Statement of comprehensive income

An undertaking shall present all items of income and expense recognised in a period:

(i) in a single statement of comprehensive income, or

(ii) in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income).

Information to be presented in the statement of comprehensive income

As a minimum, the face of the statement of comprehensive income
shall include line items that present the following amounts for the period:
(a) revenue;
(b) finance costs;
(c) share of the income statement of associates, and joint ventures accounted for using the equity method;
d) tax expense;

(e) a single amount comprising the total of:

(i) the post-tax profit or loss of discontinued operations and

(ii) the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation;

(f) profit or loss;

(g) each component of other comprehensive income classified by nature (excluding amounts in (h));

(h) share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and

(i) total comprehensive income.

An undertaking shall disclose the following items in the statement of comprehensive income as allocations of profit or loss for the period:

(a) profit or loss for the period attributable to:

(i) minority interest, and

(ii) owners of the parent.

(b) total comprehensive income for the period attributable to:

(i) minority interest, and

(ii) owners of the parent.

Additional line items, headings and subtotals shall be presented on the face of the statement of comprehensive income and the separate income statement (if presented), when such presentation is relevant to understanding the financial performance.

As the impacts of various transactions differ in frequency, potential for gain (or loss) and predictability, disclosing the components of financial performance assists in an understanding of the performance achieved, and in making projections.

Additional line items are included on the face of the statement of comprehensive income and the separate income statement (if presented), and the descriptions used (and the ordering of items) are amended, when this is necessary to explain the elements of financial performance.


EXAMPLE- Order of presentation of the income statement’s components
Issue
The description and ordering of items on the face of the income statements should be amended when this is necessary to explain the elements of performance.

Can management present the lines in the income statement in a different order from that described in IAS 1?

Background
Undertaking A’s management wishes to present the results of the undertaking’s share of profits and losses of associates accounted for using equity method before the line of finance costs.

Presented below is an extract from the undertaking’s proposed income statement

Share of results of associates
XXX

Finance costs
(XX)




Profit before tax
XXX





Solution
There is a suggested ordering of items to be reported on the face of the income statement: finance costs are presented before the results of associates.

Deviation from this general sequence would be rare, although permitted when this is necessary to explain the elements of performance.

Additionally, management should present and classify items in the income statement consistently from one period to the next.


Factors to be considered include materiality, and the nature (and function) of the components of income, and expenses. For example, a bank amends the descriptions to apply the requirements in IFRS 7. Income and expense items are not offset unless the criteria above are met.

No item should be described as extraordinary items, either on the face of the income statement, or in the notes.

Profit or loss for the period

An undertaking shall recognise all items of income and expense in a period in profit or loss unless an IFRS requires or permits otherwise.

Some IFRSs specify circumstances when an undertaking recognises particular items outside profit or loss in the current period. IAS 8 specifies two such circumstances: the correction of errors and the effect of changes in accounting policies.

Other IFRSs require or permit components of other comprehensive income that meet the Framework’s definition of income or expense to be excluded from profit or loss

Other comprehensive income for the period

An undertaking shall disclose the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments, either in the statement of comprehensive income or in the notes.

An undertaking may present components of other comprehensive income
either:

(i) net of related tax effects, or

(ii) before related tax effects with one amount shown for the aggregate
amount of income tax relating to those components.

An undertaking shall disclose reclassification adjustments relating to components of other comprehensive income.

Other IFRSs specify whether and when amounts previously recognised in other comprehensive income are reclassified to profit or loss. Such reclassifications are referred to in IAS 1as reclassification adjustments.

A reclassification adjustment is included with the related component of other comprehensive income in the period that the adjustment is reclassified to profit or loss.

For example, gains realised on the disposal of available-for-sale financial assets are included in profit or loss of the current period. These amounts may have been recognised in other comprehensive income as unrealised gains in the current or previous periods.

Those unrealised gains must be deducted from other comprehensive income in the period in which the realised gains are reclassified to profit or loss to avoid including them in total comprehensive income twice.

An undertaking may present reclassification adjustments in the statement of comprehensive income or in the notes. An undertaking presenting reclassification adjustments in the notes presents the components of other comprehensive income after any related reclassification adjustments.

Reclassification adjustments arise, for example, on disposal of a foreign operation (see IAS 21), on derecognition of available-for-sale financial assets (see IAS 39) and when a hedged forecast transaction affects profit or loss (see IAS 39 in relation to cash flow hedges).


EXAMPLE- Presentation of currency translation differences

Issue
Exchange differences arise from the translation of a foreign undertaking’s financial statements for incorporation in a reporting undertaking’s financial statements.

Management should classify such differences as equity until the disposal of the net investment [IAS21].

How should management present exchange differences in the undertaking’s statement of changes in equity?

Background

An undertaking has subsidiaries in several different countries. All of them are consolidated, and management classifies the currency translation differences arising from the translation of these subsidiaries’ financial statements as translation reserve in equity.

Solution

Management should present the gain/loss on currency translations on the face of the statement of changes in equity.

