CHAPTER 9 PRESENTATION OF FINANCIAL STATEMENTS: ‘Statement of comprehensive income PAS 1 TECHNICAL KNOWLEDGE To understand the objective and usefulness of an income statement. Tounderstand the concept of comprehensive income, profit ‘or loss and other comprehensive income. To identify the components of other comprehensive income. To know the minimum line items in the statement of comprehensive income. To know the natural and functional presentation of the income statement. 180 iCOME STATEMENT income statement is @ formal statement showing the : performance of Gn entity for a given period of time. "he financial performance of an entity is primarily measured fn terms of the level of income earned by the entity thro the efeetive and efficient utiisation ofits resources ‘The financial performance is also known as the results of ‘operations of the entity. ‘The transaction approach is the traditional preparation of the income statement in conformity with accounting ntandards ‘The income statement for a period presents the income, “expenses, gains, losses and net income or loss recognized during the period. Hafermation about financial performance is useful in predicting future performance and ability to generate future g ty to generate fu ‘Comprehensive income Comprehensive income is the change in equity during a period ulting from transactions and other events, other than anges resulting from transactions with owners in their pacity as owners. ordingly, comprehensive income includes: Components of profit or loss, ‘Components of other comprehensive income rrofit or loss term profit or los isthe total of income less expenses, luding the components of other comprehensive income other words, this is the "bottom line” in the traditional @ statement. Kentity may use "net income” oF "net los" to desribe profit 181Other comprehensive income (OCD. Other comprehensive income comprises items of ond ‘expenses including reclassification adjustments that abot recognized in profit or loss as required or permitted by Philippine Financial Reporting Standards. ‘The components of "other comprehensive income” include the following: 1. Unrealized gain or loss on equity investment measured ‘at fair value through other comprehensive income 2. Unrealized gain or loss on debt investment measured at fair value through other comprehensive income, 8. Gain or loss from translation of the financial of a foreign operation statements 4, Revaluation surplus during the year. 5. Unrealized gain or loss from derivative contracts designated as cash flow hedge 6. *Remeasurements" of defined benefit plan, including actuarial gain or loss 7. Change in fair value attributable to credit risk of a finanaial liability designated at fair value through profit or los. Presentation of other comprehensive income | PAS 1, paragraph 82A, provides that the statement of comprehensive income shall present line items for amounts of other comprehensive income during the period classified by nature ‘Tho line items for amounts of OCI shal be grouped as follows 8. OCI that will be reclassified subsequently to profit or loss when specific conditions are met. b. OCI that will not be reclassified subsequently to profit or loss but to retained earnings. 182, OCT that will be reclassified to profit or loss Unrealized gain or loss on debt investment measured at fair value through other comprehensive ineome, Gain or loss from translating financial statements of a foreign operation. Unrealized gain or loss on derivative contracts designated "as cash flow hedge. I that will be reclassified to retained earnings Unrealized gain or loss on equity investment measured ‘at fair value through other comprehensive income, ‘The Application Guidance of PFRS 9, paragraph B5.7.1, Provides that such unrealized gain or loss is reclassified. to retained earnings upon disposal of the investment, Revaluation surplus during the year ‘The realization of the revaluation surplus is through retained earnings, Remeasurements of defined benefit plan, including ‘actuarial gain or loss. ‘The remeasurements are not reclassified subsequently, but are permanently excluded from profit or loss, However, the remeasurements may be transferred within ‘equity or retained earnings. Change in fair value attributable to eredit risk of a financial liability designated at fair value through profit ‘or loss. Buch gain or loss from change in fair value attributable Ao credit risk of a financial lsbility may be transferred within equity or retained earnings 183Presentation of comprehensive income An entity has two options of presenting comprehensive income, namely: 1, Two statements: ‘An income statement showing the components of profit b. A statement of comprehensive income beginning with profit or loss as shown in the income statement plus ‘or minus the components of other comprehensive 2. Single