HI5020 Corporate Accounting

Session 4a
Statement of Comprehensive Income & Statement
of Changes in Equity

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 Session Objectives
•Understand how profit is both calculated and disclosed
•Comprehensive income
•The link between profits and professional judgement and
the accounting model selected
•The purpose of “Statement of Comprehensive Income”
and “Statement of Changes in Equity” and the
requirements of an entity
•Accounting for changes in accounting policies
•Managing prior period errors

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 What is income as defined by AASB?
•“Increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases in liabilities
that result in equity, other than those relating to
contributions from equity participants.”
•Revenue is a class of income, related to the ordinary
day-to-day activities of an entity.
•Income includes gains, such as interest, dividends
received, royalties, etc. as well as revenue

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 Calculating Profit
This simplest way of expressing profit is the
recognition of:
Revenue & other income $XX
Less: Direct expenses XX
Gross profit $XX
Less: Operating expenses XX
Net profit before tax $XX
Less: Income tax payable XX
Net profit after tax $XX
Example: CIMIC FS

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 Calculating Profit (cont.)
•In reality, it is not that simple as there are many
factors as well as considerations under AASB that
need to be considered.

•And then of course, the internal aspects of a

business, such as the professional knowledge
(and in some cases, the professional integrity) of
those charged with the preparation of said
reports.

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 Calculating Profit (cont.)
•AASB 101 (par.88) requires entities to recognise all items of
income and expenses in a period relating to profit or loss
UNLESS a particular accounting standard requires or permits
otherwise stating:
“an entity shall recognise all items of income and expense in
a period in Profit or Loss unless an Australian Accounting
Standard requires or permits otherwise”

“Matching Principle”

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 Statement of Comprehensive Income
AASB 101 (par.81) states that:
“An entity shall present all items of income and expense
recognised in a period
a) in a single statement of comprehensive income, or;
b) in two statements:
i. a statement displaying components of profit or loss
(separate income statement) and
ii. a second statement beginning with profit or loss and
displaying components of other comprehensive
income (statement of comprehensive income)”
See the sample CIMIC Group Ltd. formerly Leighton
Holdings
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 Disclosure of Profits/Losses & Changes in Equity

•Profits & losses have a direct impact on equity

and as such, an impact on assets and/or
liabilities.

•An increase in profits would show in the Equity

account as Retained Earnings and as such, there
would have to be something in the Asset side of
the Balance Sheet that would reflect that.

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 Disclosure of Profits/Losses & Changes in Equity (cont.)

•An example could be via an error, where a fixed

asset was valued above its recoverable value. As
such, there would be a correction in the form of a
reduction in assets, reduction in the retained
earnings, recognising the write-down expense to
the recoverable value.
•There are a number of Accounting Standards that
require certain income and expense items to be
recorded directly into particular equity accounts,
not into a period’s P/L.
•These are referred to as “other comprehensive
income”

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 Other Comprehensive Income

AASB 101 (par.7) defines “other comprehensive income” as:

“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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 Other Comprehensive Income (cont.)
AASB 101 (par.7), components of “other comprehensive
income” includes:
A. Changes in relation to revaluation surplus (AASB 116, Property,
Plant & Equipment, AASB 138, Intangible Assets)
B. Actuarial gains (e.g. in December 2006, the Financial Accounting
Standards Board (FASB) issued SFAS 158, which stated that a
plan’s funded status must be recognized on the balance sheet,
and actuarial gains and losses in a period should flow directly to
comprehensive income in shareholder’s equity) and losses on
defined benefit plans recognised in accordance with AASB 119
(par.93A), Employee benefits .
C. Actuarial Gains and Losses (Pension Plan Estimates) explained on
the next slide

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Gain or loss arising from the difference between estimates and actual
experience in a company's pension plan. Actuarial gains and losses
are used when accounting for pension plans because of the need to
make assumptions about the future rate of salary increases, the
length of employee tenure, an appropriate discount rate for the plan
obligations and the expected rate of return on plan assets.
http://www.investopedia.com/terms/a/actuarial-gain-
loss.asp#ixzz3YAp8bjFP

