INTERMEDIATE ACCOUNTING III (AE 17)

LEARNING MATERIAL

UNIT NUMBER/ HEADING: STATEMENT OF COMPREHENSIVE INCOME

LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Discuss the concept of comprehensive income;
b. Distinguish profit or loss and other comprehensive income;
c. Identify the components of other comprehensive income;
d. Recognize the reclassification adjustment related to other
comprehensive income
e. Present the income statement following the functional and
natural presentation

Presentation of Content

DEFINITON AND BASIC PRINCIPLES

 Comprehensive income is the change in equity during a period
resulting from transactions and other events, other than changes
resulting from transactions with owners in their capacity as owners.
 Accordingly, comprehensive income includes the following:
 Components of profit or loss
 Components of other comprehensive income
 Profit or loss is the total income less expenses, excluding the
components of other comprehensive income. This is the “bottom line”
in the traditional income statement
 Other comprehensive income comprises items of income and
expense including reclassification adjustments that are not
recognized in profit or loss as required or permitted by PFRS
 Components of other comprehensive income include:
 Unrealized gain or loss on equity investment measured at
FV-OCI
 Unrealized gain or loss on debt investment measured at FV-
OCI
 Gain or loss from translating the financial statements of a
foreign operation
 Revaluation surplus during the year
 Unrealized gain or loss from derivative contracts designated
as cash flow hedge
 Remeasurements of defined benefit plan:
 Actuarial gain and loss on PBO

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  The difference between actual RoPA and interest income
on FVPA
 Change in the effect of asset ceiling minus interest on
the beginning effect of asset ceiling
 Change in fair value attributable to credit risk of a financial
liability designated at FVPL

Presentation of other comprehensive income

 The amended PAS 1, par. 82A, provides that the other comprehensive
income section shall present the line items for amounts of other
comprehensive income in the period, classified by nature
 The line items for amounts of OCIs shall be grouped as follows:
a. OCI that will be reclassified subsequently to profit or loss when
specific conditions are met
 Gain or loss from translating financial statements of a foreign
operation
 Unrealized gain or loss on derivative contracts designated as
a cash flow hedge
 Unrealized gain or loss on debt investment measured at fair
value through OCI
**Reclassification adjustments are amounts reclassified to profit or
loss in the current period that were recognized in other comprehensive income
in the current or previous periods
b. OCI that will not be reclassified subsequently to profit or loss
 Unrealized gain or loss on equity investment measured at FV-
OCI (reclassified to retained earnings upon disposal of the
investment)
 Change in revaluation surplus – realization is through retained
earnings
 Remeasurements of a defined benefit plan – not recycled
subsequently to P/L but may be transferred within equity or
retained earnings
 Gain or loss attributable to credit risk of a financial liability
designated at FVPL – may be recycled subsequently within
equity or retained earnings

Presentation of comprehensive income

 PAS 1, provides that an entity has two options of presenting
comprehensive income, namely:
a. Two-statement approach
o An income statement showing the components of profit or loss

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 o A statement of comprehensive income beginning with P/L as
shown in the income statement plus or minus the components
of other comprehensive income
b. Single statement approach
 This is the combined statement showing the components of profit
or loss and components of other comprehensive income in a
single statement of comprehensive income

Income Statement is a formal statement showing the financial

performance or profit or loss of an entity for a period of time
The financial performance of an entity is primarily measured in terms of
the level of income earned by the entity through the effective and
efficient utilization of resources. It is also known as results of
operations
PAS 1, par 88, provides that an entity shall recognize all items of income
and expense during a period in profit or loss unless a PFRS requires or
permits otherwise
The transaction approach is the conventional or traditional
preparation of income statement in conformity with PFRS. It is the
direct result of the application of the principle of matching costs with
revenue that is why, this procedure is also called matching approach

INCOME and EXPENSES

1. INCOME
 Increase in economic benefit during the accounting period in the
form of inflow or increase in asset or decrease in liability that results
in increase in equity, other than contribution from owners
 It is the inflow of future economic benefit that increases equity, other
than contribution by owners
 It is derived from the following ordinary activities:
 Sale of merchandise to customers
 Rendering of services
 Use of entity resources
 Disposal of resources other than products
 It encompasses both
 Revenue – arises in the course of ordinary regular activities
of an entity
 Gains – represent other items that meet the definition of
income and do not arise in the course of ordinary regular
activities of an entity

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 2. EXPENSES
 the decrease in economic benefit during the accounting period in
the form of outflow or decrease in asset and increase in liability that
results in decrease in equity, other than distribution to owners
 it is the outflow of future economic benefit that decreases equity,
other than distribution or dividend paid to owners
 it includes the following:
 cost of goods sold or cost of sales
 distribution costs or selling expenses
 administrative expenses
 other expenses
 income tax expense

