Professional Documents
Culture Documents
ACCT10001
Accounting Reports and Analysis
Topic 5:
Statement of Profit or Loss
Other Comprehensive Income
Statement of Changes in Equity
Textbook reading
Chapter 6 – Statement of profit or loss and
statement of changes in equity
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Learning Objectives
• Explain the principles of recognition, measurement and
disclosure associated with income and expense items
• Discuss how accounting policy choice and incentives can
effect the determination of profit
• Explain the nature, purpose and disclosure requirements of
the Statement of Profit or Loss
• Explain the nature and purpose of the Statement of
Changes in Equity
The Economic Reality
(Events & Attributes)
of the “The Entity”
(Sole Trader, Partnership, Company)
Time
past, present, future
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The Statement of Profit or Loss
• The conventional measure of financial performance
– The sources of revenue and other gains earned by
the entity Income
– The consumption of benefits (depletion of assets)
and other losses incurred by the entity Expenses
Profit = Income – Expenses
In terms of Stocks and flows
– Income and Expanses are flows during the period
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The Reporting Period
• The financial statements are prepared on the assumption
the entity is a going concern and will continue for the
foreseeable future There are implications if mgt believes this is not so
• The indefinite life of a going concern entity is divided into
reporting periods
– The CA 2001 and AASBs require reports to be prepared
(at least) annually (for publicly listed, also half‐yearly)
– The reporting date is not prescribed
• Australian fiscal year ends on June 30
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Accrual accounting
• AASBs require financial statements to be prepared on the
accrual basis of accounting
• The effects of transactions and other events are recognised
when they occur (not as cash is received or paid), and so are
recorded and reported in the financial statements of the
periods to which they relate
– Profit ≠ Cash flow
• Issues may arise as to how certain items of income and expense
are allocated (i.e. recognised) across different reporting periods
Income
• Definition
– Increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity
participants
Other than
Income = ↑ A or ↓ L => ↑ Eq
cont’d equity
↑ Cash ↑ Retained
↑ Receivables earnings
↑ Accrued revenue
↓ Unearned revenue
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Income (Revenue & Gains)
• The definition of income encompasses both:
– revenue arising in the course of ordinary activities
• Principal revenue generating activities – sales, fees
• Other revenue – interest, dividends, royalties, rent
– gains representing other items that meet the definition
of income and may, or may not, arise in the course of
ordinary activities
• realised gains from disposals of non‐current assets
• unrealised gains from increases in fair value of non‐
current assets
Income
• Recognition
– To be recognised as income, the increase in future
economic benefits or decrease in liabilities must have arisen
and must be able to be measured reliably
• The recognition of income occurs simultaneously with
the recogni on of an ↑A or ↓L
• Chicken or the egg?
– In practice, the requirement is revenue must be earned
• i.e. the entity has performed (or as it performs) its
obligations under the contract
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Income
• Measurement
– For most income, obtaining a reliable measurement is
straight forward
• Based on value of cash received or an agreed value
recorded on an invoice
– Some income, however, must be measured according to a
reliable estimate
• Pro rata estimation e.g. accrued revenue
• Market valuation
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Income
• Disclosure
– All material items must be separately disclosed
• Line disclosure in Statement of profit or loss: Revenue
• Disaggregated note disclosure
– Revenue recognition policies
JB Hi‐Fi Note 1(u)
The Group recognises revenue when the amount of revenue can be
reliably measured, it is probable the future economic benefits will
flow to the entity and specific criteria have been met …
Revenue from sale of goods is recognised … at the point of
sale (if the goods are taken) or on delivery of the goods to
the customer
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Revenue from primary activities
• A manufacturing / trading firm sells goods to a customer
• A professional services firm provides services to clients
• Recognition:
– At time goods or services are provided (for cash or credit)
to customer or client (the point of sale)
– Coincides with recognition of cash or trade receivables (↑
A) or depletion of unearned revenue (↓ L)
• Measurement:
– Agreed value at point of sale (the transaction price)
• Disclosure:
– Line item: Sales revenue, Service / fees revenue
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Revenue from primary activities
• A magazine publisher provides monthly editions to
subscribers / An insurance company provides insurance cover
• Recognition:
– Unearned revenue at time annual subscription / premium
is received A liability, NOT revenue
– Revenue as each edition is delivered / month elapses,
coinciding with deple on of unearned revenue (↓ L)
• Measurement:
– One‐twelfth of annual subs / premium (pro rata)
• Disclosure:
– Line item: Subscriptions revenue / Revenue from premiums
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Gains from primary activities
• An increase in livestock on a commercial farm
• Recognition:
– At me of birth (↑ A)
– Concept of duality: where is the other half?
