Chapter 16
The statement of
comprehensive income and
statement of changes in equity
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PPTs to accompany Deegan, Australian Financial Accounting 7e
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Objectives of this lecture
• Understand how profit or loss and total comprehensive
income are calculated and how these measures should
be disclosed in the financial statements of a reporting
entity
• Appreciate that the determination of the profits and total
comprehensive income for a given period is heavily
dependent upon both professional judgment and on the
particular accounting model that has been adopted
• Understand that an entity is required to produce both a
statement of comprehensive income (which replaces the
former income statement) and a statement of changes in
equity (as well as a statement of financial position and
statement of cash flows)
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Objectives (cont.)
• Understand what a non-recurring item is and how it
should be disclosed
• Understand how to account for prior period errors
• Understand how to account for changes in accounting
estimates
• Appreciate that while ‘profit or loss’, or ‘total
comprehensive income’ provide an indication of the
financial performance of an organisation, such measures
do not reveal much about the social and environmental
performance of a reporting entity
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Definition of income, revenue and
gains
Income (according to the IASB/AASB Conceptual
Framework) represents:
increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity other
than those relating to contributions from equity participants
Revenues (Conceptual Framework):
– a class of income relating typically to an entity’s ordinary
activities
Gains (Conceptual Framework):
– a class of income that need not relate to an entity’s ordinary
activities
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Definition of expenses
Expenses (Conceptual Framework) are:
decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or
incurrences of liabilities that result in decreases in equity
other than those relating to distributions to equity
participants
• Differences between expenses and income will be
reflected in either:
– profit or loss, or
– other comprehensive income
• ‘Total comprehensive income’ is the aggregate of ‘profit
or loss’ and ‘other comprehensive income’
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Recognition of income
• The Conceptual Framework sets the following
recognition criteria for the elements of accounting:
– It must be probable that any future economic benefit will
flow to or from the entity
– The item must have a cost or value that can be measured
reliably
• Determination of income (revenues and gains) and
expenses depends on the measurement models
adopted
– Currently we have a ‘mixed approach’, as various valuation
approaches are used
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Measurement of income and
expenses
• There is disagreement about how certain expenses
should be measured
• Without any specific rules about a particular type of
expense, different entities will record different
expenses, with implications for profit
• Impact of AASB 2 Share Based Payment
– has diminished the discretion that may be exercised
regarding placing a cost on share options
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Role of professional judgement
• An entity should disclose assumptions made and the
basis of those assumptions
• There are different approaches by accountants
• All discretion (and, therefore, scope for professional
judgement) relating to the expensing of some items has
been removed
• Firms might have agreements in place relying on reported
‘profits’
• Timing of recognition of income or expenses can be
important to managers
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Not all income and expenses are
reflected within profit or loss
• Certain gains and certain expenses will not be
taken into consideration in calculating a reporting
entity’s ‘profit or loss’
• A number of accounting standards specifically
stipulate that certain expenses and certain gains
are not to be included in the ‘profit or loss’ of the
reporting period
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Not all income and expenses are
reflected within profit or loss (cont.)
•
The ‘profit or loss’ of an entity does not include all
expenses and income recognised within the financial
period
•
A more comprehensive measure of financial
performance is provided by a measure known as ‘total
comprehensive income’
•
‘Total comprehensive income’ includes both ‘profit or
loss’ and ‘other items of comprehensive income’
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Statement of comprehensive
income
• Profit or loss is disclosed in the statement of
comprehensive income ( AASB 101 Presentation of
Financial Statements)
• AASB 101 requires entities to recognise all items of
income and expense in a period in profit or loss unless a
particular accounting standard requires or permits
otherwise.
• Amendments to AASB 101 in 2007 introduced the
statement of comprehensive income
• Reporting entities can either present a statement of
comprehensive income, or they can separately provide
both an income statement and a statement of
comprehensive income (AASB 101 par 81)
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Definition of ‘other comprehensive
income’
AASB 101 defines ‘other comprehensive income’ as
follows:
Other comprehensive income comprises 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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Components of other
comprehensive income
According to AASB 101, components of ‘other
comprehensive income’ would include:
(a) changes in revaluation surplus (see AASB 116
Property, Plant and Equipment and AASB 138
Intangible Assets)
(b) actuarial gains and losses on defined benefit plans
recognised in accordance with paragraph 93A of
AASB 119 Employee Benefits
(c) gains and losses arising from translating the
financial statements of a foreign operation (see
AASB 121 The Effects of Changes in Foreign
Exchange Rates)
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Components of other
comprehensive income (cont.)