Additionally, management should present, in a note to the financial statements, a reconciliation of the amount of such exchange differences at the beginning and end of the period.

Reclassification adjustments do not arise on changes in revaluation surplus recognised in accordance with IAS 16 or IAS 38 or on actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19.

These components are recognised in other comprehensive income and are not reclassified to profit or loss in subsequent periods.

Changes in revaluation surplus may be transferred to retained earnings in subsequent periods as the asset is used or when it is derecognised (see IAS 16 and IAS 38).

Actuarial gains and losses are reported in retained earnings in the period that they are recognised as other comprehensive income (see IAS 19).


Income statement presentation - IFRS News - June 2005

Any group with international operations, whether listed or not, can benefit from making it easier for its major stakeholders to understand its financial statements.

Income statement presentation is an essential part of stakeholder communications and IFRS aims to add transparency and comparability to this communication. IAS 1, the standard which deals with the presentation of financial statements, contains broad guidelines on presentation format. The qualitative characteristics for the financial statements in the IFRS framework only represent general guidance.

Stakes are high for companies: broad guidelines offer opportunities to drive their communication based on financial statement presentation. The abuse of this flexibility, however, may do more harm than good in the medium term.

Analysts may be confused by presentations of ‘results before bad news and things management didn’t expect’. Regulators will not endorse such flexibility and will request strict rules to be applied. Restatements may occur and companies’ reputations will be tarnished by such behaviour.

How can companies acquire a useful and transparent presentation of their results?

How presentation format can make a difference

Most users look at the income statement first for information on the company’s financial performance. The notes may provide useful additional information but the size and complexity of these often prevent most users from considering them in detail.

The income statement presentation could influence the user’s decision-making. IAS 1 allows companies to report income statements on a functional (costs of sales, selling, marketing, etc...) or a nature (salaries, rent, depreciation, etc...) basis.

The temptation to combine both presentations is high, but will transparency and comparability result from doing so?

Imagine two similar companies: one excludes depreciation from its cost-of-sales figure to derive its gross profit figure, while presenting depreciation as a separate line item; the other includes depreciation of production equipment in costs of sales to reflect a complete functional presentation.

It would seem that the company that mixes function and nature expense categories generates more gross profit. This only reflects a choice of presentation and not the actual performance of the company.

The first presentation could create confusion for the user and it would not be comparable between different companies.

‘Industry practice’: slippery slope

Many companies suggest that analysts require certain disclosures on the face of the income statement, which are not defined or required under IFRS. ‘Earnings before interest, depreciation and amortisation’ (EBITDA) is an example, which is used in many capital intensive industries.

Many different calculation methods exist. Some companies exclude all amortisation and depreciation from the subtotal; others exclude all significant non-cash charges such as restructurings and impairments. This makes ‘EBITDA’ a wide category that is non-comparable.

Analysts must then make various adjustments to the published EBITDA figures based on information from the notes. Disclosing partial information on the face of the income statement (often without an explanation on its calculation) does not add value for users.

Transparency

Transparent reporting would result from use of a format similar to the examples in the application guidance to IAS 1. Subtotals and further line items only result in clearer presentation if certain criteria are met (see box below).


Other common reporting issues

The use of the ‘operating profit’ subtotal: many companies disclose ‘operating profit’ even though IFRS no longer requires it. If this subtotal is presented, IAS 1 states that all activities are presumed to be part of operations apart from the results of financing activities, equity-accounted investments, discontinued operations and taxation.

‘Non-recurring’ or ‘exceptional’ results: another commonly-used subtotal is the division of operating profit to ‘recurring’ and ‘non-recurring’ portions (or similar). Management may wish to make this separation to exclude ‘difficult debits’ or because the items were treated as ‘extraordinary’ under local GAAP.

These subtotals do not usually help to achieve clear and consistent presentation, but may be acceptable if the general criteria for a mixed presentation are met (see box below).

Restructuring: as restructuring provisions are not separate ‘functions’, it is unlikely that a separate line item for restructuring can be used in a functional expense presentation.

Conclusion

The income statement presentation can make a difference between companies even if the underlying results are similar. A company that follows IAS 1 will reduce subjectivity and aid comparability between different undertakings.

When is a mixed presentation acceptable?

The mixture of function and nature, and the use of subtotals, are only acceptable when all of the following requirements are met:

The proposed presentation is not misleading: the income statement presentation should be unbiased. The proposed breakdown should not result in a misleading cost-of-sales figure and overstate gross profit.

A potential for bias can exist if the subtotal gets undue prominence over the line items and the subtotals normally required by IFRS;

The presentation should be applied consistently across all years and the ‘rules’ should be set out in the accounting policies.

An undertaking that wishes to present a subtotal for non-recurring items should have an accounting policy which describes the classification rules (to avoid the cherry-picking of items to be classified as non-recurring); and

The breakdown of expenses by nature is presented in the notes to the financial statements, as required by IAS 1: the breakdown should be made in a separate note, which could be tied to the total of expenses presented on the face of the income statement.