statement of comprehensive income ‘This ia the combined statement showing the components of profit or loss and components of other comprehensive income in a single statement. ‘The Revised Conceptual Framework calls this single statement as slatement of financial performance. Sources of income a. Sales of merchandise to customers "The income from sales shall include all sales to customers during the period. Sales returns, allowances and discounts shall be deducted from gross sales to arrive at net sales b. Rendering of services Income from rendering of services, among others, includes professional fees, media advertising commissions, Insurance agency commissions, admission fees for artistic performance and tuition fees. ©. Use of entity resources ‘This income category inchides interest, rent, royalty and dividend income. 4. Disposal of resources other than products Examples include gain on sale of investments, gain on tele of property plant and equipment and gino ane ot intangible assets, 184 Components of expense a. Cost of goods sold or cost of sales . Distribution costs or selling expenses © Administrative expenses d. Other expenses @. Income tax expense Cost of goods sold of merchandising concern Beginning inventory 500,000 Netpurchases 2,000,000 Goods avaible for sale 2,500,000 Bang inventory 300,000) Conta goede sold {Ores pirchanee 1,800,000 Preigntin 150,000 Total 2,050,000 Purchese returns, sllowances and discounts 50,000) Netpurchagos 2,000,000 Cost of goods sold of manufacturing concern eginningraw materials 500,000 Retpurduces 2,000,000, wy nateras available foruse 500,000 raw meters C00°000) yr nateral ed 2,200,000 iret labor 500000 recent 300,000 manufacturing cost 6.500,000 ene Soo,a00 eg con of goats in proses 7,490,000 fing goon prosene Es00;e00 Giclee manstcon $490,000 ming fnabed go ‘ae0,e00 vilbl fr ele 8,000,000 ished pools 500000) (Cont of oc sold 185Classifications of expenses Distribution costs constitute costs which are directly related to selling, advertising and delivery of goods to customers. Distribution costs ordinarily include: Salesmen's salaries Salesmen's commissions ‘Traveling and marketing expenses Advertising and-publicity Freight out Depreciation of delivery equipment and store equipment Administrative expenses constitute cost of administering the business. Administrative expenses ordinarily include all operating ‘expenses not related to selling and cost of goods sold, ‘Examples include: Doubtful accounts Office salaries Expenses of general executives Expenses of general accounting and credit department Office supplies used Certain taxes Contribution Professional fees Depreciation of office building and office euipment Amortization of intangible assets Other expenses are those expenses which are not directly related to the selling and administrative function. Examples include: ‘a, Loss on sale of trading investments b. Loss on disposal of property, plant and equipment ¢. Loss on sale of noneurrent investment 4, Casualty loss ~ flood, earthquake, fire 186 No more extraordinary items PAS 1, paragraph 87, specifically mandates that an entity “shall not present any items of income and expense a extraordinary either on the face of the income statement or “statement of comprehensive income or in the notes. Line items PAS 1, paragraph 82, provides that as a minimum, the income jatement and statement of comprehensive income shall include the following line items: m Revenue b, Gain and loss from the derecognition of financial asset ‘measured at amortized cost as required by PFRS 9. Finance cost, Share in income or loss of associate and joint venture “accounted for using the equity method Gain o loss on the reclassification of financial amortized cost to fair value profit or loss Gain or loss on the reclassification of financial asset from fair value other comprehensive income to fair value profit or loss. Income tax expense ‘A single amount comprising discontinued operations Profit or loss for the period ‘Total other comprehensive income Comprehensive income for the period being the total of profit or loss and other comprehensive income. set froin following items shall be disclosed on the face of the jme statement and statement of comprehensive income: Profit or loss for the period attributable to noncontrolling interest and owners of the parent ‘Total comprehensive income for the period attributable to noncontrolling interest and owners of the parent. 