topic 11: statement of comprehensive income & changes in equity financial accounting bfa201
TRANSCRIPT
Topic 11: Statement of Comprehensive Income &
Changes in Equity
Financial Accounting BFA201
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Readings and references
• Deegan Chapter 16
• AASB 101 Presentation of Financial Statements
• AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
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Learning Objectives
To understand:
• how profit or loss & total comprehensive income are calculated and disclosed in the financial statements of a reporting entity
• how to apply AASB 101 to the Statement of Comprehensive Income & the Statement of Changes in Equity
• how to apply AASB 108 - account for and disclose prior period errors and changes in accounting policy and changes in accounting estimates
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Statement of Comprehensive Income
Statement of Comprehensive Income
• The statement of comprehensive income provides information regarding the financial performance of the entity for the reporting period
• Income, expenses and other comprehensive income (e.g. movement in the revaluation surplus) are summarised in the statement of comprehensive income.
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Measurement of profit
Profit & Loss
Expenses
Revenue
Gains
Income Statement
INCOME
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Measurement of profit
• Income
• Expense
• AASB Framework recognition criteria
• Determination of income and expenses may depend on the measurement model adopted
• Professional judgement and disclosure of assumptions made in the exercise of professional judgement
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Measurement of profit
• Recognising income and expenses
Profit and Loss
Income and expenses
Equity
Examples:• Revaluations• Prior period
errors
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Measurement of profit
• Certain gains and certain expenses will not be taken into consideration in calculating a reporting entity’s ‘profit or loss’.
• There are a number of accounting standards that
specifically stipulate that certain expenses (such as those relating to the correction of prior period accounting errors) and certain gains (such as those relating to asset revaluations) are not to be included in the ‘profit or loss’ of the reporting period.
• So ‘profit or loss’ of an entity does not include all expenses and income recognised within the financial period.
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Measurement of profit
• A more comprehensive measure of financial performance is provided by a measure known as ‘total comprehensive income’ – it will include various gains and expenses that are not incorporated within ‘profit or loss’.
• ‘Total comprehensive income’—which is a relatively
recently developed concept—includes both ‘profit or loss’ and ‘other items of comprehensive income’.
• Within a financial report, profit or loss is disclosed in the statement of comprehensive income (which replaces the ‘income statement’).
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Measurement of profit
• The format for the statement of comprehensive income is prescribed in AASB 101 Presentation of Financial Statements
• AASB 101 requires entities to recognise all items of income and expense in a period in profit or loss unless a particular accounting standard requires or permits otherwise.
• Some expenses and revenues are adjusted directly against equity e.g. prior period errors (AASB 108)
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Measurement of profit
Profit and Loss
Expenses
Revenue
Gains
Total Comprehensive
Income
Other comprehensive
Income
OR
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Measurement of profit
• Total comprehensive income has two components: Profit or loss and Other comprehensive income
• The traditional profit measurement is no longer appropriate due to:
• Changes in the categorisation and labelling of financial statement elements;
• Reduced emphasis on matching.
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Measurement of profit
• Specific accounting standards require or permit components of ‘other comprehensive income’ that meet the AASB Framework’s definition of income or expense to be excluded from the calculation of ‘profit or loss’.
• • Nevertheless, they would be reflected in a measure of
financial performance now referred to as ‘total comprehensive income’.
• As the name would suggest, ‘total comprehensive income’ is comprised of ‘profit or loss’ plus other gains and losses that are recorded directly in various equity accounts, and is presented in a ‘statement of comprehensive income’.
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Measurement of profitComprehensive income approach:
• Profit includes all income and expenses as defined in the Framework.
• It includes all changes in net assets (equity), other than transactions with owners.
• The contents of the income statement are determined conceptually, rather than arbitrarily.
• No income or expense items bypass the income statement.
• The assessment of current performance and prediction of future performance may be more difficult.
Statement of Comprehensive Income
Income and expense items must be presented as:
one Statement of Comprehensive Income OR two statements
+Income statementRevenuesExpensesOther gains & losses= Income before taxIncome tax expenseNet Income
Statement of Comprehensive IncomeNet IncomeForeign currency translation adj.Unrealised holding gains/lossesChanges in the revaluation surplusOther non-owner changes in equityLess tax related to OCI= Comprehensive Income
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Statement of Comprehensive Income
• Reporting entities have a choice when presenting information about their financial performance.
• They can either present a statement of comprehensive income which provides information about the entity’s profit or loss plus ‘other items of comprehensive income’, or they can separately provide both an income statement and a statement of comprehensive income.
• AASB 101 para 7 defines ‘other comprehensive income’ as follows:
Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Australian Accounting Standards.