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 Other Comprehensive Income (cont.)
C. Gains and losses arising from translating the
financial statements of a foreign operation, AASB
121, “The Effects of Changes in Foreign
Exchange Rates” (Discussed in HI6025)
D. Gains and losses from re-measuring available-
for-sale financial assets, AASB 139, “Financial
Instruments – Recognition & Measurement.”
E. The effective portions of gains and losses on
hedging instruments in a cash-flow hedge, AASB
139 again

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 Comprehensive Income (cont.)
•AASB 101 addresses the format that a Statement
of Comprehensive Income should take as well as
those items that are to be disclosed separately in the
Statement or in the “notes to and forming part of.”
•AASB 101 (par.82) requires that there is a minimum
line items to be disclosed and they are as follows as
shown on next slide:

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 Comprehensive Income (cont.)
a. Revenue
b. Finance costs
c. Share of profit/losses of associates and joint
ventures accounted for using the equity
method
d. Tax expense
e. A single amount comprising the total of:
1) post-tax profit or loss of discontinued
operations
2) post-tax gain or loss recognised on
measurement to fair value less costs to sell or
on disposal of assets or disposal groups
constituting the discontinued operations
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 Comprehensive Income (cont.)
f. Profit and loss
g. Each component of other comprehensive
income classified by nature (excluding
amounts in “h”)
h. Share of the comprehensive income of
associated and joint ventures accounted for
using the equity method (to be discussed in
Week 12)
i. Total comprehensive income

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 Presentation of Statement of Comprehensive Income

AASB 101 (par.99) states:

“An entity shall present an analysis of expenses in profit or
loss using a classification based on either the nature of
expenses or their function within an entity, whichever
provides information that is reliable and more relevant.”
•This really depends on the type of business & in
fact they have the choice.
•Two methods on the basis of the “nature of
expense” or “function of expense”

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 Nature of Expense Method - Example

Revenue x
Other income x
Changes in inventories of finished goods & WIP x
Raw materials & consumables used x
Employee benefit costs x
Depreciation and amortisation costs x
Other expenses x
Total expenses x
Profit x

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 Function of Expense Method (Cost of Sales)

Revenue x
Cost of sales x
Gross profit x
Other income x
Distribution costs (x)
Administrative costs (x)
Other expenses (x)
Profit x

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 Profits, Professionalism & Accounting Models

•By now, you should be starting to understand

that there is a link between profits, the
professional capabilities of an accountant and the
choice of accounting model.
•So many options are available.
•Consider factors such as inventory valuation,
depreciation as well as the method of
presentation.

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 Statement of Changes in Equity
An entity is required to present the following:
1. A statement of financial position
2. A statement of comprehensive income
3. A statement of cash flows
4. A statement of changes to owners’ equity
(refer next slide – actual copy from Annual
Report, 2005-06, Therapeutic Goods
Administration)

Notes to and forming part of the financial

statements.

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 Statement of Changes in Equity: Example
Accum. results Asset Rev. Res Contributed equity Total equity
2006 2005 2006 2005 2006 2005 2006 2005
$,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000

Opening bal. 11,213 6,504 2,095 1,600 - - 13,308 8,104

Adjustment for errors - - - - - - - -
Adjustment-changes in - 184 - - - - - 184
accounting policies

Adjusted O/B 11,213 6,688 2,095 1,600 - - 13,308 8,288

Income & Expense
Revalue adjustments - - - 495 - - - 495
Subtotal I&E - - - 495 - - - 495

Net Operating Result (4,756) 4,525 - - - - (4,756) 4,525

Total I & E (4,756) 4,525 - - - - (4,756) 4,525
Distribution-owners - - - - - - - -
Return on Capital - - - - - - - -
Dividends - - - - - - - -
Returns of Capital - - - - - - - -
Restructuring - - - - - - - -
Other (details) - - - - - - - -
Contribution-owners - - - - - - - -
Appropriation –equity - - - - - - - -
injection