This is why we need a
– ↑ A, no ∆ L => ↑ Eq Must be income
Conceptual Framework
• Measurement:
– What is the transaction price? In the absence of a transaction …
– Market price (fair value) of the livestock
• Disclosure:
– Line item: Gain on recognition of livestock
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Long‐term construction projects
• Construction companies typically undertake projects that take
several years to complete
– Major infrastructure projects
– National Broadband Network (NBN)
– The Spot
• Under accrual accounting, revenue is recognised when it is
earned
• But, when is revenue earned in a long‐term construction project?
– When the contract is signed?
– When the project is completed?
– As progress payments are received?
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Long‐term construction projects
• Accounting Standards permit entities who recognise revenue
over time to use an input (or percentage of completion)
method for both recognition and measurement
• Example
– ARA Constructions commences a long‐term project in 2018
• Contract price is $300m
• Estimated total costs are $120m
• Estimated time to complete is 3 years
• Actual costs incurred in FY19 are $30m
– How much revenue should be recognised in FY19?
Costs incurred in FY19 = $30m => 25% of total estimated costs
=> 25% completion of $300m contracted revenue = $75m 17
Commercial example – Lendlease Annual Report 2018
4. Revenue
Accounting Policies
Revenue from the provision of services is recognised
in the Income Statement in proportion to the stage
of completion of the transactions at the balance
sheet date.
• For Construction and Development: the value of
work performed using the percentage complete
method, which is measured by reference to
costs incurred to date as a percentage of total
forecast costs for each contract. This
measurement is an accounting judgement as
management uses judgement to estimate
expenses incurred to date as a percentage of
total estimated costs. Also includes origination
fees for infrastructure services rendered.
p.151 Lendlease Annual Report 2018
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Other revenue in the ordinary course of business
• An entity rents out excess office space
• Interest and dividends earned from investments
• Recognition:
– At time rental service is provided
– When dividend is declared
– As interest is earned pro rata
• Measurement:
– Agreed price, declared dividend, pro rata measurement
• Disclosure:
– Line item: Other revenue
– Notes disclose any material items of other revenue
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Other revenue in the ordinary course of business
• Example: $100,000 invested on March 31 at 6% p.a. paid half‐
yearly
• Recognition:
– At June 30, no receipt but 3 months interest has been
earned
– Coincides with recognition of accrued revenue (↑ A)
• Measurement:
– pro rata measurement: $100,000 x 6% x 3/12 = $1,500
• Disclosure:
– Disaggregated under Other revenue in Notes
JB Hi‐Fi Note 1(u): Interest revenue is accrued on a time
basis, by reference to the principal outstanding and at the
effective interest rate applicable …
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Realised gains in the ordinary course of business
• An entity sells a non‐current asset that cost $100,000 and has a
carrying amount of $20,000, for $25,000 cash
• Recognition:
– When title is transferred
– Coincides with recognition of cash and derecognition of PPE
• Measurement:
– Proceeds from disposal less Carrying amount i.e. $5,000
• Estimated consumption of FB = $80k ($100k less $20k)
• Actual consumption of FB = $75k ($100k less $25k)
• Realised gain = entity’s overestimation of depreciation
• Disclosure:
– Line item: Other income (Gain on disposal of PPE)
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Expenses
• Definition
– Decreases in economic benefits during the accounting
period in the from of outflows or depletions of assets or
incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity
participants
Other than
Expenses ↓ A or ↑ L => ↓ Eq
direct dist’ns
↓ Cash ↓ Retained earnings
↓ Receivables via dividends
↓ Inventories
↓ PPE ↑ Payables
↑ Accruals
↑ Provisions 22
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Expenses
• The definition of expenses encompasses both:
– expenses arising in the course of ordinary activities
• cost of sales, wages, depreciation