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Statement of Comprehensive Income: AASB 101
• Para 82: As a minimum, the statement of comprehensive income must include amounts for:• Revenue• Finance costs• Share of profits of associates and joint ventures • Tax expense• Profit or loss on discontinued operations• Each component of other comprehensive income
classified by nature• Income tax related to OCI (para 90)
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Statement of Comprehensive Income –
Presented as a single statement
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Statement of Comprehensive Income: AASB 101
• If we were to look only at profit or loss recorded in the statement of comprehensive income (or in a separate income statement) we would not get a full picture of all the expenses and income (as defined in the AASB Framework) that were recognised in the current period.
• A joint consideration of the period’s profit or loss, plus a consideration of items impacting ‘other comprehensive income’ allows us to more fully appreciate all the income and expenses of a financial period.
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Presentation AASB 101
Income
Revenue (from ordinary
activities)
Gains
Expenses
Nature
Function
Material Disclose nature & amount separately
DepreciationRaw materials
Employee benefits
Cost of SalesCost of distribution
Cost of admin.
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Presentation AASB 101
• Paragraph 97 where items of income or expense are material, an entity shall disclose their nature and amount separately
• Paragraph 99 – Expense analysis: Entities may choose a presentation format based on either: their nature or function
• Entities must select the most relevant and reliable format– Classification by nature might involve expense categories
such as: Depreciation; Purchases of raw materials; and Employee benefits
– Classification by function might involve expense categories such as: Cost of sales; Cost of distribution; and Cost of administration
• Items are NOT to be presented as Extraordinary items
Statement of Comprehensive Income1st form of analysis: nature of expense (para. 102)
2015 2014Revenue xxxx xxxxOther income xxxx xxxxChanges in inventories of finished goods and work in progress (xxxx) (xxxx)Raw material and consumables used (xxxx) (xxxx)Employee benefits expense (xxxx) (xxxx)Depreciation and amortisation expense (xxxx) (xxxx)Impairment of property, plant and equipment (xxxx) (xxxx)Other expenses (xxxx) (xxxx)Finance costs (xxxx) (xxxx)Share of profit of associates xxxx xxxxProfit before tax xxxx xxxxIncome tax expense (xxxx) (xxxx)Profit for the year xxxx xxxxxOther comprehensive incomeGains on property revaluation xxxx xxxxTotal comprehensive income for the year xxxx xxxx
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2nd form of analysis: Function of expense/ ‘COS’ Method Para 103 2015 2014
Revenue xxx xxxCost of sales (xxx) (xxx)Gross profit xxx xxxOther income xxx xxxDistribution costs (xxx) (xxx)Administrative expenses (xxx) (xxx)Finance costs (xxx) (xxx)Profit before tax xxx xxxIncome tax expense (xxx) (xxx)Profit for the year from continuing operations xxx xxxLoss for the year from discontinued operations (xxx) (xxx)Profit for the year xxx xxxOther comprehensive incomeExchange differences on translating foreign operations xxx xxxAvailable-for-sale financial assets (xxx) xxxCash flow hedges xxx xxxGains on property revaluation xxx xxxIncome tax relating to components of other comprehensive income xxx (xxx)Other comprehensive income for the year, net of tax (xxx) xxxTotal comprehensive income for the year xxx xxx
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Presentation AASB 101
• Recognition of expenses: conventional practice has been to recognise expenses when the probability is less than 0.5, e.g. doubtful debts expense.
• Estimation is sometimes necessary when measuring expenses, e.g. depreciation.
• Measurement of expenses – – Where expenses are paid by cash, the amount of the
expense is the amount of cash paid.– Where expenses are an outflow of resources other than
cash, the amount of the expense is the book value of the outflow.
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Tax on OCI• Income tax related to each component of ‘Other
Comprehensive Income’ (OCI) must be shown as either:
– OR
List aggregate amount NOTESof tax relating to OCI on to financial Comprehensive Income statements Statement
Net: (after tax effects)
Gross amount (before tax
effects)
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Tax on OCI
• ‘Other comprehensive income’ is added to ‘profit for the year’ to give ‘total comprehensive income for the year’.
• AASB 101 requires entities to disclose the amount of income tax relating to each component of ‘other comprehensive income’, either in the statement of comprehensive income, or in the notes to the financial statements.
• Entities are permitted to present the components of ‘other comprehensive income’ either before tax effects (gross presentation) or after their related tax effects (net presentation).
• This is confirmed by AASB 101, paragraph 91, which states:
An entity may present components of other comprehensive income either:(a) net of related tax effects; or(b) before related tax effects with one amount shown for the aggregate amount of income tax relating to those components.
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Lecture Case Study – part 1
Refer to handout
Complete the Statement of Comprehensive Income for Wattle Ltd using function of expense method.
