Statement of comprehensive income

• Reflects a company’s true income during a specific time period

Comprehensive income- is the change in equity during the period resulting from transactions and other events, other than
those changes resulting from transactions with owners in their capacity as owners

Total comprehensive income composes

• Components of profit and loss

• Components of other comprehensive income

Profit or loss- the total income less expenses, excluding the component of other comprehensive income

Other comprehensive income- comprises of items of income and expenses including reclassification adjustments that are
not recognized in profit or loss as required or permitted by PFRS

1. May be recycled to profit or loss

• Change in Fair value of a debt instrument classified as FVOCI
• Gain or loss of translating the financial statements of a foreign operation
• Unrealized gain or loss of derivatives contracts designated as cash flow hedge
2. May not be recycled to profit or loss (recycled to RE)
• Change in Fair value of an equity investment classified as FVOCI
• Net remeasurement gain or loss on defined benefit plan
• Revaluation surplus during the year
• Gain or loss on credit risk of a financial liability designated at FVPL (fair value option)

Presentation

1. Two statement approach

• A statement of profit or loss showing the components of profit or loss
• A statement of comprehensive income
2. Single statement approach
• A combined statement showing the components of P/L and OCI

Presentation of Expense

1. Functional Presentation
• The traditional and common form of P/L
• It classifies cost according to their function as part of cost of sales, distribution costs, and administrative
activities
• Also known as the cost of sales method

Note: An entity classifying expenses by function shall disclose additional information on the nature of expenses including;

• Depreciation expense and amortization expense

• Employee benefits expense
2. Natural presentation
• Expenses are aggregated according to their nature and not allocated among the various functions within
the entity
• Examples include, depreciation, purchase of raw materials, transport costs, employee benefits, and
advertising cost
Accounting changes

Accounting policies are the specific principles, bases, rules, and practices applied by an entity in preparing and presenting
financial statements

Consistency of accounting principles- an entity shall select and apply its accounting policies consistency for similar
transactions, events and conditions unless and IFRS specifically requires or permits categorization of items for which
different policies may be appropriate. If an IFRS requires or permit such categorization, an appropriate accounting policy
shall be selected and applied consistently to each category

Selection and Applying Accounting Policies

• When an IFRS specifically applies to a transaction, other event or condition, the accounting policy or policies
applied to that item shall be determined by applying the IFRS
• In the absence of an IFRS that specifically applies to that transaction, other event or condition, management shall
use it judgement in developing and applying an accounting policy that result in information that is relevant and
reliable
• In making the judgement, management shall refer to, and consider the applicability of the following sources in
descending order
1. The requirement in IFRS dealing in similar and related issues
2. The definitions, recognition criteria, and measurement for assets, liabilities, income, and expenses in the
Conceptual Framework for Financial Reporting
3. The most recent pronouncements of other standard setting bodies that use a similar reporting framework to
develop accounting standards
4. Other accounting literature and accepted industry practices, to the extent that these do not conflict with IFRS
dealing with similar and related issues and the framework

Accounting Changes

Change in accounting policy- arises when the entity adopts a generally accepted accounting principle which is different
from the one previously used by the entity. An entity shall change accounting policy only if the change is

• Required by IFRS
• Results in the financial statements providing more reliable and relevant information about the effects of
transactions, other events or conditions on the entity’s financial position, financial performance or cash flows

Treatment: Changes in accounting policies are accounted for under specific transitional provisions, if any, in a PFRS. In
the absence of specific transitional provisions, or in case of a voluntary change in accounting policy, they are accounted
for by a retrospective application.

Retrospective application is applying a new accounting policy to transactions and events as if the policy had always been
applied

Change in accounting estimate- is an adjustment of the carrying amount of an asset or liability or the amount of the
periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits
and, obligations associated with, assets and liabilities. They result from new information or new developments and,
accordingly, are not correction of errors.