187Forms of income statement PAS 1, paragraph 99, provides that an entity shall present ‘an anaiysis of expenses recognized in profit or loss using a classification based on either the function of expenses or their nature within the entity, whichever provides information that is reliable and more relevant. Accordingly, the income statement may be presented in two ‘ways, namely functional and natural. Functional presentation ‘This form classifies expenses according to their function as part of cost of goods sold, distribution costs, administrative ‘expenses and other expenses. ‘The functional presentation is also known as the cost of goods ‘sold method. ‘An entity classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation, amortization and employee benefit costs. Natural presentation ‘The natural presentation is referred to as the nature of expense method. ‘Under this form, expenses are aggregated according to their ‘nature and not allocated among the various functions within the entity. In other words, the expenses are no longer classified as cost ‘of goods sold, distribution costs, administrative expenses and other expenses, ‘The expenses which are of the same nature are grouped or aggregated and presented as one item. For example, depreciation, purchases of raw materials, transport costs, employee benefit costs and advertising costs are presented separately. 188 “Functional” income statement EXAMPLAR COMPANY Tnoome Statement ‘Year ended December 31, 2020 Note Net sales o Cost goods sold e% Gross income Other income @ Investment income @ ‘Total income Distribution costs ) 1,350,000 Administrative expenses (6) 1,000,000 Other expences @ "320,000 Finance cost| ® Tnoome before tax Tnoome tax expense Net income Note 1 « Net sales Grose sales Sales return and allowance Sales discount Net sales Note 2 ~ Cost of goods sold Inventory, January 1 Purchases 6,000,000 Freight in '300,000 Total 6,300,000 Purchase return and allowance (150,000) Purchase discount (250/000) (Goods available forsale Inventory, December 31 Costof sales 189 9,300,000 100,000) 1,500,000, 7,400,000 (2/000:000)Note 8 - Other income Iteroct rveae Dividend revene Rene revenue (Gain from expropriation Total Note 4 Investment income Share in net income of associate (25%) Note 5 - Distribution costs Salo calaris SSSand Phenyl ‘Advertiing ‘Store supple expense Delivery expense Deprection “stare equipment ‘Total distribution costs Note 6 - Administrative expenses Ofc salaries $8 and Pest oer Office supplies expense ‘Taree and leenose Doubtful accounts Depreciation -ece equipment ‘Total adninetrative expenses Note 7 - Other expen: ‘Leas on sale of investment [Loss on sale of property Casualty lose from earthquake ‘Total ‘Note 8 - Finance cost Interest expense on bank loan Interest expense on bonds payable ‘Total finance cost “Natural” income statement EXAMPLAR COMPANY Tocome Statement ‘Year ended December 31,2020 Note Net calos a 9,000,000 Other income @ ‘900,000 Investment income @ 500,000 ‘Total income 10,400,000 sponses: Teron ininventory 1 (500,000) Netpurchases {®) 5,900,000 Employee benefit nets (© 1,400,000 Sales commission 180,000, diverting 100,000, Supplies expense 120,000 Delivery expense 250,000 son @ 40.0 Biles ard lcaees 20,000 Doubtful accounts 40,000 Other expenses (320,000 Binance fost 10) _ 200/000 Income before tax Income tax expense Net income Note 1-Net sales Grose sales 9,300,000 Sales return and allowance ( 100,000) Sales discount (200,000) Net sales 19,000,000, ‘Note 2 Other income Interest revere 180,000 Dividend revenue 120,000 Rent revenue 100,000 Gain from expropriation 500,000 ‘Total 900,000 191Note 8- Investment income ‘Share in net income of asociate (25%) ‘Note 4~ Increase in inventory Inventory - December 31 Inventory -January 1 Increase in inventory Note 6 Net purchases Note 6- Employee benefit costs Sales salaries 88S and Phidhealth-eales Office salaries ‘SSS and Philhealth- fice Bonuses ‘Total employee costs ‘Note 7- Supplies expense Store supplies Oice supplies ‘Total supplies expense Note 8 - Depreciation Depreciation store Depreciation fice ‘Total depreciation 192 500,000 2,000,000 1,500,000 500,000 16,000,000 '300,000 (150,000) (_ 250,000) 5,900,000 600,000 20,000, 50,000 30,000, 100,000 1,400,000 150,000 90,000 240,000 ‘Note 9- Other expenses Lesson sale ofinvostment 30,000 Leeson disposal of property 120,000 Casualty lose from earthquake 170,000 ‘Total Note 10- Finance cost Interest expense on bank loan Interest expense on bonds payable ‘Total finance cost Which form of income statement? PAS 1 does not prescribe any format. Paragraph 105 simply states that because each method of presentation has merit for different types of entities, ‘management is required to select the presentation that is reliable and more relevant. Statement of comprehensive income ‘As stated earlier, in addition to the income statement, a statement of comprehensive income is also prepared in order to show the total comprehensive income. ‘The statement of comprehensive income starts with the profit for loss as shown in the income statement plus or minus the “components of other comprehensive ‘The purpose of this statement is to provide a more comprehensive information on financial performance measured more broadly than the income