ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
TOPIC 2: Performance Reporting
LLPWC CHAPTER 19:
Comprehension Questions: 7, 8
Application and Analysis Exercises: 19.6, 19.7, 19.8
Additional Exercises: 19.15, 19.23
Additional Problem 1 – see below
In-class Practice Question – to be provided in tutorials
In-class MCQ – to be provided in tutorials
Chapter 19 Comprehension Questions
7.
Explain the difference between classification of expenses by nature and by function.
See also AASB 101 para. 102 and 103. Classification of expenses by nature is according to their
type of expense (such as, materials used, transport costs, employee benefits, depreciation,
electricity, advertising costs, finance costs). Classification of expense by function is according to
the activity involved (such as, cost of sales, selling and distribution costs, administration, and
finance costs). Refer section 19.4.3.
8.
Does the separate identification of profit and items of other comprehensive income provide
a meaningful distinction between the effects of different types of non-owner transactions
and events?
Whether an item of income or expense is included in profit or in other comprehensive income is
determined by the treatment of various gains and losses and other items of income or expense
prescribed by accounting standards. The distinction becomes blurred when similar items, such as
the effects of an asset revaluation under AASB 116, are included in profit (if a loss on revaluation)
and in other comprehensive income (if a gain on revaluation).
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
Chapter 19 Application and Analysis exercises
Exercise 19.6 - STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Lachlan Limited
Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2013
$'000
Revenue
1 200
Cost of sales
(840)
Gross profit
360
Interest income
24
Other income
30
Selling and distribution expenses
(76)
Administrative expenses
(35)
Finance costs
(18)
Profit before tax
285
Income tax expense
(85)
Profit for the year
200
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss:
Revaluation loss on available-for-sale financial assets, net of tax
(1)
Items that will not be reclassified subsequently to profit or loss:
Gain on revaluation of land
4
Other comprehensive income net of tax
3
Total comprehensive income for the year
203
Calculations:
Other income comprises:
Gain on sale of plant
Valuation gain on trading securities
Dividend revenue
$’000
5
20
5
30
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
Exercise 19.7 - PREPARATION OF A STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
William Limited
Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2013
$’000
Revenue
950
Cost of sales
(600)
Gross profit
350
Interest revenue
25
Other income
10
Selling and distributions expenses
(50)
Administrative expenses
(30)
Finance costs
(15)
Profit before tax
290
Income tax expense
(75)
Profit for the year
215
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss:
Gain on available-for-sale investments net of tax
20
Total comprehensive income for the year
235
Explanation:
Other income comprises: interest revenue $25,000 and gain on sale of plant and equipment
$10,000.
Exercise 19.8 - STATEMENT OF CHANGES IN EQUITY
Riley Ltd
Statement of Changes in Equity for the year ended 30 June 2013
Share
General
Foreign
Retained
currency
translation
Capital Reserve
Reserve
Earnings
$
$
$
$
Balance at 30 June 2012
160 000 40 000
60 000
160 000
Comprehensive income for the year
ended 30 June 2013
14 000
130 000
Dividends
(110 000)
Transfer to general reserve
10 000
(10 000)
Issue of share capital
40 000
Balance at 30 June 2013
200 000 50 000
74 000
170 000
Total
$
420 000
144 000
(110 000)
40 000
494 000
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
Exercise 19.15 PREPARATION OF A STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME
Liam Ltd
Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2013
$’000
Income from investments
980
Interest income
90
Net loss on financial instruments held for trading
(20)
Other income
10
Administrative expenses
(75)
Finance costs
(15)
Profit before tax
970
Income tax expense
(280)
Profit for the year
690
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Revaluation gain on available-for sale investments
70
Income tax relating to revaluation gain
(21)
Other comprehensive income
49
Total comprehensive income for the year
739
Explanations
• Income from investments comprises dividends from investments $920 000 + distributions from
trusts $60 000 = $980 000.
• Interest income comprises interest on deposits $80 000 + interest income from bank bills
$10 000 = $90 000.
• Net loss on financial assets held for trading comprises income from dealing in securities and
derivatives $40 000 – loss on credit derivatives held for trading $60 000 = Loss $20 000. These
items are presented on a net basis as permitted by paragraph 35 of AASB 101 (refer section
19.2.5).
