FINANCIAL ACCOUNTING & REPORTING 3

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Statement of Comprehensive Income

Module 012 Week004- FinAcct3 Statement of

Comprehensive Income
An entity shall present an analysis of expenses recognized in profit or loss
using a classification based on either their nature or their function within
the entity, whichever provides information that is reliable and more relevant.
Expenses are subclassified to highlight the components of financial
performance that may differ in terms of frequency, potential for gain or loss
and predictability.
A discontinued operation occurs when two things happen: (1) a company
eliminates the results of operations of a component of the business, and (2)
there is no significant involvement in that component after the disposal
transaction.
Companies report as discontinued operations in a separate income statement
category the gain or loss from disposal of a component of an entity, In
addition, companies report the results of operations of a component that has
been or will be disposed of separately from continuing operations.
Companies show the effects of discontinued operations net of tax as a
separate category, after continuing operations.
A company that reports a discontinued operation must report per share
amounts for discontinued operations either on the face of the income
statement or in the notes to the financial statements.

At the end of this module, you will be able to:

1. Identify the different forms of income statement
2. Prepare the income statement
3. Understand the nature and accounting treatment of discontinued
operations

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Statement of Comprehensive Income

Presentation of expenses

PAS 1, paragraph 99, provides that an entity shall present on the face of the income
statement an analysis of expenses using a classification based on either the function of
expenses or their nature within the entity, whichever provides information that is reliable
and more relevant.
Expenses are subclassified to highlight components of financial performance that may
differ in terms of frequency, potential for gain or loss and predictability.
Accordingly, the income statement may be presented in two ways, namely functional and
natural.
Functional presentation
The functional presentation is the traditional and common form of income statement. It is
also known as the cost of sales method.
This form classifies expenses according to their function as part of cost of sales, distribution
costs, administrative activities and other activities.
Entities classifying expenses by function shall disclose additional information on the nature
of expenses, including depreciation, amortization and employee benefit costs.
This method can provide more relevant information to users than the classification of
expenses by nature, but allocating costs to functions may require arbitrary allocations and
involve considerable judgement.
Natural presentation
This presentation is referred to as the nature of expense method.
Under this form, expenses are aggregated according to their nature and not allocated
among the various functions within the entity. This method may be simple to apply because
no allocations of expenses to functional classifications are necessary.
In other words, the “natural” expenses are no longer classified as cost of sales, distribution
costs, administrative and other activities.
The expenses which are of the same nature are grouped or aggregated and presented as
one item.
Examples of “natural” expenses
a) Purchases
b) Employee benefit costs which include sales salaries, office salaries, SSS contribution,
medicare contribution, bonuses and other employee benefits
c) Advertising costs
d) Transport costs including freight out and other delivery expenses
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Statement of Comprehensive Income

e) Supplies which include store supplies and office supplies

f) Depreciation
g) Other expenses

Discontinued operations

A discontinued operation occurs when two things happen: (1) a company eliminates the
results of operations of a component of the business, and (2) there is no significant
involvement in that component after the disposal transaction.
Under Appendix A of PFRS 5, a discontinued operation is defined as “a component of an entity
that either has been disposed of or is classified as held for sale” and:
a) Represents a separate major line of business or geographical area of operations.
b) Is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations
c) Is a subsidiary acquired exclusively with a view to resale
A component of an entity may be a subsidiary, a major line of business or geographical
segment whose operations and cash flows can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the entity.
The component can be clearly distinguished operationally and for financial reporting
purposes if the assets and liabilities and the revenue expenses area directly attributable to
the component.
Accordingly, a discontinued operation occurs when the operations and cash flows of that
component have been or will be eliminated from the ongoing operations of the entity and
the entity will have no significant continuing involvement in that component after disposal.
Timing of reporting
A component of an entity is classified as discontinued operation at the date:
a) When the entity has actually disposed of the operation.
b) When the operation meets the criteria to be classified as held for sale.
If the discontinued criteria are met after the end of reporting period, an entity shall not
classify the discontinued operation as held for sale in the current financial statements.
Component classified as held for sale
A component of an entity is classified as “held for sale” if the carrying amount will be
recovered principally through a sale transaction rather that continuing use.
The discontinued operation is accounted for as a “disposal group classified as held for sale.”

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Statement of Comprehensive Income

Examples of discontinued operation

a) Selling by a diversified entity of a major division that represents the entity’s only
activities in the electronics industry.
b) Selling by a meat packing entity of controlling interest in a furniture entity. All other
operations of the entity are in the meat packing business.
c) Selling by a communications entity of all its radio stations. The entity’s remaining
activities are television stations and a publishing house.
d) A conglomerate is engaged in commodity business, real estate, manufacturing, and
constructions business. Selling of any of the four businesses is a discontinued
operation.
Income statement presentation
PFRS 5, paragraph 33, provides that an entity shall disclose a single amount comprising the
total of post-tax profit or loss of the discontinued operation and the post-tax gain or loss
recognized on the measurement to fair value less to cost of disposal or on the disposal of the
assets or disposal group constituting the discontinued operation.
Disclosures about discontinued operation
The following details are disclosed in the notes to financial statements:
a) The amount of revenue, expenses and gain or loss attributable to the discontinued
operation during the nearest period and the related income tax.
b) Any impairment loss
c) Any gains or loss from the actual disposal of the assets and the settlement of the
liabilities of a discontinued operation is recognized on the sale or date of settlement.
Such gain or loss is reported as part of the discontinued operation.
d) The termination cost of employees and other costs which are directly incurred as a
result of the discontinuance.
PFRS 5, paragraph 34, provides that if a disposal group is classified as held for sale in the
current year, the results of the disposal group for prior period shall be re-presented as
relating to discontinued operation in the comparative figures for the current year’s income
statement.
Presentation in statement for financial position
PFRS 5, paragraph 38, provides that an entity shall also present separately on the face of the
statement of financial position the following information:
a) Assets of the component held for sale separately from all other assets.
b) Assets of the component held for sale are measured at the lower of fair value less to
cost of disposal and their carrying amount.
c) Liabilities of the component separately from all other liabilities.
d) Nondepreciation – noncurrent assets of the component held for sale shall not be
depreciated.
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Statement of Comprehensive Income

PFRS 5, paragraph 3, provides that the assets of the component shall be presented as a single
amount under current assets and the liabilities of the component shall be presented as a
single amount under current liabilities.
The assets and liabilities of the component cannot be offset against the other.
Cash flow presentation
PFRS 5, paragraph 33, provides that the net cash flows attributable to the operating,
investing and financing activities of a discontinued operation shall be separately presented
in the statement of cash flows or disclosed in the notes.

References and Supplementary Materials

Books and Journals

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 1; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting;

United States; John Wiley & Sons, Inc.

Online Supplementary Reading Materials

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
http://www.ifrs.org/issued-standards/list-of-standards/ifrs-5-non-current-assets-held-
for-sale-and-discontinued-operations/; December 1, 2017
IAS 18 Revenue; http://www.ifrs.org/issued-standards/list-of-standards/ias-18-
revenue/; December 1, 2017

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Statement of Comprehensive Income

Online Instructional Videos

Balance Sheet and Income Statement Relationship;
https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-
financial-stateme/financial-statements-tutorial/v/balance-sheet-and-income-statement-
relationship; January 10, 2018

Income Statement Explained: Comprehensive Income Statement Tutorial- Profit & Loss
Statement;
https://www.bing.com/videos/search?q=statement+of+comprehensive+income&&view=d
etail&mid=7483CCBE7F3A38AD2C2D7483CCBE7F3A38AD2C2D&FORM=VRDGAR;
January 10, 2018

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