(d) gains and losses on remeasuring financial
instruments where the entity has elected to
include the gain or loss in other comprehensive
income (see AASB 9 Financial Instruments,
paragraph 5.7.5), and
(e) the effective portion of gains and losses on
hedging instruments in a cash flow hedge (see
AASB 139)
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Disclosures on the statement of
comprehensive income
• AASB 101 requires specific items to be disclosed as
line items on the face of the statement of
comprehensive income. For example:
– Revenue, Finance costs, Share of profit or loss of
associates and joint ventures, Tax expense
• AASB 101 states that an entity should also disclose
the following items in the statement of
comprehensive income as allocations of profit or loss
(not as items of income or expense) for the period
relating to :
(i) non-controlling interest, and
(ii) owners of the parent
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Format of the statement of
comprehensive income
• Entities may choose a presentation format based on either:
– the nature of expenses incurred, or
– the function of expenses within the entity
• Entities must select the most relevant and reliable format
• Entities must disclose the amount of income tax relating to
each component of ‘other comprehensive income’
• Entities are permitted to present the components of ‘other
comprehensive income’ either before tax effects (gross
presentation) or after their related tax effects
See Exhibit 16.1 p.564 Single statement of comprehensive income
illustrating the classification of expenses by function
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Statement of changes in equity
• An entity is also required to produce a statement of
changes in equity
• The role of the statement of changes in equity is to
provide a reconciliation of opening and closing equity, and
also to provide details of the various equity accounts that
are impacted on by the period’s total comprehensive
income
• It also provides information about the effects of
transactions with owners in their capacity as owners
(distributions and capital contributions)
• Dividend amounts recognised as distributions to owners
during the period, and the related amount per share is to
be presented either in the statement of changes in equity
or in the notes
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Statement of changes in equity
(cont.)
• A statement of changes in equity reconciles opening and
closing equity
• Within the statement of changes in equity, the distribution
to and contributions from owners, individual components
of total comprehensive income and non-controlling
interests are separately disclosed
• The statement of changes in equity also provides details
of any amounts retained in the revaluation surplus that
were transferred to retained earnings when the asset is
derecognised
Refer to Exhibit 16.6 (p. 575) for an example of a statement of
changes in equity.
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Reclassification adjustments
• Individual accounting standards specify whether and
when amounts previously recognised in ‘other
comprehensive income’ are reclassified to ‘profit or loss’
• AASB 101 requires an entity to disclose reclassification
adjustments relating to components of other
comprehensive income in the period that the
adjustments are reclassified to profit or loss
• The purpose is to provide users with information to
assess the effect of such reclassifications on profit or
loss
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Reclassification adjustments (cont.)
• Without this information, users of the financial
statements may find it difficult to assess the effect of
reclassifications on profit or loss, or to calculate the
overall gain or loss associated with available-for-sale
financial assets
• AASB 101 requires entities to disclose reclassification
adjustments relating to components of other
comprehensive income
Refer to Worked Example 16.1 (p. 567)—
Reclassification adjustment for available-for-sale
investment
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Disclosure of ‘unusual items’
• AASB 101 requires specific disclosures in relation to ‘unusual’
items of expense or income
• Specifically, paragraph 97 states:
When items of income and expense are material, an entity shall
disclose their nature and amount separately
• This disclosure requirement relies upon professional judgment
about the materiality of an item
• Materiality is used in accordance with the definition provided by
AASB 1031 Materiality. Paragraph 9 of AASB 1031 states:
Information is material if its omission, misstatement or nondisclosure has the potential, individually or collectively, to:
(a) influence the economic decisions of users taken on the
basis of the financial report; or
(b) affect the discharge of accountability by the management
or governing body of the entity
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Non-recurring items
• In addition to relying upon judgments about the materiality
of particular income and expense items, AASB 101 also
specifically identifies items that would typically warrant
separate disclosure
• Circumstances that would give rise to the separate
disclosure of items of income and expense include:
–
–
–
–
–
–
–
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 provisions
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Other disclosure issues—Prior
period errors
Prior period errors—What are they?