– losses representing other items that meet the definition
of expenses and may, or may not, arise in the course of
ordinary activities
• realised losses from disposals of non‐current assets
• unrealised losses from decreases in fair value of
non‐current assets
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Expenses
• Recognition
– To be recognised as an expense, the decrease in future
economic benefits or increase in liabilities must have arisen
and must be able to be measured reliably
– The recognition of expenses occurs simultaneously with the
recogni on of an ↓ A or ↑ L
– An expense arises when:
• an expenditure produces no FB (or the FB is not
expected to extend beyond the end of the period)
• when FB do not, or cease to, qualify for recognition
• when a liability is recognised without the recognition of
an asset
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Expenses
• Measurement
– For most expenses, obtaining a reliable measurement is
straight forward
• based on value of cash paid or an agreed value recorded
on an invoice
– Some expenses, however, must be measured according to
a reliable estimate
• pro rata estimation e.g. accrued expenses
• reasonable estimation e.g. depreciation, employee
provisions, warranty provisions
The same measurement issues relating to the
associated asset or liability apply to the expense
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Expenses
• Disclosure
– All material items must be separately disclosed
• Line item in statement of profit or loss
– By nature: wages & salaries, depreciation
– By function: selling, distribution, administrative
• Note disclosures
– Disaggregated information
– Recognition policies
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Expenses relating to Inventory
• When future benefit is consumed or ceases to exist
– When sales occur or supplies are consumed Cost of goods sold /
Cost of materials used
– When identified as missing Inventory loss
– When realisable value is zero or falls below cost => impairment
• Recognition: Inventory write down
– When inventory is delivered or identified as lost / impaired
– Coincides with derecognition of qty or $ value of Inventory (↓ A)
• Measurement:
– Cost price of inventory derecognised (sold or missing)
– Impairment decrement (cost price less NRV)
• Disclosure:
– Line item (typically material): Cost of sales
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Expenses relating to Receivables
• Qualitative assessment of receivables identifies recoverable
amount below carrying amount
• Recognition:
– When receivables are identified as impaired
– Coincides with recognition of Allowance for DD (↓ A)
• Measurement:
– Carrying amount less Recoverable amount
• adjusted for previous estimates and bad debts realised
• Disclosure:
– Included in a line item (such as): Selling expenses
– Notes (Receivables): Bad and doubtful debts
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Expenses relating to Non‐current assets
• Systematic allocation of cost over estimated useful life of PPE /
Intangible => depreciation / amortisation
• If recoverable amount falls below cost => impairment
• Recognition:
– Estimated consumption of benefit / impairment testing
– Coincides with recognition of Accumulated depreciation /
amortisation and impairment (↓ A)
• Measurement:
– Estimation of benefit consumed
– Carrying amount less Recoverable amount
• Disclosure:
– Line item or Notes: Depreciation, amortisation and impairment
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Expenses relating to non‐current assets
Depreciation and Amortisation – key points
• An estimation
• Reflects consumption of FB, NOT decline in value!
• Is not a cash flow!
• Different methods available under AASBs Choice
– Straight line / Reducing balance / Units of use
• Land not subject to depreciation FB is indefinite
• Determined by initial measurement of non‐current asset
– Cost includes capitalised expenditures Judgement
AGENCY ISSUE
Different estimations / methods / judgements
gives different $ => different $ profit
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A Comparison: David Jones vs. Myer (FY11)
Financial statement line item DJS Myer
Sales Revenue 1,961m 3,158m
Net profit after tax 168m 160m
Depreciation 46m 60m
Property, Plant & Equipment 798m 535m
DJS higher NPAT despite less Sales => more profitable
But DJS reported less Depreciation despite more PPE???