as traditionally - computed. aeMlustration Using the data in the preceding illustration, the statement ‘of comprehensive income may appear as follows: EXAMPLAR COMPANY ‘Statement of Comprehensive Income ‘Year Ended December 31,2020 [Not income 1,560,000, Other comprehensive income tobe reclassified to profit or los: Foreign currency translation gain 150,000 Unrealized loss on derivative contract designated ascash flow hedge (100,000) _ 50,000 (Comprehensive income Comprehensive income for 2 period includes the net income or loss for the period plus or minus the components of other comprehensive income. However, the comprehnsive income of P1,600,000 is not carried to retained earnings. Only the net income of 1,550,000 is included in the determination of retained ‘earnings unappropriated. ‘The net other comprehensive income of P50,000 is carried to "reserves" or shown separately in the statement of changes in equity. Single statement of comprehensive income Another option in presenting the components of profit or loss and components of other comprehensive income is to prepare a single statement of comprehensive income. Again, this single statement is the combined income statement and statement of comprehensive income. Using the preceding data, the single statement of comprehensive income following the “functional presentation’ may appear as follows: 194 EXAMPLAR COMPANY ‘Statement of Comprehensive Income ‘Year Ended December 31, 2020 Neteales 8,000,000 Costof goods sold (6,400,000) Gross income 3,600,000 (Other income ‘900,000 Investment income 500,000 ‘Total income 5,000,000 Expenses: Distribution costs 1,350,000 Administrative expenses 1000,000, Other expenses 820,000 Finance cost £870,000 Income before tax 2,130,000 income tax expense ‘580,000 Net income 1,580,000, ‘Other comprehensive income tobe reclassified to profit or loss: Foreigncurrency translation gain 10,000 Unrealized loss on derivative contract ‘designated as cash flow hedge ( 100,000) ‘Comprehensive income Statement of retained earnings ‘The statement of retained earnings shows the changes affecting directly the retained earnings of an entity and relates the income statement to the statement of financial position, ‘The important data affecting the retained earnings that should be clearly disclosed in the statement of retained earnings are Profit or loss for the period Prior period errors Dividends declared and paid to shareholders Effect of change in accounting policy Appropriation of retained earnings epee 195Mlustration — all amounts are assumed sa XAMPLAR COMPANY itement of Retained Earnings ‘Year Ended December 31,2020 Retained earnings, January 1 1,000,000, Correction of error resulting from prior year underdepreciation ( 100,000) ‘Change in accounting policy from weighted ‘average to FIFO inventory valuation resulting in an increase 300,000 Corrected beginning balance 1,200,000, "Net income for the period 1,550,000 Dividends declared during the year 400,000) Appropriated for contingencies (200/000) Retained earnings, December 31 2,150,000 ‘Statement of changes in equity ‘he statement of changes inequity is a asic statement that shows the movements in the elements or components of the shareholders’ equity. ‘The statement of retained earnings is no longer a required basic ‘statement but itis part ofthe statement of changes in equity. ‘An entity shall present a statement of changes in a ey shall presen anges in equity showing 1. Comprehensive income for the period. 2. For each component of equity, the effects of changes in accounting policies and corrections of errors. na For each component of equity, a reonelation between the carrying amount at ginning and et period, separately changes from: a Profit or loss 1b. Each item of other comprehensive income © Transactions with owners in their capacity as owners showing separately cotebutons by and distributions to Illustration ~ all amounts are EXAMPLAR COMPANY Statement of Changes in Equity ‘Year Ended December 3, 2020 Share Retained capital Reserves earnings Balances - January 1 5,000,000 2,000,000 1,000,000 Correction oferror resulting ‘om prior year underdeprecation « 100,000) ‘Chango in accountng policy from velghted average to FIFO credit 300,000 eouance of 10,000 ordinary shares "with P1O0 par at P1S0 perabare 1,000,000 00,000 {ssuance of 5,000 preference shares with P50 par at P100 per share 260,000 250,000 Comprehensiveincome: ‘Net income 1,550,000 Other comprehensive income 50,000 Dividends paid during the year (400,000) CCarrent appropriation fr ‘contingencies 200,000 ( 200,000) Balances. December 31 8,250,000 3,000,001 ‘The preparation and a more detailed discussion of the ‘statement of financial position, income statement, statement ‘of comprehensive income and statement of changes in equity fare taken up exhaustively in Intermediate Accounting Volume Three. 197