CHAPTER 2
They are required by other PFRSS to be recognized outside of
STATEMENT OF COMPREHENSIVE INCOME
Statement of Profit or Loss and Other Comprehensive Income
Income and expenses for the period may be presented in either:
a. A single statement of profit or loss and other
comprehensive income (statement of comprehensive
income); or
b. Two statements (1) a statement of profit or loss (income
statement) and (2) a statement presenting comprehensive
income.
PAS 1 requires an entity to present information on the
following
a. Profit or loss;
b. Other comprehensive income; and
c. Comprehensive income
Presenting a separate income statement is allowed as long
as a separate statement showing comprehensive income is also
presented (i.e., "Two-statement presentation'). Presenting only an
income statement is prohibited.
Profit or loss
Profit or loss is income less expenses, excluding the components
of other comprehensive income. The excess of income over
expenses is profit; while the deficiency is loss. This method of
computing for profit or loss is called the "transaction approach."
Income and expenses are usually recognized in profit or loss
unless:
a. They are items of other comprehensive income; or
b.
profit or loss.
The profit or loss section shows line items that present the
following amounts for the period:
a. revenue, presenting separately interest revenue;
b. finance costs; (interest Expenses.)
c. gains and losses arising from the derecognition of financial
assets measured at amortized cost;
d. impairment losses and impairment gains on financial assets;
e. gains and losses on reclassifications of financial assets from
amortized cost or fair value through other comprehensive income
to fair value through profit or loss;
f. share in the profit or loss of associates and joint ventures;
g. tax expense; and
h. result of discontinued operations. (PAS 1.82)
Additional line items shall be presented whenever relevant to the
understanding of the entity's financial performance. The nature
and amount of material items of income or expense shall be
disclosed separately.
Circumstances that would give rise to the separate disclosure of
items of income and expense include:
a. 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;
b. restructurings of the activities of an entity and reversals of any
provisions for restructuring costs;
c. disposals of items of property, plant and equipment;
d. disposals of investments;
e. discontinued operations;
f. litigation settlements; and
g. other reversals of provisions. (PAS 1.98)
Extraordinary items
PAS 1 prohibits the presentation of extraordinary items in the
statement of profit or loss and other comprehensive income or in
the notes.
Presentation of Expenses
 Expenses may be presented using either of the following
methods:
a. Nature of expense method - Under this method, expenses
are aggregated according to their nature (e.g., depreciation,
purchases of materials, transport costs, employee benefits and
advertising costs) and are not reallocated according to their
functions within the entity.
b. Function of expense method (Cost of sales method) -
Under this method, an entity classifies expenses according to
their function (e.g., cost of sales, distribution costs,
administrative expenses, and other functional classifications).
At a minimum, cost of sales shall be presented separately
from other expenses.
The nature of expense method is simpler to apply because it
eliminates considerable judgment needed in reallocating expenses
according to their function. However, an entity shall choose
whichever method it deems will provide information that is
reliable and more relevant, taking into account historical and
industry factors and the entity's nature.

If the function of expense method is used, additional disclosures

on the nature of expenses shall be provided, including
depreciation and amortization expense and employee benefits
expense. This information is useful in predicting future cash
flows.

Other Comprehensive Income (OCI)

Other comprehensive Income “comprises of income and expense
(Including reclassification adjustments) that are not recognized in
profit or loss as required or permitted by other PFRSs” (PAS 1.7)

The components of other comprehensive income include the

following:

a. Changes in revaluation surplus;

The following are the major categories of expenses under the b. Remeasurements of the net defined benefit liability (asset);
function of expense method; c. Gains and losses on investments designated or measured at
fair value through other comprehensive income (FVOCI);
1. Cost of sales d. Gains and losses arising from translating the financial
2. Distribution costs (selling expenses) statements of a foreign operation;
3. Administrative expenses (General and administrative expenses) e. Effective portion of gains and losses on hedging instruments
4. Other expenses (e.g., losses) in a cash flow hedge;
5. Finance costs (Interest expenses) f. Changes in fair value of a financial liability designated at
6. Income tax expense fair value through profit or loss (FVPL) that are attributable
to changes in credit risk;
Administrative expenses is a residual category of expenses, g. Changes in the time value of option when the option's
meaning an expense is included in this category if it does not intrinsic value and time value are separated and only the
qualify for classification under the other categories. changes in the intrinsic value is designated as the hedging
instrument; and
Illustration: Function of expense h. Changes in the value of the forward elements of forward
contracts when separating the forward element and spot
Interest Expense ‘000s element of a forward contract and designating as the hedging
Cost of inventories sold 12 instrument only the changes in the spot element, and change
Insurance Expense 300 in the value of the foreign currency basis spread of a financial
Advertising Expense 50 instrument when excluding it from the designation of the
Freight-out 10 financial instrument as the hedging instrument. (PAS 1.7)
Freight-in 5
Loss on sale of equipment 1 Amounts recognized in OCI are usually accumulated a separate
Legal and other prof fees 6 component of equity. For example, cumulative change in
Rent expense (1/2 occupied by sales dept) 4 revaluation surplus is accumulated in a "Revaluation surplus
Sales commission expense 7 account, which is presented as a separate component of equity
Doubtful accounts expense 8 cumulative gains and losses from investments in FVOCI and from
translation of foreign operation is also accumulated in separate
equity accounts.