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David Jones: Annual Report 2011 Note 1(r)(iii)
Depreciation is charged to the Statement of Comprehensive
Income on a straight‐line basis over the estimated useful lives of
buildings, plant and equipment. The estimated useful lives in the
current and comparative year are as follows:
– Leasehold improvements 10 – 25 years
– Plant and equipment 5 – 25 years
– Computer equipment 3 – 5 years
– Fixtures and fittings 5 – 13 years
– Buildings 75 years
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Myer Holdings: Annual Report 2011 ‐ Note 1(o)
Land is not depreciated. Depreciation on other assets is
calculated using the straight line method to allocate their
cost net of their residual values, over their estimated
useful lives, as follows:
– Buildings 40 years
– Fixtures and fittings 3 – 12.5 years
– Plant and equipment 10 – 20 years
– Leasehold improvements 20 years
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Comparison of Accounting Policies
Policy / estimate of useful life DJS Myer
Method Straight‐line Straight‐line
Buildings 75 yrs 40 yrs
P&E, leasehold improvements 25 yrs 20 yrs
Depreciation / PPE 5.7% 11.2%
• These estimations impact figures reported in FS
– ↑ es mated useful life => ↓ deprecia on => ↑ profit
• Is DJS really outperforming Myer?
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David Jones vs. Myer
• How does DJS management justify their buildings have
longer useful lives than Myer?
– higher quality investments?
– renovated more often?
– more optimistic estimates?
• Auditors have signed off as true and fair
• Users of FS should scrutinise Notes to assess reasonableness
of the estimates
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Other expenses in the ordinary course of business
FY18 30/6/18 FY19 30/6/19 FY20
Prepayments Prepayments
Asset at 30/6/18 Asset at 30/6/19
Accruals Accruals
Liability at 30/6/18 Liability at 30/6/19
Payments for assets (prepaid expenses) and payments of liabilities
(accruals and provisions) are not expenses 36
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Expenses relating to employees
• Wages and salaries
• Leave entitlements
• On‐costs – superannuation, insurance, payroll tax
• Recognition:
– As labour is consumed and entitlements accrue
– Coincides with decrease in cash (↓ A) or recognition of
accruals and provisions (↑ L)
• Measurement:
– Hours worked x Rates of pay
– Actuarial estimates, discounted future cash flows
• Disclosure:
– Line item or Notes: Employee costs
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Other expenses in the ordinary course of business
• Advertising, rent, insurance, utilities …..
• Recognition:
– As benefits are consumed (↓ A: cash, prepaid expenses)
– Expenditures that produce no future benefit (↓ A: cash)
– Recognition of a liability with no corresponding asset (↑ L:
accrued expenses / other payables)
• Measurement:
– Amounts paid adjusted for pro rata / estimates of accruals
and prepayments
• Disclosure:
– Line item: Selling, Administration etc
– Notes: Any individually material items
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Finance costs
• Interest on loans and any other costs associated with
borrowings
• Determined by capital structure (not operating performance)
• Recognition:
– Accrual basis throughout term of loan
– Other costs as incurred
• Measurement:
– Principal x Interest rate x Pro rata
• Disclosure:
– Line item (mandatory): Finance costs
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Income tax
• Tax on profit imposed by government
• Determined by govt policy (not operating performance)
• Recognition:
– As profits are recognised
• Measurement:
– Taxable profit x Corporate tax rate
• Disclosure:
– Line item (mandatory): Income tax Expense
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Realised losses in the ordinary course of business
• An entity sells a non‐current asset that cost $100,000 and has a
carrying amount of $20,000, for $18,000 cash
• Recognition:
– When title is transferred
– Coincides with recognition of cash and derecognition of PPE
• Measurement:
– Carrying amount less Proceeds from disposal i.e. $2,000
• Estimated consumption of FB = $80k ($100k less $20k)
• Actual consumption of FB = $82k ($100k less $18k)
• Realised loss = entity’s underestimation of depreciation
• Disclosure:
– Line item: Other losses (Loss on disposal of PPE)
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Other comprehensive income (OCI)
• Consider Land purchased in 2015 for $15 million Cost
• Independent valuation in 2018 is $14 million FV < cost = impairment?
