4-Ch 4 - IFRS-w
4-Ch 4 - IFRS-w
4-Ch 4 - IFRS-w
Reporting Within
Format of Income Other Reporting
Income Statement the Income
Statement Issues
Statement 1. Evaluate past performance.
Usefulness Elements Gross profit Accounting
Limitations Minimum Income from changes and
disclosure operations errors
Quality of
Earnings Intermediate Income before Retained earnings 2. Predict future performance.
components income tax statement
Illustration Net income Comprehensive
income
Condensed Non-controlling
income interests Changes in equity
statements Earnings per
statement 3. Help assess the risk or
share
Discontinued
uncertainty of achieving future
operations cash flows.
Intraperiod tax
4-3 allocation 4-4
Income Statement - Limitations Quality of Earnings
Companies have incentives to manage income to meet
1. Companies omit items that or beat market expectations, so that
cannot be measured reliably. market price of stock increases and
value of management’s compensation increase.
Elements of the Income Statement • INCOME includes both revenues and gains.
INCOME – Increases in economic benefits during the • Revenues - ordinary activities of a company
accounting period in the form of • Gains - may or may not arise from ordinary
- inflows or enhancements of assets or activities.
- decreases of liabilities
that result in increases in equity, other than those Revenue Accounts Gain Accounts
relating to contributions from shareholders.
• Sales revenue • Gains on the sale of
Income includes both revenues and gains. • Fee revenue long-term assets
• Interest revenue • Unrealized gains on
Sales of CD: Order of magazine/newspaper: trading securities.
• Dividend revenue
Cash or A/R Advance from customer • Rent revenue
4-7 Sales Sales 4-8
Elements of The Income Statement Elements of The Income Statement
EXPENSES – Decreases in economic benefits during • EXPENSES include both expenses and losses.
the accounting period in the form of
• Expenses - ordinary activities of a company
• outflows or depletions of assets or
• Losses - may or may not arise from ordinary
• incurrences of liabilities
activities.
that result in decreases in equity, other than those
relating to distributions to shareholders.
Expense Accounts Loss Accounts
• Cost of goods sold • Losses on restructuring
Sale of CD: Depreciate CD racks Electricity bill • Depreciation expense charges
• Interest expense • Losses on the sale of long-term
1. Sales or Revenue
FORMAT OF 2. Cost of Goods Sold
THE INCOME Gross Profit
STATEMENT 3. Selling Expenses
4. Administrative or General
Expenses
Intermediate 5. Other Income and Expense
Components Income from Operations
6. Financing costs
Companies generally
Income before Income Tax
present some or all of 7. Income Tax
these sections and Income from Continuing
totals within the Operations
income statement. 8. Discontinued Operations
Net Income
9. Non-Controlling Interest
4-11
10.Earnings Per Share 4-12
FORMAT OF LO3: CONDENSED
THE INCOME INCOME
STATEMENT STATEMENT
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Condensed I/S
LO4: REPORTING WITHIN THE INCOME
STATEMENT
Gross Profit
Net sales revenue - cost of goods sold
Disclosure of net sales revenue is useful.
Unusual or incidental revenue is disclosed in other
income and expense.
Provides a useful number for evaluating
performance and predicting future earnings.
Analysts can more easily understand and assess
trends in revenue from continuing operations.
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REPORTING WITHIN THE INCOME Expense Classification
STATEMENT
Income from Operations Nature Function
Gross profit – SG&A - other income and expense
Highlights items that affect regular business
activities. • Cost of materials used
• Cost of goods sold
Used to predict the amount, timing, and uncertainty • Direct labor incurred
• Selling expenses
of future cash flows. • Delivery expense
• Advertising expense • Administrative
Expense Classification • Employee benefits expenses
Reported by • Depreciation expense
- Nature, or • Amortization expense
- Function
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2017
4-19 4-20
Expense Classification Gains and Losses
Function-of-Expense Approach Illustration 4-6
IASB takes the position that both
revenues and expenses and
2017 other income and expense
should be reported as part of income from operations.
Illustration 4-8
Gains and Losses Income before Income Tax
Financing costs must be reported on the I/S.
Additional items that may need disclosure:
Losses on write-downs of inventories to net realizable
value or of property, plant, and equipment to
recoverable amount, as well as reversals of such
write-downs.
Losses on restructurings of the activities and reversals
of any provisions for the costs of restructuring.
Gains or losses on the disposal of items of property,
plant, and, equipment or investments.
Litigation settlements.
Other reversals of liabilities.
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Net Income Allocation to Non-Controlling Interest
Represents the income after all If a company prepares a consolidated income
revenues and statement that includes a partially own subsidiary, IFRS
requires that net income of the subsidiary be allocated
expenses
to the controlling (majority) and non-controlling interest
for the period are considered. (minority).
Viewed by many as the most important measure of a
This allocation is reported at the bottom of the income
company’s success or failure for a given period of
statement after net income.
time.
Net income $164,489
Attributable to:
Shareholders of Boc Hong $120,000
Non-controlling interest 44,489
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4-27 4-28
Illustration: Lancer, Inc. reports net income of $350,000.