Reclassification Adjustments
Items of OCI include reclassification adjustments.

> 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." (PAS
1.7)

Reclassification adjustments arise, for example, on

disposal of a foreign operation, derecognition of debt instruments
measured at FVOCI, or when a cash flow hedge becomes
ineffective or affects profit or loss.

On derecognition (or when the cash flow hedge becomes

ineffective), the cumulative gains and losses that were
accumulated in equity on these items are reclassified from ÓCI to
profit or loss. The amount reclassified is called the reclassification a. Those for which reclassification adjustment is allowed; and
adjustment. b. Those for which reclassification adjustment is not allowed.

A reclassification adjustment for a gain is a deduction in
OCI and an addition to profit or loss. This is to avoid double
inclusion in total comprehensive income. On the other hand, a
reclassification adjustment for a loss is an addition to OCI and a
deduction from profit or loss.
The entity's share in the OCI of an associate or joint
venture accounted for under the equity method shall also be
presented separately and also grouped according to the
classifications above.

Reclassification adjustments do not arise on changes in

revaluation surplus, derecognition of equity instruments
designated at FVOCI, and remeasurements of the net defined
benefit liability (asset).

On derecognition, the cumulative gains and losses that

were accumulated in equity on these items are transferred
directly to retained earnings, rather than to profit or loss as a
reclassification adjustment.

Illustration: Reclassification adjustment

In 20x1 ABC Co. disposed of a foreign operation for which a
cumulative gain of 100,000 is recognized in equity. ABC Co. is
subject to a 30% tax rate. How much is the net tax reclassification Items of OCI, including reclassification adjustments,
adjustment to other comprehensive income in 20x1? may be presented at either net of tax or gross of tax.

Answer: 70,000 Total Comprehensive Income

The net of tax reclassification adjustment is computed as
(100,000 x 70%). The amount is "negative" (ie., a deduction)
because reclassification adjustment is just transferring an amount
from other comprehensive income to profit or loss, it does not
affect total comprehensive income for the period.
Total comprehensive income is "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)

Prior to the disposal, the translation gain was presented as
a positive amount in other comprehensive income (as an addition
because it is a gain). On disposal, the translation gain is removed
(deducted) from other comprehensive income and reclassified
(added) to profit or loss. As
On the other hand, if the cumulative translation adjustment
in the illustration above was a loss, the reclassification adjustment
to other comprehensive income would have been a positive
amount (i.e., an addition).
Total comprehensive income is the sum of profit or loss
and other comprehensive income. It comprises all 'non
owner' changes in equity. Presenting information on
comprehensive income, and not just profit or loss, helps
users better assess the overall financial performance of
the entity.

Other comprehensive income, including reclassification

adjustments, may be presented net or gross of related tax. Either
way, disclosure of the related taxes is required, either on the face
of the statement of profit or loss and other comprehensive income
or in the notes.

However, it should be noted that reclassification

adjustments to profit or loss are always made at gross of tax. This
is because the tax effects of items of income or expenses that
enter into the determination of profit or loss from continuing
operations are aggregated and presented in a single line item
described as "Income tax expense."

If in the previous illustration, the requirement is for us to

compute for "the reclassification adjustment to profit or loss," the
answer would have been positive P100,000 and gross of tax.

Presentation of OCI

The other comprehensive income section shall group items of

OCI into the following:
Chapter 2: Summary
 Income and expenses may be presented: (a) in a single
statement of profit or loss and other comprehensive
income, or (b) in two statements - an income statement
and a statement presenting comprehensive income.

 Other comprehensive income (OCI) comprises items of

income and expense (including reclassification
adjustments) that are not recognized in profit or loss as
required or permitted by other PFRSS. OCI include: (a)
changes in revaluation surplus, (b) remeasurements of
the net defined benefit liability (asset), (c) unrealized
gains and losses on FVOCI investments, (d) translation
gains and losses on foreign operation, and (e) effective
portion of gains and losses on hedging instruments in a
cash flow hedge.

 Reclassification adjustments are amounts reclassified from

OCI to profit or loss. OCI may be presented net or gross
of related taxes.

 Total comprehensive income includes all non-owner

changes in equity. It comprises profit or loss and other
comprehensive income.

 Presenting extraordinary items in the financial statements,

including the notes, is prohibited.

 Expenses may be presented using either the Nature of

expense or the Function of expense method. Additional
disclosure is required when the function of expense
method is used.