• Independent valuation in 2018 is $20 million
• Policy choice: cost or revaluation model
– If cost – ignore (RA exceeds CA)
– If revaluation – revalue PPE by $5 million Unrealised gain
• ↑ in Assets (PPE / Land & buildings) => ↑ in Equity Income
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Other comprehensive income (OCI)
• Such unrealised gains are not included in the conventional
measure of profit
• Recognition:
– At time of revaluation (not applicable if cost method used)
• Measurement:
– Revalued amount less Carrying amount prior to revaluation
• Disclosure:
– Other comprehensive income (Gain on revaluation of PPE)
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Financial performance
• The conventional key measure of financial performance is
profit or loss
• Profit is a measure of the return the entity has generated
for its investors over the reporting period
• An indicator of how well management has discharged its
responsibilities to efficiently and effectively utilise the
entity’s resources
• Can use current and previous periods’ profits as a basis for
predicting future returns (i.e. trend analysis)
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Profit or loss vs Comprehensive income
Revenue & Unrealised
+ = Income
Realised gains gains
less less
Expenses & = Expenses
Losses
equals equals equals
Profit or loss + =
Other Comprehensive
Comprehensive income
Income
• Comprehensive income represents the increase in net
assets (other than those relating to equity participants)
Which is more important to analysts? 45
Reporting Comprehensive Income
• May be presented in a single Statement of Profit or Loss and
Other Comprehensive Income
– Presents all income and expenses but has separate sections for
Profit or loss and OCI
• Alternatively (and more commonly), may be presented in
separate statements as follows:
• Statement of Profit or Loss
– Presents revenue and expenses to give profit or loss
• Statement of Comprehensive Income
– Presents a figure for Profit or loss followed by details of OCI to
give Total comprehensive income
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A single statement
STATEMENT OF PROFIT OR LOSS & OCI
Revenue & realised gains $
Expenses & losses ($)
Profit (or loss) $$
Unrealised gains $
Other comprehensive income $$
Comprehensive income $$
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Separate statements (more common)
STATEMENT OF PROFIT OR LOSS
Revenue & realised gains $
Expenses & realised losses ($)
Profit (or loss) $
STATEMENT OF COMPREHENSIVE INCOME
Profit (or loss) $
Unrealised gains $
Reversals of unrealised gains ($)
Other comprehensive income $
Comprehensive income $ 48
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Disclosure requirements
• Specific line items that must be disclosed in the statements
(regardless of materiality)
– Profit or loss
– Total OCI
– Comprehensive income (= P/L + OCI)
– If applicable, profit attributable and OCI attributable to NCI
and members of the parent
– Revenue
– Finance costs
– Tax expense
– Additional line items, headings, and sub‐totals relevant to an
understanding of the entity’s financial performance
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Disclosure requirements
• Specific line items that must be disclosed in either the
statements or the Notes
– Categories of revenue (sale of goods, the rendering of
services, interest, royalties, dividends)
– Amount of inventories recognised as an expense Cost of sales
– An analysis of expenses using a classification based on:
• nature (depreciation, employee costs) or function
• function (cost of sales, selling, administrative)
– Any other items of income or expense that are material
• write‐downs of inventory or PPE Individual items that
• restructuring costs are not material are
• disposals of PPE and Investments aggregated as Other
• litigation settlements 50
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• Presents details about the changes in carrying amounts from
the beginning to the end of the period for each component
• Must disclose details about changes resulting from profit or
loss, other comprehensive income and transactions in relation
to contributions by and distributions to owners
Contributed equity Reserves Retained earnings
+ ↑ in OCI + Profits
+ Share issues
Tfrs from Ret’d earnings Tfrs from Reserves
less Losses
less Share buy-backs less Tfrs to Retained earnings Dividends
Tfrs to Reserves
= Carrying amount at end = Carrying amount at end = Carrying amount at end
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Agency Issues
• Income and expenses are recognised according to ↑ and ↓ in
assets and liabilities
• The same agency issues pertaining to assets and liabilities flow
on to income and expenses
Examples of estimates Examples of
and judgements policy choices
• Doubtful debts • Inventory valuation methods
• NRV of inventory / RA of PPE • Depreciation methods
• Capitalising expenditure • PPE valuation methods
• Depreciation & amortisation
• Provisions & accruals
• Hybrid classification (Int exp or
Div)
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Summary
• Knowledge of an entity’s financial performance enables users
to assess how well the entity has utilised its resources and, by
extension, how well management has discharged its
responsibilities to investors
• Accounting Standards provide guidance as to appropriate
recognition, measurement and classification of income and
expense items that measure financial performance
• The income statement provides information about past
performance and is usually helpful in predicting future
performance
• Users must have an understanding of the choices, estimations
and judgements made by management in deriving profit
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