Treatment: The affect of a change in an accounting estimate shall be recognized prospectively by including it in profit or
loss in;

a. The period of the change, if the change affects that period only
b. The period of the change and future periods, if the change affects both
Example of items which estimates are necessary;

a. Bad debts
b. Inventory obsolescence
c. Service life, residual value, and expected pattern of consumption of benefits of depreciable assets
d. Warranty cost
e. Fair value of financial assets and liabilities

Examples of changes in accounting policy;

a. Change in the method of inventory pricing from the FIFO to the weighted average method
b. Change in the method of accounting for long term contracts
c. The initial adoption of policy to carry assets at revalued amount
d. Change from cost model to fair value in measuring investment properties
e. Change to a new policy resulting from the requirement of a PFRS
f. Change of financial reporting framework such as from PFRS for SMEs to compliance with full PFRS

Problem Sets

P1

An entity reported the following data for the current year:

Net sales 9,500,000
Cost of goods sold 4,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operation 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on debt investment at FVOCI 200,000
Unrealized loss on forward contract designated as a cash flow hedge 400,000
Actuarial loss on defined benefit plan due to actuarial assumptions 300,000
Foreign translation gain 100,000
Loss on credit risk of financial liability designated at FVPL 700,000
Revaluation surplus during the current year 2,500,000
1. What net amount should be recognized in other comprehensive income?
2. What amount should be reported as comprehensive income

P2
An entity reported net income of P7,400,000 for the current year. The auditor raised questions about the following
amounts that had been included in net income:
Equity in earnings of an associate – 25% interest 1,500,000
Dividend received from the associate 400,000
Unrealized loss on equity investment at FVOCI 550,000
Gain on early retirement of bonds payable 2,200,000
Debit adjustment of profit of prior year for error in under depreciation, net of tax 750,000
Loss from fire 1,400,000
Unrealized gain on equity investment at FVPL 500,000
What amount should be reported as adjusted net income?
P3
On January 1, 2020, an entity purchased for P5,000,000 a machine with useful life of ten years and residual value of
P200,000. The machine was depreciated by the double declining balance method and the carrying amount of the machine
was P3,200,000 on December 31, 2021. The entity changed to the straight-line method on January 1, 2022 and the residual
value did not change.
What is the carrying amount of the asset on December 31, 2022?

P4
On January1, 2022, an entity decided to decrease the useful life of an existing patent from 10 years to 8 years. The patent
was purchased on January 1, 2017 for P3,000,000 no residual value. The entity decided on January 1, 2022 to change the
depreciation method from an accelerated method to the straight-line method. On January 1, 2022, the cost of an
equipment was P8,000,000 and the accumulated depreciation P3,400,000. The remaining useful life of the equipment on
January 1, 2022 is 10 years and the residual value P200,000. What is the total charge against income for 2022 as a result
of the accounting changes?

P5

An entity was incorporated on January 1, 2019. In preparing the financial statements for the year ended
December 31, 2021, the entity used the following original cost and useful life:
Building 15,000,000 15 years
Machinery 10,500,000 10 years
Furniture 3,500,000 7 years

On January 1, 2022, the entity determined that the remaining useful life is 10 years for the building, 7 years for the
machinery and 5 years for the furniture. The entity used the straight-line method of depreciation with no residual value.
What amount should be reported as total depreciation for 2022?

P6
During 2022, an entity decided to change from the FIFO method of inventory valuation to the weighted average method.
Inventory balances under each method were:
FIFO Weighted Average
December 31, 2019 4,500,000 5,400,000
December 31, 2020 7,800,000 7,100,000
December 31, 2021 8,300,000 7,800,000
The income tax rate is 25%. What amount should be reported as the effect of this accounting change in
the statement of retained earnings for 2022?

P7
An entity reported the following events during 2022:
• The entity decided to write off P1,000,000 from inventory which was over two years old as it
was obsolete.
• A counting error relating to inventory on December 31, 2021 was discovered. The error required
an increase in the carrying amount of inventory on that date at P500,000.
• Sales of P1,500,000 had been omitted from the financial statements for the year ended
December 31, 2021.
• The provision for uncollectible accounts on December 31, 2021 was P500,000. During 2022, P800,000 was written off
related to the December 31, 2021 accounts receivable.
What pretax amount should be reported as prior period error in the financial statements for 2022?