U

BLUE NOTES
CHAPTER

INCOME 41 S
L

Comprehensive income is the change in equity during a period resulting from transactions and other events, other than
changes resulting from transactions with owners in their capacity as owners. (SCI = P/L + OCI)

Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.
Components of Profit or Loss:
1. Income Statement – a formal statement showing the financial performance of an entity for a given period.
a. Income – an inflow of future economic benefit that increases equity, other than contribution by owners.
 Sales of merchandise to customers
 Rendering of services
 Use of entity resources
 Disposal of resources other than products
b. Expense – an outflow of future economic benefit that decreases equity, other than distribution or dividend
paid to owners
 Cost of sales
 Distribution costs – directly related to selling, advertising and delivery of goods to customers
 Administrative expenses – cost of administering the business; usually not related to sales
 Other expenses – not directly related to distribution and administrative function
 Income tax expense
c. Forms of presenting income statement
 Functional – cost of sales method; expenses according to function
 Natural – nature of expense method; expenses according to nature
Note: PAS 1 does not prescribe any format. Management is required to select the presentation that is reliable and more relevant. Par. 105
2. Primary approaches to income measurement
a. Capital maintenance approach– net assets approach; NI occurs only after the beg. capital used is
maintained
 Financial Capital → Net Assets*(End.) – Net Assets*(Beg.) – Contributions + Distributions = NI
- Concept based on Historical Cost ; *Nominal or Financial Amount
 Physical Capital → Net Assets*(End.) – Net Assets*(Beg.) – Contributions + Distributions = NI
- Expressed in terms of Current Cost ; *Physical Productive Capital
b. Transaction approach – matching approach (in conformity to PFRS); (Income – Expenses) = NI
Other comprehensive income comprises items of income and expense including reclassification adjustments (amounts
reclassified to P/L in the current period that were recognized in OCI in the current or previous periods) that are not
recognized in profit or loss as required or permitted by PFRS.
Components of Other Comprehensive Income:
1. Unrealized gain or loss on investment in equity instrument measured at FV through OCI
2. Gain or loss from translating the financial statements of a foreign operation
3. Change in revaluation surplus
4. Unrealized gain or loss from derivative contracts designated as cash flow hedge
5. Actuarial gain or loss on defined benefit plan “fully recognized” through OCI

Practical Accounting 1 Theory of Accounts

Chapter 41 – Statement of Comprehensive Income USL Blue Notes 159

Presentation of OCI
1. Line items of OCI subsequently reclassified to P/L
a. Gain or loss from translating the financial statements of a foreign operation
b. Unrealized gain or loss from derivative contracts designated as cash flow hedge
2. Line items of OCI not subsequently reclassified to P/L
a. Unrealized gain or loss on investment in equity instrument measured at FV through OCI
- To be reclassified to Retained Earnings upon disposal of the investment (PFRS 9)
b. Change in revaluation surplus
- To be realized through Retained Earnings
c. Actuarial gain or loss on defined benefit plan “fully recognized” through OCI
- Not reclassified subsequently
Options in Comprehensive Income Presentation
1. Two statements = Income Statement and SCI (NI from Income Statement + or – Components of OCI)
2. Single statement = Components of P/L + or – Components of OCI
Note: An entity shall not present any items of P/L as extraordinary items in SCI or separate income statement or in the notes. (PAS 1, par.87)

Statement of Retained Earnings (no longer required) Statement of Changes in Equity

 Profit or loss for the period  Comprehensive income for the period
 Prior period errors  Effects of changes in accounting policies and
 Dividends declared and paid to shareholders correction of errors*
 Effect of change in accounting policy  A reconciliation b/w CA at beginning and end of
 Appropriation of retained earnings the period*, separately disclosing changes from:
1. Profit or loss
2. Each item of OCI
3. Transactions with owners in their capacity as
owners showing separately contributions by
and distributions to owners
*For each component of equity

Illustrative Problems
1. Hilti Co. had the following account balances:

Sales 120,000
Cost of goods sold 60,000
Salary expense 10,000
Depreciation expense 20,000
Dividend revenue 4,000
Utilities expense 8,000
Rental revenue 20,000
Interest expense 12,000
Sales returns 11,000
Advertising expense 13,000

What would Hilti report as total expenses if the company uses the natural presentation?
Solution:
Cost of sales 60,000
Salary expense 10,000

Theory of Accounts Practical Accounting 1

160 USL Blue Notes Chapter 41 – Statement of Comprehensive Income

Depreciation expense 20,000

Utilities expense 8,000
Interest expense 12,000
Advertising expense 13,000
Total 123,000

2. For the year ended December 31, 2014, Kawasak Inc. reported the following:

Net income 180,000

Preference share dividends declared 30,000
Ordinary share dividends declared 6,000
Unrealized holding loss, net of tax 3,000
Retained earnings 240,000
Ordinary share capital 120,000
Accumulated OCI, Beginning Balance, net of tax 15,000

What would Kawasak report as its ending balance of Accumulated Other Comprehensive Income?
Solution:
Beginning balance 15,000
Unrealized holding loss 3,000
Ending Balance 12,000

Practical Accounting 1 Theory of Accounts