit or loss
Components of OCI comprise:
Changes in a revaluation surplus
Actuarial gains and losses on defined benefit plans
Gains and losses arising from the translation of financial statements of foreign operations
Gains and losses on remeasuring available-for-sale financial assets
The effective portion of gains and losses on hedging instruments in a cash flow hedge

19. Statement of Income and Statement of Comprehensive Income Presentation
IFRS and US GAAP require comprehensive income to be presented in one statement of comprehensive income or in two separate consecutive statements comprising of a separate statement of income and a statement of comprehensive income.
US GAAP
Generally, US GAAP considers all items recorded in OCI as subject to reclassification into net income and, therefore, no separate presentation groupings are required.
IFRS
For fiscal years beginning July 1, 2012 (with early adoption permitted), IFRS requires the presentation of items in OCI that ultimately may be reclassified into net income to be presented separately from those that will not be reclassified into net income. The tax effect must be shown separately, either by individual item or in aggregate.
Reclassification adjustments do not arise on changes in revaluation surplus recognized in accordance with IAS 16 (Property, Plant and Equipment) or on actuarial gains and losses on defined benefit plans recognized in accordance with paragraph 93A of IAS 19 (Employee Benefits).

20. Classification of Other Comprehensive Income Items
Example 1:
Treadstone International’s controller, Hans Burke, called you yesterday inquiring about the differences for classification of various items in OCI that might be encountered when his company changes from US GAAP to IFRS next year. Hans ed you a list of potential transactions. Hans would like you to prepare a draft statement of other comprehensive income based on IFRS. The tax rate for all items in OCI is 30%.
2014
2013
Cash flow hedges
$ 40
$ (90)
Foreign currency exchange differences
670
550
Available for sale gains
170 64
Defined benefit plan actuarial (losses) / gains
(60) 80
Revaluation of property
300 –

21. Classification of Other Comprehensive Income Items
Example 1 solution (IFRS):

22. Statement of Profit or Loss & Other Comprehensive Income
To enhance understandability of the statement IAS 1 requires separate disclosure of the nature and amount of certain material income and expense items including:
Inventory and PPE write-downs
Cost of restructuring
Disposals of PPE & other investments
Profit/(losses) re discontinuing operations
Litigation settlements
Reversals of provisions
Such disclosures can be made either in the statement or in the notes

23. Statement of Financial Position
Summarizes the elements directly related to the measurement of financial position
Provides the basic information for evaluating an entity’s capital structure and analyzing its liquidity, solvency and financial flexibility
Provides a basis for computing rates of return

24. Statement of Financial Position Classifications
No prescribed format in IAS 1, but assets and liabilities to be classified on basis of:
Current/non-current OR
In order of their liquidity
Whichever is more relevant
Assets are classified as current or non-current depending on whether they are expected to be sold, consumed or realized as part of the normal operating cycle within 12 months of balance date

25. Current Elements
Cash
Generally any monies available “on demand.”
Cash equivalents - short-term highly liquid investments that mature within three months or less.
Restrictions or commitments must be disclosed.
Liabilities
Liabilities are current/noncurrent based on settlement date.
LO 2

26. Statement of Financial Position Presentation Debt classification under default for covenant violation
US GAAP
Allows debt to retain non-current classification as of the balance sheet date if a lender waives or modifies the related debt covenant violation on or after the balance sheet date but prior to the issuance of the financial statements.
IFRS
Requires that a lender must waive or modify a debt covenant violation prior to or at the balance sheet date in order for the related debt to be classified as non-current at the balance sheet date.

27. Debt Classification Under Default for Covenant Violation Example
Riley’s Roosters, Inc. (RRI) has a December 31 year-end. As of June 30, 2012, RRI obtains a $100,000 loan from a bank for a new chicken coop facility. The loan is due in 24 months. In December 2012, RRI spends too much of its cash on its holiday party and incurs a debt covenant violation as of December 31, As a result of the violation, the loan becomes due within 30 days. At this time, RRI asks the bank to waive the violation. RRI tells the bank it will recoup some of the cash by selling the leftover holiday party favors on eBay. On January 5, 2013, the bank agrees to waive the violation. RRI issues its financial statements on January 25, 2013.
How should this loan be classified (current or non-current) on RRI’s balance sheet as of December 31, 2012 using IFRS and US GAAP?

28. Debt Classification Under Default for Covenant Violation Example
Example 2 (solution):
Balance sheet date
Fiscal year
Post-fiscal year and prior to issuance of financials
IFRS
US GAAP
Fiscal year
Post-fiscal year and prior to issuance of financials
Solution:
As the bank modified the debt covenant violation subsequent to RRI’s balance sheet date of December 31, 2012 but prior to the financial statement issuance date of January 25, 2013, the debt is classified as current as of the balance sheet date using IFRS but non-current for US GAAP.

29. Deferred Tax Assets and Liabilities
IFRS prohibits deferred tax assets or liabilities to be classified as current.
US GAAP requires classification as current or non-current based on the nature of the underlying asset or liability.