LO5: Earnings Per Share It declares and pays preferred dividends of $50,000 for
the year. The weighted-average number of ordinary
shares (OS) outstanding during the year is 100,000
Net income - preference dividends shares. Lancer computes earnings per share as follows:
4-29 4-30
ILLUSTRATION 4-12
Income Statement Discontinued Operations
Definition: A component of an entity that either has been
disposed of, or is classified as held-for-sale, and:
1. Represents a major line of business or geographical
area of operations, or
2. Is part of a single, coordinated plan to dispose of a
major line of business or geographical area of
Divide by operations, or
weighted-
average 3. Is a subsidiary acquired exclusively with a view to
shares resell.
outstanding Ex: 2017-9-20 HTC sold its cell phone segment to Google
上次Google賣Motorola手機部門是29億美元,這次則是用11億
EPS
美元把HTC的手機部門買回來,基本上這2次多是手機研發和
IP(智慧財產權),然後Google把貴的美國Motorola員工賣掉
Earnings per Share LO 5
,接下來換成便宜的台灣員工。
4-31 4-32
Discontinued Operations Discontinued Operations
Companies report as discontinued operations Illustration: Multiplex Products, a highly diversified company,
1. (in a separate income statement category) the gain decides to discontinue its electronics division.
or loss from disposal of a component of a business. During the current year, the electronics division lost $300,000
2. The results of operations of a component that has (net of tax).
been or will be disposed of separately from Multiplex sold the division at the end of the year at a loss of
continuing operations. $500,000 (net of tax).
A company that reports a discontinued operation must report LO6: Special Reporting Issues
per share amount for the line item either on the face of the
income statement or in the notes to the financial statements.
Intra-period Tax Allocation
Illustration 4-12
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Illustration 1 Illustration 2
Schindler Co. has income before income tax of $250,000. Schindler Co. has income before income tax of
It has a gain of $100,000 from a discontinued operation. $250,000. It has a loss of $100,000 from a discontinued
Assuming a 30 percent income tax rate, Schindler operation. Assuming a 30 percent income tax rate,
Schindler presents the following information on the
presents the following information on the income
income statement.
statement. Income before income tax $250,000
Income before income tax $250,000 Income tax
Income tax Income from continuing operations
Income from continuing operations Loss from discontinued operations
Gain on discontinued operations Net income
Net income
Companies may also report the tax effect of a discontinued
item by means of a note disclosure.
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Summary Summary
4-39 4-40
Example: Gaubert Inc. decided in March 2015 to change
OTHER REPORTING ISSUES from FIFO to weighted-average inventory pricing.
Gaubert’s income before taxes, using the new weighted-
LO7: Accounting Changes and Errors average method in 2015, is $30,000.
1. Changes in Accounting Principle Pretax Income Data
earnings.
Restatement of F/S Approach preserves
comparability. Illustration 4-18
adjusted to
Income Statement Presentation of a Change in Accounting Principle (Based on 30% tax
Examples include: rate)
Equipment cost
Net book value
Residual value
Residual value (new)
Depreciable base
Depreciable base
Useful life (original)
Useful life remaining years
Annual depreciation
Annual depreciation
Statement of Financial Position (Dec. 31, 2016) Journal entry for 2017
Fixed Assets:
Equipment
Accumulated depreciation
Net book value (NBV)
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3. Corrections of Errors
Example: In 2017, Hillsboro Co. determined that it
• Result from: incorrectly overstated its accounts receivable and
sales revenue by $100,000 in 2016. In 2017,
o mathematical mistakes.
Hillsboro makes the following entry to correct for this
o mistakes in application of accounting
error (ignore income taxes).
principles.
o oversight or misuse of facts.
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Summary-Accounting Changes and Errors Summary-Accounting Changes and Errors
ILLUSTRATION 4-19
ILLUSTRATION 4-19 Summary of Accounting Changes and Errors
Summary of Accounting Changes and Errors
Type of Type of
Changes in Accounting Principle Situation Changes in Accounting Estimate
Situation
Criteria Normal, recurring corrections and
Criteria Change from one generally accepted
adjustments.
accounting principle to another.
Examples Changes in the realizability of receivables
Examples Change in the basis of inventory pricing from and inventories; changes in estimated lives
of equipment, intangible assets; changes in
FIFO to average-cost.
estimated liability for warranty costs, income
Placement Recast prior years’ income statements on the taxes, and salary payments.
on Income same basis as the newly adopted principle. Placement Show change only in the affected accounts
Statement on Income (not shown net of tax) and disclose the
LO 7
Statement nature of the change.
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4-51 4-52
Illustration
Retained Earnings Statement
Illustration 4-20
Before issuing the report for the year ended December 31,
2015, you discover a ₩50,000 error (net of tax) that caused
2014 inventory to be overstated (overstated inventory caused
COGS to be lower and thus net income to be higher in 2014).
Would this discovery have any impact on the reporting of the
Statement of Retained Earnings for 2015?
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Illustration
LO9: Comprehensive Income
All changes in equity during a period except
those resulting from investments by owners and
distributions to owners.