WATTLE LTDStatement of Comprehensive Incomefor the year ended 30 June 2011
NOTE 2011 2010
Sales revenue 1 1,510,000 xCost of goods sold 2 (948,800)Gross Profit 561,200Other income 3 274,000 x
835,200 xSelling expenses 4 (275,500) xAdministrative expenses 5 (205,000)Other expenses 6 (94,500)Borrowing costs 7 (1,200) xProfit before income tax 259,000 xIncome tax expense (77,700) xProfit for the year $181,300 x
Other Comprehensive IncomeGain on property revaluation 8 45,000Tax relating to other comprehensive income (13,500)Other Comprehensive Income for the year 31,500
Total Comprehensive Income for the year 212,800$
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Note 1: Sales Revenue: Sales - $1535000 less sales returns $25,000
Note 2: COGS: COGS - $942,800 plus freight inward $6,000
Note 3: Other income:Services revenue 270,000Proceeds on sale of machinery 54,000Carrying amount of machiney sold -50,000 4,000
274,000
Note 4: Selling ExpensesFreight outwards 7,000Advertising expense 10,000Sales staff salaries 200,000Sales staff vehicle expenses 16,000Telephone expense 12,500Depreciation of sales staff motor vehicles 30,000Total Selling Expenses 275,500
Note 5: Administrative expenses Administrative staff salaries expense 193,000Depreciation - office furniture 12,000Total Administrative Expenses 205,000
Note 6: Other ExpensesRent expense 16,500Rates expense 15,000Insurance expense 20,000Depreciation of machinery 18,000Depreciation - buildings 25,000Total Other Expenses 94,500
Note 7: Borrowing costs - Interest expense 1,200
Note 8: Revaluation of propertyBuilding at cost 500000Less accumulated depreciation -125000Carrying amount 375000Fair Value as at 30/6/11 420000Revaluation increment 45000
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Changes in accounting estimates AASB 108
• Para. 32 – estimates used e.g. bad debts, fair value of financial assets, useful lives of depreciable assets, warranty obligations (does not undermine reliability para. 33)
• Para. 5 – changes in estimates arises from new information or new developments so are not correction of errors (and not change in accounting policy para. 35)
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Changes in accounting estimates – recording
• Para. 34 recognised prospectively by including in profit or loss in:– Period of the change, if the change affects that period
only (eg prov for bad debts); or– The period of the change & future periods (eg change
in useful life of depreciable asset)
• If also affects assets and liabilities then need to adjust carrying amount in the period of the change (para. 37)
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Lecture Example 1
30 June 2013, Topsy Ltd on further information decided to revise the useful life of machinery (purchased for $400,000 on 1 July 2010, depreciated on straight-line basis with no residual) from 8 years to 5 years. No depreciation recorded for current period.• Prepare journal entry to account for change in
accounting estimate• Prepare appropriate supporting note as change had
a material effect.
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Solution
Dr Depreciation 100,000
Cr Acc Deprec – machinery 100,000
Supporting note – change in accounting estimate:
As a result of the revision during the year of the est. life of the machinery from eight to five years, the depreciation charge will increase by $50,000 for the following three years.
2013 ($) 2012 ($) Profit before tax has been arrived at after taking into account:
Depreciation Original 50,000 50,000 Change in accounting estimate 50,000 – 100,000 50,000
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Statement of Changes in Equity
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Statement of Changes in Equity
• Reconciles opening and closing equity• Provides details of each equity account:
» Share capital» Retained profit» Revaluation surplus
• Lists how each component is impacted by total comprehensive income– Eg. AASB108 errors or revaluation
• Lists transactions with owners• Comparative information required
Statement of Changes in Equity• AASB 101 para. 106 requires the preparation of a
Statement of Changes in Equity
• A statement of changes in equity shows:
a) Total comprehensive income for the period
b) For each equity component, effects of changes in accounting policies and correction of errors
d) For each component of equity, a reconciliation between beginning & end of period; separately disclosing changes from:
i. profit or loss;
ii. other comprehensive income &
iii. transactions with owners (contributions; distributions & ownership changes)
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Lecture Example 2: Statement of Changes in Equity preparation
The shareholders’ equity section of the balance sheet of Newton Ltd at 30 June 2010 was as follows:
Additional information• Newton Ltd issued 16 000 shares at $2.50 each on 31 May 2010 for cash.• A transfer of $10 000 was made from retained earnings to the general reserve• Net profit for the year was $130 000• Dividends for the year comprised: interim dividend $50 000; final dividend
provided $60 000.• Land was revalued to current fair value, resulting in the recognition of a gross
revaluation increment of $20 000 and a deferred tax liability of $6 000.