30. CLASSIFICATION IN THE STATEMENT
Equity
LO 2

31. Minimum Accounts
The minimum accounts to be presented on the statement of financial position as defined by IAS 1.54 are:
Property, plant and equipment
Investment property
Intangible assets
Financial assets (excluding amounts shown under (e), (h) and (i))
Investments accounted for using the equity method
Biological assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total of assets classified as held for sale and assets included in disposal groups classified as held for sale per IFRS 5

32. Minimum Accounts
The minimum accounts to be presented on the balance sheet as defined by IAS 1.54 (continued):
Trade and other payables
Provisions
Financial liabilities (excluding amounts shown under (a) and (b))
Liabilities and assets for current tax per IAS 12
Deferred tax liabilities and deferred tax assets per IAS 12
Liabilities included in disposal groups classified as held for sale per IFRS 5
Minority interest, presented within equity
Issued capital and reserves attributable to equity holders of the parent

33. Statement of Changes in Equity
The following is disclosed in this statement:
Total comprehensive income for the period attributable to:
Equity holders of parent
Non controlling interests
For each component of equity
Changes in accounting policies
Corrections of errors required by IAS 8
For each component of equity a reconciliation between opening and closing balances showing changes resulting from
Profit/(Loss)
OCI
Transactions with equity holders, showing separately distributions to equity holders

34. Statement of Changes in Equity
ILLUSTRATION 4-23
Statement of Changes in Equity
LO 9

35. Statement of Cash Flows Same as US GAAP except:
Cash flow classification
Transaction
IFRS
US GAAP
Interest paid
Operating or financing
Operating
Interest received
Operating or investing
Dividends paid
Financing
Dividends received

36. Notes Notes enhance the understandability of the other statements
Each item in the statements is cross-referenced to any related information in the notes
The order of notes is:
Summary of accounting policies
Supporting information for items in statements
Other disclosures:
Dividends
Company details
Auditor remuneration

37. Sources Of Estimation Uncertainty
“an entity shall disclose in notes key assumptions about the future of estimation uncertainty that is material” (IAS 1 para 125)
Notes shall include details of:
Their nature
Their carrying amount as at the reporting date
Examples include:
Future interest rates
Useful lives of non-current assets

38. GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and IFRS related to the income statement.
Similarities
Both U.S. GAAP and IFRS require companies to indicate the amount of net income attributable to non-controlling interest.
Both U.S. GAAP and IFRS follow the same presentation guidelines for discontinued operations, but IFRS defines a discontinued operation more narrowly. Both standard-setters have indicated a willingness to develop a similar definition to be used in the joint project on financial statement presentation.

39. GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Similarities
Both U.S. GAAP and IFRS have items that are recognized in equity as part of other comprehensive income but do not affect net income. Both U.S. GAAP and IFRS allow a one statement or two statement approach to preparing the statement of comprehensive income.
Differences
Presentation of the income statement under U.S. GAAP follows either a single-step or multiple-step format. IFRS does not mention a single-step or multiple-step approach.

40. GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
The U.S. SEC requires companies to have a functional presentation of expenses. Under IFRS, companies must classify expenses by either nature or function. U.S. GAAP does not have that requirement.
U.S. GAAP has no minimum information requirements for the income statement. However, the U.S. SEC rules have more rigorous presentation requirements. IFRS identifies certain minimum items that should be presented on the income statement.
U.S. SEC regulations define many key measures and provide requirements and limitations on companies reporting non-U.S. GAAP information. IFRS does not define key measures like income from operations.

41. GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
U.S. GAAP does not permit revaluation accounting. Under IFRS, revaluation of property, plant, and equipment, and intangible assets is permitted and is reported as other comprehensive income. The effect of this difference is that application of IFRS results in more transactions affecting equity but not net income.

42. GLOBAL ACCOUNTING INSIGHTS
About The Numbers
The terminology used in the IFRS literature is sometimes different than what is used in U.S. GAAP. For example, here are some of the differences.

43. GLOBAL ACCOUNTING INSIGHTS
On the Horizon
The IASB and FASB are working on a project that would rework the structure of financial statements. One stage of this project will address the issue of how to classify various items in the income statement. A main goal of this new approach is to provide information that better represents how businesses are run. In addition, this approach draws attention away from just one number—net income.

44. GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and IFRS related to the statement of financial position.
Similarities
Both U.S. GAAP and IFRS allow the use of the title “balance sheet” or “statement of financial position.” IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet.
Both U.S. GAAP and IFRS require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment. Comparative prior period information must be presented and financial statements must be prepared annually.

45. GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Similarities
U.S. GAAP and IFRS require presentation of non-controlling interests in the equity section of the statement of financial position.
Differences
U.S. GAAP follows the same guidelines as presented in the chapter for distinguishing between current and noncurrent assets and liabilities. However, under U.S. GAAP, public companies must follow U.S. SEC regulations, which require specific line items. In addition, specific U.S. GAAP mandates certain forms of reporting for this information. IFRS requires a classified statement of financial position except in very limited situations.

46. GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
Under U.S. GAAP cash is listed first, but under IFRS it is many times listed last. That is, under IFRS, current assets are usually listed in the reverse order of liquidity than under U.S. GAAP.
Use of the term “reserve” is discouraged in U.S. GAAP, but there is no such prohibition in IFRS.

47. GLOBAL ACCOUNTING INSIGHTS
About The Numbers
The order of presentation in the statement of financial position differs between U.S. GAAP and IFRS. As indicated in the following table, U.S. companies generally present current assets, non-current assets, current and non-current liabilities, and shareholders’ equity. In addition, within the current asset and liability classifications, items are presented in order of liquidity.

48. Homework
E4-7,P4-4, CA4-6
E5-7, P5-3, CA5-3
DUE THURSDAY, SEPTEMBER 10