Includes:
(overstated inventory caused COGS to be lower and thus NI: all revenues and gains, expenses and
net income to be higher in 2014).
losses reported in net income, and
Restrictions of Retained Earnings OCI: all gains and losses that bypass net
Disclosed income but affect equity.
o In notes to the financial statements.
o As Appropriated Retained Earnings.
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Comprehensive Income
Other Reporting Issues
Reported in Equity
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does not
require the
creation of a
new financial
statement.
Disadvantage -
net income
buried as a
subtotal on the
statement.
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Statement of Changes in Equity Statement of Changes in Equity
ILLUSTRATION 4-23
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4-63 4-64
Relevant Facts
GLOBAL ACCOUNTING INSIGHTS Following are the key similarities and differences between
U.S. GAAP and IFRS related to the income statement.
INCOME STATEMENT Similarities
• Both U.S. GAAP and IFRS require companies to indicate
Standards issued by the FASB (U.S. GAAP) are the
the amount of net income attributable to non-controlling
primary global alternative to IFRS. As in IFRS, the income
interest.
statement is a required statement for U.S. GAAP. In
• Both U.S. GAAP and IFRS follow the same presentation
addition, the content and presentation of the U.S. GAAP
guidelines for discontinued operations, but IFRS defines a
income statement is similar to the one used for IFRS.
discontinued operation more narrowly. Both standard-
On the Horizon setters have indicated a willingness to develop a similar
The IASB and FASB are working on a project that would rework the definition to be used in the joint project on financial
structure of financial statements. One stage of this project will statement presentation.
address the issue of how to classify various items in the income • Both U.S. GAAP and IFRS have items that are recognized
statement. A main goal of this new approach is to provide in equity as part of other comprehensive income but do not
information that better represents how businesses are run. In affect net income. Both U.S. GAAP and IFRS allow a one
addition, this approach draws attention away from just one statement or two statement approach to preparing the
number—net income.
4-65 4-66 statement of comprehensive income.
Differences
1. The major elements of the income statement are
• The U.S. SEC requires companies to have a functional
presentation of expenses. Under IFRS, companies must classify a. revenue, cost of goods sold, selling expenses, and
expenses by either nature or function. U.S. GAAP does not have general expense.
that requirement. b. operating section, nonoperating section, discontinued
• U.S. GAAP has no minimum information requirements for the operations and cumulative effect.
income statement. However, the U.S. SEC rules have more c. revenues, expenses, gains, and losses.
rigorous presentation requirements. IFRS identifies certain
minimum items that should be presented on the income statement. d. All of these.
• U.S. SEC regulations define many key measures and provide
requirements and limitations on companies reporting non-U.S. 2. The income statement information would help in which of
GAAP information. IFRS does not define key measures like the following tasks?
income from operations.
a. Evaluate the liquidity of a company.
• U.S. GAAP does not permit revaluation accounting. Under IFRS,
revaluation of property, plant, and equipment, and intangible b. Evaluate the solvency of a company.
assets is permitted and is reported as other comprehensive c. Estimate future cash flows.
income. The effect of this difference is that application of IFRS d. Estimate future financial flexibility.
results in more transactions affecting equity but not net income.
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3. The income statement provides investors and creditors 5. IFRS requires that a single amount be disclosed within
information that helps them predict the income statement for
a. the amounts of future cash flows. a. the post-tax profit/loss on discontinued operations and the
b. the timing of future cash flows. pre-tax gain/loss on the disposal of discontinued
c. the uncertainty of future cash flows. operational assets.
d. All of the above. b. the pre-tax profit/loss on discontinued operations and the
post-tax gain/loss on the disposal of discontinued
operational assets.
4. If a company prepares a consolidated income statement, c. the pre-tax profit/loss on discontinued operations and the
IFRS requires that net income be reported for pre-tax gain/loss on the disposal of discontinued
a. the majority interest only. operational assets.
b. the minority interest only. d. the post-tax profit/loss on discontinued operations and the
c. both the majority interest and the minority interest. post-tax gain/loss on the disposal of discontinued
d. as a single amount only. operational assets.
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Prepare an income statement for the year 2017 using the multiple-
step form. Ordinary shares outstanding for 2017 total 40,550 (000
4-71 omitted).
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EXERCISE 4-11 WOODS CORPORATION
WEBSTER COMPANY
Income Statement Income Statement
For the Year Ended December 31, 2017 For the Year Ended December 31, 2017
(In thousands, except earnings per share) Net sales(a)
Cost of goods sold(b)
Sales
Cost of goods sold Gross profit
Gross profit Selling expenses(c)
Operating Expenses
Administrative expenses(d)
Selling expenses
Sales commissions Other income and expense
Depreciation of sales equipment Rent revenue
Transportation-out Income from operations (interest)
Administrative expenses
Interest expense
Officers' salaries
Depreciation of office furniture and equip. Income before income tax
Other Income and Expense Income tax
Rental revenue Income from continuing operations
Other Expenses and Losses Discontinued operation
Interest expense Loss on sale of division
Income before income taxes Less: Applicable income tax
Income tax
Net income
Earnings per share Net income
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Selling expenses
Admin. and general expenses