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
Exercise 19.23 - PREPARATION OF A STATEMENT OF FINANCIAL POSITION, STATEMENT OF PROFIT
OR LOSS AND OTHER COMPREHENSIVE INCOME AND STATEMENT OF CHANGES IN EQUITY
Jacob Ltd
Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2013
$'000
Revenue
4 469
Cost of sales
(2 987)
Other income
6
Selling and distribution expenses
(906)
Administrative expenses
(252)
Finance costs
(48)
Profit before tax
282
Income tax expense
(85)
Profit for year
197
Other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation of land, net of tax
Items that may be reclassified subsequently to profit or loss:
Revaluation of available-for-sale investments, net of tax
Other comprehensive income
Total comprehensive income
35
7
42
239
Explanations
• Selling and distribution expenses comprise distribution expenses $86 000 + sales and marketing
expenses $820 000 = $906 000.
• Finance costs comprise interest $44 000 + other borrowing costs $4000 = $48 000.
• Alternatively, each items of other comprehensive income may be reported at gross e.g., land
revaluation $50 000 + revaluation of available-for-sale financial assets $10 000, less tax related
of $15,000 and $3,000, respectively. If adopting this approach, para. 91 of AASB 101 requires
the amount of related tax to be reported separately for items that might be subsequently
reclassified to profit or loss, and those for which subsequent reclassification is not permitted by
Australian Accounting Standards.
(Ignore Statement of Financial Position)
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
Jacob Ltd
Statement of Changes in Equity for the year ended 30 June 2013
Share
Land
Investment
Retained
Capital
Revaluation Revaluation
Earnings
Reserve
Reserve
$'000
$'000
$'000
$'000
Balance at 30 June 2012
1 541
15
35
326
Comprehensive income for the
35
7
197
year
Dividends
(150)
Dividends reinvested
30
Issues of share capital for cash
120
Balance at 30 June 2013
1 691
50
42
373
Total
$'000
1 917
239
(150)
30
120
2 156
Additional Problem 1 – Non-statutory performance measures
(a) The term ‘underlying profit’ is one of a growing number of terms used by entities to describe
their reported profits. Underlying profit (and others like underlying earnings, non-GAAP, pro
forma earnings, street earnings, normalised earnings) and measures of profit that do not equate
to the profit figure determined through compliance with accounting standards – i.e. statutory
profit. These terms can generically be referred to as non-statutory profit measures.
(b) The obligations for the reporting of non-statutory profit measures can be found in the
Australian Securities and Investments Commission’s (ASIC) Regulatory Guide 230 ‘Disclosing
non-IFRS financial information’ (RG 230) issued in December 2011. Whilst ASIC acknowledges
that financial information presented other than in accordance with accounting standards can be
useful it can be potentially misleading. As such, RG 230 sets out the principles for disclosing
non-IFRS (non-statutory) financial information. Whilst there are very specific requirements, the
overriding principle is that IFRS information should be given equal or greater prominence
compared to non-IFRS information and that the financial statements must no included non-IFRS
information. Further, non-IFRS information should be explained and reconciled to the IFRS
financial information, be calculated consistently form period to period; and be unbiased and not
used to remove ‘bad news’. See: http://asic.gov.au/regulatory-resources/find-adocument/regulatory-guides/rg-230-disclosing-non-ifrs-financial-information/
As suggested by the 2015 KPMG survey, the use of non-IFRS financial information “continues to
play a key role in how top companies communicate and analyse their financial performance”. As
indicated by the KPMG survey of the ASX200, “86% of companies reported at least one non-IFRS
performance measure in their annual reports and 69% of these companies reported a 2015
non-IFRS measure that implied ‘better performance than the relevant statutory measure.” The
proliferation of non-statutory performance metrics raises questions as to the motive for entities
to report these numbers and the implications for information quality. Students interested in this
very topical area are encouraged to read the following article: ‘The rise and rise of non-GAAP
Disclosure: A survey of Australian practice and its implications’ (2016), by Coulton, Riberio, Shan
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
and
Taylor.