COST OF GOODS SOLD OF A MERCHANDISING ENTITY

Beginning inventory xx
Add: Net Purchases
Gross Purchase xx
Purchase Returns & Allowances (xx)
Purchase Discount (xx) xx
Transportation In xx xx
Goods available for sale xx
Less: Ending Inventory (xx)
Cost of goods sold xx

COST OF GOODS SOLD OF A MANUFACTURING ENTITY

Beginning raw materials xx

Net purchases xx
Raw materials available for use xx
Ending raw materials (xx)
Raw materials used xx
Direct Labor xx
Factory overhead xx
Total manufacturing cost xx
Beginning goods in process xx
Total cost of goods in process xx
Ending goods in process (xx)
Cost of goods manufactured xx
Beginning finished goods xx
Goods available for sale xx
Ending finished goods (xx)
Cost of goods sold xx

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 Distribution costs or selling expenses constitute costs which are
directly related to selling, advertising and delivery of goods to
customers. It includes:
 Salesmen’s salaries
 Sales commissions
 Traveling and marketing expenses
 Advertising and publicity expenses
 Freight out
 Depreciation of delivery equipment and store equipment
Administrative expenses constitute cost of administering the
business. these ordinarily include all operating expenses not related to
selling and cost of goods sold. It includes:
 Doubtful accounts
 Office salaries and expenses of general executives
 Office supplies expense
 Contributions to charity
 Professional fee
 Depreciation of office building and office equipment
 Amortization of intangible assets
Other expenses are those expenses which are not directly related to
the distribution and administrative function. It includes:
 Loss on sale of trading investment
 Loss on sale of property, plant and equipment
 Loss on sale of noncurrent investment
 Loss on sale of intangible asset
 Casualty loss from earthquake, typhoon, hurricane, tsunami,
flood, fire, storm surge, and other natural disaster
 Expropriation loss

OTHER IMPORTANT CONCEPTS AND DISCLOSURES

a. No more extraordinary items
 PAS 1, par. 87, specifically mandates that an entity shall
not present any items of income and expense as
extraordinary items, in the income statement or statemetn
of comprehensive income or in the notes
 Unusual and infrequent items of income and expense are
considered component of income from continuing
operations
b. Separate disclosure
 PAS 1, par. 97, provides that when items of income and
expense are material, their nature and amount shall be
disclosed separately

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  Paragraph 98 provides the circumstances that would give
rise to the separate disclosure of items of income and
expense
 Items of income and expense requiring disclosure:
 Writedown of inventory to net realizable value and
reversal of such writedown
 Writedown of PPE to recoverable amount and reveral
amount
 Restructuring of the activities of an entity and
reversal of any provision for the cost of restructuring
 Disposal of an item of property, plant and equipment
 Disposal of investment
 Discontinued operation
 Litigation settlement
 Other reversal of provision

c. Line items
 PAS 1, par. 82, provides that the line items in the statement
of comprehensive income are:
1. Revenue
2. Gain or loss from derecognition of financial asset
measured at amortized cost as required by PFRS 9
3. Finance cost
4. Share of income or loss of associate and joint venture
accounted for using the equity method
5. Income tax expense
6. A single amount comprising discontinued operations
7. Profit or loss of the period
8. Other comprehensive income
9. Comprehensive income for the period
 The following items shall be disclosed on the face of the
income statement and statement of comprehensive income
1. Profit or loss attributable to noncontrolling interest
and owners of the parent
2. Total comprehensive income attributable to
noncontrolling interest and owners of the parent
 An entity shall present additional line items, headings and
subtotals in the statement of comprehensive income or
separate income statement when such presentation is
relevant to an understanding of the financial performance
of the entity

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FORMS OF INCOME STATEMENT
 PAS 1, par. 99, provides that an entity shall present on the face of the
income statement an analysis of expenses using a classification based
on either function of expenses or their nature within the entity,
whichever provides information that is reliable and more relevant
 The income statement may be presented in two ways:
a. Functional Presentation
o It is the traditional and common form of income statement
o Also known as cost of goods sold method
o It classifies expenses according to their function as part of
cost of goods sold, distribution costs, administrative activities
and other activities
o Entities classifying expenses by function shall disclose
additional information on the nature of expenses, including
depreciation, amortization and employee benefit cost

b. Natural presentation
o Referred to as the nature of expense method
o Expenses are classified accoirding to their nature and not
allocated among the various functions within the entity
o Expenses which are of the same nature are grouped and
presented as one item
o Examples:
 Purchases
 Employee benefit costs
 Advertising costs
 Transport costs including freight out and other delivery
expenses
 Supplies which include store supplies and office
supplies
 Depreciation
 Other expenses