Applied Business Statistics for Managers | My Assignment Tutor

Lecture 3:The statement of profit or loss and othercomprehensive income, and the statement of changes inequityHI5020 Corporate AccountingHolmes InstituteApplied Business Statistics for ManagersTopics covered in this session▪ Profit or loss and total comprehensive income calculation anddisclosure in the Financial Statement.▪ The link between profits and professional judgement and theaccounting model selected▪ The link between total comprehensive income andprofessional judgement and the accounting model selected▪ The purpose of “Profit and Loss Account” “Statement ofComprehensive Income” and “Statement of Changes inEquity”Holmes InstituteApplied Business Statistics for ManagersTopics covered in this session▪ Accounting for changes in accounting policies and estimates▪ Understand how to account for prior period errors▪ Limitation of ‘profit or loss’, or ‘total comprehensive income’ inrevealing social and environmental performance of areporting entityHolmes InstituteApplied Business Statistics for ManagersIntroduction to the statement of profit orloss and other comprehensive income▪ Income (according to the Conceptual Framework)represents:increases in assets or decreases of liabilities, that result inincreases in equity, other than those relating tocontributions from holders of equity claimsHolmes InstituteApplied Business Statistics for ManagersIntroduction to the statement of profit or lossand other comprehensive income▪ Income can be further broken down into revenues and gains➢ Revenues:• are a class of income relating typically to an entity’s ordinaryactivities➢ Gains:• are a class of income that need not relate to an entity’s ordinaryactivitiesHolmes InstituteApplied Business Statistics for ManagersIntroduction to the statement of profit or lossand other comprehensive income▪ Expenses (Conceptual Framework) are:decreases in assets, or increases in liabilities, that result indecreases in equity, other than those relating todistributions to holders of equity claimsHolmes InstituteApplied Business Statistics for ManagersIntroduction to the statement of profit or lossand other comprehensive income▪ At this point it should be noted that differences between expenses and income will bereflected in either:➢ profit or lossor➢ other comprehensive income▪ ‘Total comprehensive income’ is the aggregate of ‘profit or loss’ and ‘othercomprehensive income’Holmes InstituteApplied Business Statistics for ManagersIntroduction to the statement of profit or lossand other comprehensive income▪ Determination of income and expenses depends on themeasurement models adopted➢ Currently we have a ‘mixed approach’, as various measurement approaches are used➢ For example, income can be recognised for some assets —for example, equity investmentsheld for trading—in the absence of a transaction. For other assets, a transaction must occur(e.g. inventory)Holmes InstituteApplied Business Statistics for ManagersIntroduction to the statement of profit or lossand other comprehensive income• Certain gains and certain expenses will not be taken into consideration in calculating areporting entity’s ‘profit or loss’• There are a number of accounting standards that specifically stipulate that certainexpenses and certain gains are not to be included in the ‘profit or loss’ of the reportingperiod – rather they will be included within ‘other comprehensive income’• Hence, ‘profit or loss’ does not include all expenses and income recognisedwithin the financial periodHolmes InstituteApplied Business Statistics for ManagersTotal Comprehensive Income▪ A more comprehensive measure of financial performance isprovided by a measure known as ‘total comprehensiveincome’—it will include various gains and expenses that arenot incorporated within ‘profit or loss’▪ ‘Total comprehensive income’—which is a relatively recentlydeveloped concept—includes both ‘profit or loss’ and ‘otheritems of comprehensive income’Holmes InstituteApplied Business Statistics for ManagersOther Comprehensive Income▪ AASB 101 defines ‘other comprehensive income’ as follows:Other comprehensive income comprises items of incomeand expense (including reclassification adjustments) that arenot recognised in profit or loss as required or permitted byother Australian Accounting StandardsHolmes InstituteApplied Business Statistics for ManagersComponents of ‘other comprehensive income’A. Changes in relation to revaluation surplus (AASB 116,Property, Plant & Equipment, AASB 138, Intangible Assets)B. Actuarial Gains and Losses and remeasurements of definedbenefit plans AASB 119 (par.93A), Employee benefits .C. Gains and losses arising from translating the financialstatements of a foreign operation, AASB 121, “The Effects ofChanges in Foreign Exchange Rates”D. Gains and losses from re-measuring available-for-salefinancial assets, AASB 139, “Financial Instruments –Recognition & Measurement.”Holmes InstituteApplied Business Statistics for ManagersComponents of ‘other comprehensive income’E. The effective portions of gains and losses on hedginginstruments in a cash-flow hedge, AASB 139F. For particular liabilities designated as at fair value