Available
at:
http://www.cifr.edu.au/assets/document/111601%20Rise%20and%20rise%20of%20non-GAAP%20disclosure%20Report%20A4_WEB_FA2.pdf
(c) Whilst not used in the four statutory statements, the use of underlying profits and other nonstatutory (non-IFRS) financial measures in the 2015 Annual Report by Qantas Airways Limited
can only be described as extensive. The first line of the CEO’s report on page 4 indicates
‘Qantas’ underlying profit before tax of $975 million was a turnaround of $1.6 billion compared
with 2013/2014.’ Students will have varying opinions as to if this extensive use of non-IFRS is
within the ‘spirit’ of RG 230 and therefore should generate a good discussion.
(d) The use of non-statutory performance metrics is financial reporting and market
announcements is quite extensive and growing. This is evident in the two articles and also
another article which we recommend to students: ‘The rise and rise of non-GAAP Disclosure: A
survey of Australian practice and its implications’ (2016), by Coulton, Riberio, Shan and Taylor
(see (a) for reference).
What is also evident from the articles is the growing level of anxiety and concern in relation to
the pervasive and growing use of these non-statutory numbers, and particularly, the motivation
for the use of these non-statutory numbers. Management would argue that they are providing
more genuinely relevant and useful information. i.e. the ‘true story of its performance’.
However, there is concern that these numbers are motivated by self-serving management
behaviour, for example, used in remuneration incentives and performance measurement.
The use of non-statutory numbers gives rise to the following consequences and challenges for
investors and users of financial reports, accounting regulators and corporate regulators.
Challenge for investors/users - Difficulty in determining which are the ‘real’ number they
should be focussing upon. Investors must exercise very careful judgement when using nonstatutory numbers.
• They must be aware of how these numbers are determined as these measures are
often quite different across entities and even across time within entities. Unlike
statutory numbers determined by accounting standards.
• How are they metric used in measuring the performance of management and the
board
Challenge for corporate regulators (ASIC): To ensure that the information does not cause
greater uncertainly and confusion and used to mislead information. This may require increased
surveillance by ASIC.
Challenge for accounting regulators:
• Are the current reporting requirements meeting the needs of users.
• Is the use of non-statutory numbers devaluing the information provided under
reporting regulations
• Should accounting regulator regulate the use of non-statutory numbers in financial
reports or should this remain the domain of ASIC.
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
In-class Practice Question
Hurricane Ltd
Statement of Comprehensive Income
For the financial year ended 30 June 2015
Notes
Sales
Less Cost of goods sold
Gross profit
Other income – gain on sale of fixtures
Selling expenses
Occupancy/Administration expenses
Finance costs
1
2
3
Profit before tax
Income tax expense
Profit after tax
Other comprehensive income items
Items that will not be reclassified to profit or loss:
Revaluation on store - net of tax
Total other comprehensive income
Total comprehensive income for the year
4
5
$
$2,130,500
628,500
1,502,000
1,400
1,503,400
245,000
156,300
1,000
402,300
1,101,100
330,330
770,770
38,500
809,270
1: Selling expenses would include:
Advertising expense
Sales staff salaries expense
Sales staff vehicle expense
$65,000
$100,000
$80,000
$245,000
2: Occupancy expense or Administration expenses would include:
Rates expense
Insurance expense
Administrative staff salaries expense
Stationery expense
Lease expense of photocopier
$9,000
$10,600
$131,200
$2,000
$3,500
$156,300
3: Finance costs must be disclosed separately
4: Income tax = $1,101,100 x 30% = $330,330
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ACCT3102 – Tutorial 2
Tutorial Solutions
Semester 1 / 2017
5: Revaluation = $520,000-$465,000 = $55,000 x (1-30%) = $38,500. The revaluation can be
disclosed net of tax or gross with the line item of tax.
Hurricane Ltd
Statement of Changes in Equity
For the financial year ended 30 June 2015
Share General Asset Rev Retained
Total
Capital Reserve Surplus Earnings
$
$
$
$
$
Balance at 30 June 2014
592,000 43,000
67,000 33,000 735,000
Profit for the year
770,770 770,770
Comprehensive income – Revaluation gain net
38,500
38,500
tax
Dividend declared
(80,000)* (80,000)
Transfer to general reserve
10,000
0
(10,000)
Balance at 30 June 2015
592,000 53,000 105,500 713,770 1,464,270
* Dividend calculated as: 400,000 @ 20c = $80,000
MCQ Solutions:
1
2
3
4
5
B
A
A
D
D
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