Prior period errors are omissions from, and misstatements
in, the entity’s financial statements for one or more prior
periods arising from a failure to use, or misuse of,
reliable information that:
(a) was available when the financial statements for
those periods were authorised for issue, and
(b) could reasonably be expected to have been
obtained and taken into account in the preparation and
presentation of the financial statements
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Other disclosure issues—Prior
period errors (cont.)
Such errors include the effects of mathematical mistakes,
mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud (AASB 108)
Prior period errors:
– are to be adjusted against opening retained earnings,
restating comparative information (AASB 108)
– will not appear in the statement of comprehensive
income other than as adjustments to comparatives
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Changes in accounting estimates
(addressed by AASB 108)
• During the accounting process many estimates are made
and may need revision if circumstances change or new
information or more experience is obtained
• Changes in accounting estimates are not considered to
be corrections of an error
• Impact of a change in estimate
• Required disclosures if there are changes in accounting
estimates that are material (AASB 108)
Refer to Worked Example 16.2 (p. 572) Change in accounting
estimate (changing the useful life of an asset)
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Changes in accounting policies
• Difference between a change in accounting policy and a
change in an accounting estimate
• AASB 108, paragraph 14, identifies two situations when a
change in accounting policy is likely to occur.
• Changes in accounting policy are to be made
retrospectively or prospectively, depending upon the
background to the change.
• On initial application of a new accounting policy the
effects of the change in accounting policy is to be
accounted for retrospectively.
• AASB 108, paragraph 22 requirements when a change in
accounting policy is made retrospectively
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Disclosures where there is a mandatory change
in accounting policy due to the release of a new
accounting standard (AASB 108)
When initial application of an Australian Accounting Standard
has an effect on the current period or any prior period, would
have such an effect except that it is impracticable to determine
the amount of the adjustment, or might have an effect on future
periods, an entity shall disclose:
(a) the title of the Australian Accounting Standard;
(b) when applicable, that the change in accounting policy is
made in accordance with its transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions;
(e) when applicable, the transitional provisions that might have
an effect on future periods;
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Disclosures where there is a mandatory change
in accounting policy due to the release of a new
accounting standard (AASB 108) (cont.)
(f) for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment
(g) the amount of the adjustment relating to periods before those
presented, to the extent practicable; and
(h) if retrospective application required by paragraph 19(a) or ( b)
is impracticable for a particular prior period, or for periods before
those presented, the circumstances that led to the existence of
that condition and a description of how and from when the change
in accounting policy has been applied.
Financial statements of subsequent periods need not repeat these
disclosures.
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Disclosures where there is a
voluntary change in accounting
policy (AASB 108)
When a voluntary change in accounting policy has an
effect on the current period or any prior period, would
have an effect on that period except that it is impracticable
to determine the amount of the adjustment, or might have
an effect on future periods, an entity shall disclose:
(a) the nature of the change in accounting policy;
(b) the reasons why applying the new accounting policy
provides reliable and more relevant information;
(c) for the current period and each prior period presented,
to the extent practicable, the amount of the adjustment;
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Disclosures where there is a voluntary
change in accounting policy (AASB
108) (cont.)
(d) the amount of the adjustment relating to periods before
those presented, to the extent practicable; and
(e) if retrospective application is impracticable for a
particular prior period, or for periods before those presented,
the circumstances that led to the existence of that condition
and a description of how and from when the change in
accounting policy has been applied.
Financial statements of subsequent periods need not repeat
these disclosures.
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Profit as a guide to an
organisation’s success
• Profit or loss and total comprehensive income are
measures of financial performance
• Non-financial issues are not included directly in the
calculation of total comprehensive income
• There are numerous reasons why traditional financial
accounting ignores environmental and social impacts
• Interests of investors might be put above the interests of
other stakeholders
• Financial performance indicators are not comprehensive
in regard to total organisational performance
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Summary
• The lecture considers how to construct a statement of
comprehensive income and a statement of changes in
equity
• Profit or loss and total comprehensive income are
influenced directly by the asset and liability
measurement rules applied
• Format of statements is governed by AASB 101
• Statement of comprehensive income provides a
reasonably comprehensive picture of financial
performance
• Profit calculations typically ignore social costs and
benefits
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