Closing Balance 6,457 11,213 2,095 2,095 - - 8,552

2613,308
 Statement of Changes in Equity
Recent amendments, under AASB 101 (par.106) requires:
“An entity shall present a statement of changes in equity showing the
statement:
•Total comprehensive income for the period, showing separately the
total amounts attributable to owners of the parent and to minority
interest;
•For each component of equity, the effects of retrospective application
of restatement recognised in accordance with AASB 108;
•The amounts of transactions with owners in their capacity as owners,
showing separately contributions by and distributions to owners;
•For each component of equity, a reconciliation between the carrying
amount at the beginning and at the end of the period, separately
disclosing each change”.

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Statement of Changes in Equity (cont.)

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 Statement of Changes in Equity (cont.)
AASB 101 (par.107), states (in relation to dividends):
“An entity shall present, either in the statement of changes
in equity, or in the notes, the amount of dividends
recognised as distributions to owners during the period, and
the related amount per share.”
Changes in an entity’s equity between the start and end of
the reporting period are reflected by the increase/decrease
in its net assets during that period (AASB 101 par.109).

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 Changes in Accounting Policy (cont.)
AASB 108 (par.13) requires an entity to “select
and apply its accounting policies consistently for
similar transactions, other events and
conditions.”

Be careful to clearly distinguish between changes

in accounting policy & changes in accounting
estimates (pp. 570 – 585)

Refer to AASB 108 “Accounting Policies,

Changes in Accounting, Estimates & Errors”

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 Changes in Accounting Policy (cont.)
AASB 108 (par.19) specifies that subject to (par.23);
“An entity shall account for a change in accounting
policy resulting from the initial application of an AAS
in accordance with the specific transitional
provisions, if any in that AAS; and,
When an entity changes an accounting policy upon
initial application of an AAS that does not include
specific transitional provisions applying to that
change, or changes an accounting policy voluntarily,
it shall apply the change retrospectively”.

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 Retrospective Application
•Retrospective application means that a change in accounting principle is
treated by restating comparative financial statements to reflect the new
method as though it had been applied all along.

•Instead of showing the cumulative effect of the difference between the two
accounting principles in the current income statement, this figure will now be
reflected as a retrospective application and an adjustment to the opening
retained earnings balance.

•Thus, the new term “retrospective application” implies that the company
should apply the new standard it adopted to all periods shown unless it is
impracticable to determine the cumulative effect or the period-specific effect
of the change.

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 Accounting Errors
•Errors include mathematical mistakes, fraud,
oversight and misinterpretation of information

•AASB 108 (par.42) requires that; “correction of material

prior period error is to be accounted for retrospectively in
the first financial report issued after the error is
discovered”

•Basically it means that previously reported financial

information has to be corrected.

•Refer: Worked Example 16.4 (pp. 578-579)

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 Accounting Errors - Example
Assume that JD Ltd found that they had made an error
that occurred in the previous accounting period, where
an amount of $14,650, payable to an company in USA
was overlooked and not provided for in the financial
statements.

Retained earnings 10,255

Income tax payable 4,395 (30% x $14,650)
Accounts payable 14,650
To record an accounts payable from prior year
including ITP at 30%

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 Prior Period Error
The company must disclose:
• Nature of prior period error
• For previous period, extent of correction on
financial statement line and if AASB 133
“Earnings per Share” applies, for basic and
diluted earnings per share
• Amount of correction relating to period before
comparatives
• If retrospective statement is impracticable
circumstances that caused condition and
description of how error corrected

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 The information content of total
comprehensive income
Profit, loss and other comprehensive income are all measures of
financial performance
What about the social and environmental performance of the
company?
Entities may be very successful financially, but be causing extensive
damage to the environment or ignoring their employees’ wellbeing
Traditional financial accounting ignores environmental and social
impacts (difficult to measure, not convenient …)
What about other stakeholders’ interests?
Interests of investors might be put above the interests of other
stakeholders
Indicators of financial performance are still not comprehensive about
the organisation’s total performance

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END

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