throughprofit or loss, the amount of the change in fair value that isattributable to changes in the liability’s credit risk; AASB 139G. Changes in the value of the time value of options whenseparating the intrinsic value and time value of an optioncontract and designating as the hedging instrument only thechanges in the intrinsic value. AASB 139Holmes InstituteApplied Business Statistics for ManagersComponents of ‘other comprehensive income’H. Changes in the value of the forward elements of forwardcontracts when separating the forward element and spotelement of a forward contract. AASB 139Holmes InstituteApplied Business Statistics for ManagersTo SummarizeAs a general rule, all items of income and expense in a periodshould be recognised by an entity in profit or lossunlessa particular accounting standard requires otherwise▪ There are certain accounting standards that specifically statethat certain gains (eg. increases from asset revaluations) andcertain expenses (eg. correction of prior period accountingerrors) are not to be included in the ‘profit or loss’ of thereporting period▪ These items are to be included in the ‘othercomprehensive income’ of the reporting periodHolmes InstituteApplied Business Statistics for ManagersTo Summarize▪ A joint consideration of the period’s profit or loss, plus aconsideration of items impacting on ‘other comprehensiveincome’ allows us to more fully appreciate all the income andexpenses of a financial periodHolmes InstituteApplied Business Statistics for ManagersJudgements and Estimates in recognising incomeand expenses when compiling financial statements▪ The income and expenses of an organisation, will be directlyinfluenced by various assumptions and judgements thatfinancial accountants make as part of the process ofpreparing financial reports.▪ Users need to be provided with a summary of theseassumptions and judgementsHolmes InstituteApplied Business Statistics for ManagersDisclosures on the statement of profit or lossand other comprehensive income▪ AASB 101 requires that the following minimum information be disclosed as line itemson the face of the statement of profit or loss and other comprehensive income:➢ Revenue➢ Finance costs➢ Share of profit or loss of associates and joint ventures➢ Tax expense➢ Post-tax profit or loss of discontinued operations➢ Each component of ‘other comprehensive income’ classified by nature➢ Share of the other comprehensive income of associates and joint ventures accounted forusing the equity methodHolmes InstituteApplied Business Statistics for ManagersFormat of the statement of profit or loss and othercomprehensive income—Function of expenseapproachHolmes InstituteApplied Business Statistics for ManagersReclassification adjustments▪ Individual accounting standards specify whether and when amountspreviously recognised in ‘other comprehensive income’ are reclassifiedto ‘profit or loss’▪ AASB 101 requires an entity to disclose reclassification adjustmentsrelating to components of other comprehensive income in the periodthat the adjustments are reclassified to profit or loss▪ The purpose is to provide users with information to assess the effect ofsuch reclassifications on profit or loss▪ For example, in relation to financial assets such as bonds that aremeasured at fair value through other comprehensive income, AASB 9requires that a gain or loss be transferred to Profit and Loss accountwhen the financial assets are derecognised.Holmes InstituteApplied Business Statistics for ManagersReclassification adjustments▪ The unrealised gains that have previously been recognised inequity must be deducted from other comprehensive income inthe period in which the realised gains are reclassified to profitor loss to avoid double-counting.Holmes InstituteApplied Business Statistics for ManagersDisclosure of ‘material items’▪ AASB 101 requires specific disclosures in relation to ‘material’items of expense or income• This disclosure requirement relies upon professional judgement about the materiality of an itemHolmes InstituteApplied Business Statistics for ManagersDisclosure of ‘material items’▪ Paragraph 98 of AASB 101 provides guidance about when separate disclosure ofparticular income or expense items would likely be warranted.➢ write-downs of inventories or property, plant and equipment➢ restructuring of entities’ activities➢ disposals of items of property, plant and equipment➢ disposals of investments➢ discontinued operations➢ litigation settlements➢ other reversals of provisionsHolmes InstituteApplied Business Statistics for ManagersChanges in accounting estimates (addressed byAASB 108)• During the accounting process many estimates are made; for example, estimates aremade of bad debts, inventory obsolescence and warranty obligations• Estimates need revision if circumstances change or new information or moreexperience is obtained• Changes in accounting estimates are not considered to be corrections of an error• If the change in estimate affects current period only:– recognise in period of change• If change affects current and future periods:– recognise in period of change and future periodsHolmes InstituteApplied Business Statistics for ManagersChanges