2010 2009
Share capital 200,000 160,000
General reserve 50,000 40,000
Revaluation surplus 74,000 60,000
Retained earnings 170,000 160,000
494,000 420,000
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Share capital
General reserve
Revaluation surplus
Retained earnings
Total equity
Balance at 1 July 2009 160,000 40,000 60,000 160,000 420,000
Changes in Equity for 2010
Total comprehensive income for the year (net of tax) 14,000 130,000 144,000
Distributions to shareholders (110,000) (110,000)
Transfer to general reserve 10,000 (10,000) 0
Issue of share capital 40,000 40,000
Balance at 30 June 2010 200,000 50,000 74,000 170,000 494,000
Solution Newton Ltd
Statement of Changes in Equityfor the year ended 30 June 2010
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Lecture Case Study – part 2
Refer to handout
Complete the Statement of Changes in Equity for Wattle Ltd.
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Lecture Case Study - solution
WATTLE LTD
Statement of Changes in Equityfor the year ended 30 June 2011
Share capital
General reserve
Revaluation Surplus
Retained earnings Total equity
Balance at 1 July 2010 887,000 5,000 80,000 140,000 1,112,000
Changes in Equity for 2011Total comprehensive income for the year 31,500 181,300 212,800
Dividend declared - ordinary (80,000) (80,000)
Dividend declared - preference (40,000) (40,000)
Transfer to general reserve 10,000 (10,000) 0
Balance at 30 June 2011 887,000 15,000 111,500 191,300 1,204,800
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Prior period errors AASB 108
• Para. 5 prior period errors: omissions or misstatements in financial statements for prior periods arising from misuse of reliable information available at the time and could have been obtained and used (eg math mistakes, mistakes in applying policies, oversights, fraud).
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Prior period errors - recording
• Correction is excluded from profit or loss of the period in which it is discovered.
• Adjust opening balance of retained earnings and restate comparative information.
• Change in accounting estimates are not corrections of errors.
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Lecture Example 3
During 2013 Mayhem Ltd discovered that payment to a supplier of $4,000 had been omitted in the 2012 financial statements. Tax rate is 30%. The following information has been supplied before incorporation of the error. Correct this in accordance with the requirements of AASB 108.
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Mayhem LimitedAbridged Statement of Comprehensive Income
for the year ended 30 June 2013
2013 2012
Profit before tax 28,500 35,400
Income tax exp 8,550 10,620
Profit for the year 19,950 24,780
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Share capital
Retained earnings Total
Balance at 30 June 2011 6,000 9,000 15,000
Profit for the year ending30 June 2012
– 24,780 24,780
Distributions – (3,000) (3,000)
Balance at 30 June 2012 6,000 30,780 36,780
Profit for the year ending 30 June 2013
– 19,950 19,950
Distributions – (3,000) (3,000)
Balance at 30 June 2013 6,000 16,950 22,950
Mayhem LimitedStatement of Changes in Equity for the year ended 30 June 2013
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SolutionMayhem Limited
Abridged Statement of Comprehensive Income for the year ended 30 June 2013
2013 2012
Profit before tax 28,500 31,400
Income tax exp 8,550 9,420
Profit for the year 19,950 21,980
BFA201_13 49
Share capital
Retained earnings Total
Balance at 30 June 2011 6,000 9,000 15,000
Profit for the year as restated
– 21,980 21,980
Distributions – (3,000) (3,000) Balance at 30 June 2012 6,000 27,980 33,980
Profit for the year ending 30 June 2013
– 19,950 19,950
Distributions – (3,000) (3,000) Balance at 30 June 2013 6,000 16,950 22,950
SolutionMayhem Limited
Statement of changes in equity for the year ended 30 June 2013
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Solution cont.Notes to the financial statements
Note 2 Prior period error
An amount due to a supplier was omitted during preparation of 2012 financial statements. The 2013 figures have been restated to take into account the omission. The effect of the restatement on those financial statements is summarised below. There is no effect on 2013 results.
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Solution cont.Effect on 2012
Increase in expenses (4,000)
Decrease in income tax expense 1,200
Decrease in profit (2,800)
Increase in accounts payable (4,000)
Decrease in tax payable 1,200
Decrease in equity (2,800)
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Example: Statement of Changes in Equity (with changes in accounting policy)
Cash Re- Share Retained flow valuationCapital earnings hedges surplus Total ($000) ($000) ($000) ($000) ($000)
Balance at 1/01/2011 xxx xxx xxx – xxxChanges in accounting policy – xxx – – xxxRestated balance xxx xxx xxx – xxxChanges in equity for 2011Dividends – (xxx) – – (xxx) Total comprehensive Income for the year – xxx (xxx) xxx xxxBalance at 31 December 2011 xxx xxx (xxx) xxx xxxChanges in equity for 2012Issue of share capital xxx – – – xxx Dividends – (xxx) – – (xxx)Total comprehensive income for the year – xxx (xxx) xxx xxxTransfer to retained earnings – xxx – (xxx) – Balance at 31 December 2012 xxx xxx (xxx) xxx xxx
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Next Week – Week 12 Other disclosure issues
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