in accounting estimates (addressed byAASB 108)▪ When there is a change in accounting estimate, it is relevantfor a financial statement reader to understand how this hasimpacted reported profit relative to prior periods, and how itmight impact future reporting periodsHolmes InstituteApplied Business Statistics for ManagersPrior period errors▪ Prior period errors are omissions from, and misstatements.Such errors include the effects of mathematical mistakes,mistakes in applying accounting policies, oversights ormisinterpretations of facts, and fraud▪ Prior period errors➢ are to be adjusted against opening retained earnings, (AASB108)➢ will not appear in the statement of profit or loss and othercomprehensive incomeHolmes InstituteApplied Business Statistics for ManagersAccounting Errors – ExampleAssume that JD Ltd found that they had made an error thatoccurred in the previous accounting period, where an amountof $14,650, payable to an company in USA was overlookedand not provided for in the financial statements. Retained earningsIncome tax payable10,2554,395 (30% x $14,650)Accounts payable14,650 To record an accounts payable from prior year including ITPat 30%Holmes InstituteApplied Business Statistics for ManagersDisclosure requirements-prior period errorsThe company must disclose:➢ Nature of prior period error➢ For previous period, extent of correction on financial statement lineitem and if AASB 133 “Earnings per Share” applies, for basic anddiluted earnings per shareHolmes InstituteApplied Business Statistics for ManagersChanges in accounting policy▪ AASB 108, paragraph 5, defines ‘accounting policies’ as:the specific principles, bases, conventions, rules and practices applied by an entity inpreparing and presenting financial statements.▪ Paragraph 19 of AASB 108 states:Subject to paragraph 23:(a) an entity shall account for a change in accounting policy resulting from the initialapplication of an Australian Accounting Standard in accordance with the specifictransitional provisions, if any, in that Australian Accounting Standard; and(b) when an entity changes an accounting policy upon initial application of anAustralian Accounting Standard, that does not include specific transitional provisionsapplying to that change,It shall apply the change retrospectively.Holmes InstituteApplied Business Statistics for ManagersChanges in accounting policy▪ To assist users’ understanding of the impact that any changesin accounting policy may have, AASB 108, paragraphs 28 to30, requires extensive disclosuresHolmes InstituteApplied Business Statistics for ManagersStatement of changes in equity▪ Statement of Changes in Owner’s Equity is a component of theFinancial Statements.▪ The role of the statement of changes in equity is to provide areconciliation of opening and closing equity, and also to providedetails of the various equity accounts that are impacted on by theperiod’s total comprehensive incomeHolmes InstituteApplied Business Statistics for ManagersStatement of changes in equityAASB 101, paragraph 106 requires:An entity shall present a statement of changes in equity showing in thestatement:▪ total comprehensive income for the period▪ for each component of equity▪ for each component of equity, a reconciliation between thecarrying amount at the beginning and the end of the period,separately disclosing each changeHolmes InstituteApplied Business Statistics for ManagersProfit’ as a measure of performance▪ 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 theenvironment or ignoring their employees’ wellbeing➢ Traditional financial accounting ignores environmental and social impacts (difficult tomeasure, not convenient …)▪ What about other stakeholders’ interests?➢ Interests of investors might be put above the interests of other stakeholdersHolmes InstituteApplied Business Statistics for Managers‘Profit’ as a measure of performance▪ It is important to recognise that financial performance indicators, suchas profits or losses or ‘total comprehensive income’, are notcomprehensive indicators of the overall ‘performance’ of an organisation▪ For a comprehensive view of an organisation’s performance, financialmeasures such as profitability should be supplemented with other typesof performance-based information, perhaps tied to the social andenvironmental performance of the entityHolmes InstituteApplied Business Statistics for ManagersSummary of the Lecture▪ Profit or loss and total comprehensive income calculation anddisclosure in the Financial Statement.▪ The link between profits and professional judgement and theaccounting model selected▪ The link between total comprehensive and professionaljudgement and the accounting model selected▪ The purpose of “Profit and Loss Account” “Statement ofComprehensive Income” and “Statement of Changes inEquity”Holmes InstituteApplied Business Statistics for ManagersSummary of the Lecture▪ Accounting for changes in accounting policies and estimates▪ Understand how to account for prior period errors▪ Limitation of ‘profit or loss’, or ‘total comprehensive income’ inrevealing social and environmental performance of areporting entity

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