PRESENTATION OF
FINANCIAL
STATEMENTS
CHAPTER 9 PAS 1
Statement of Comprehensive Income
INCOME STATEMENT
• An income statement is a formal statement showing the
financial performance or profit or loss of an entity for a
period of time.
• The financial performance of an entity is primarily measured
in terms of the level of income earned by the entity through the
effective and efficient utilization of resources.
• The transaction approach is the traditional preparation of the
income statement in conformity with accounting standards.
• The income statement for a period presents the income,
expenses, gains, losses and net income or loss recognized
during the period.
Transaction approach
• Transaction approach or matching approach is the
conventional or traditional preparation of income statement in
conformity with PFRS.
• This approach of computing net income or loss requires the
determination of how much income was earned during the year
and how much expenses were incurred in earning the revenue.
The difference between the income and the expenses is net
income or loss.
Usefulness of income statement
• Useful in predicting the capacity of the entity to generate cash
flows from existing resources with regards to profitability.
• Also useful in forming judgment about the effectiveness of
employing additional resources.
DEFINITION
• 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.
• Accordingly, comprehensive income includes the following:
1. Components of profit or loss
2. Components of other comprehensive income
Profit or loss
• Profit or loss is the total of income less expenses, excluding
the components of other comprehensive income.
• An entity may use “net income” or “net loss” to describe profit
or loss.
Other comprehensive income (OCI)
• Other comprehensive income comprises items of income and
expenses including reclassification adjustments that are not
recognized in profit or loss as required or permitted by
Philippine Financial Reporting Standards.
• Components of OCI
1. Unrealized gain or loss on equity investment measured at fair
value through other comprehensive income
2. Unrealized gain or loss on debt investment measured at fair
value through other comprehensive income
3. Gain or loss from translating the financial statements of a
foreign operation.
4. Revaluation surplus during the year
Other comprehensive income (OCI)
• Components of OCI
5. Unrealized gain or loss from derivative contracts designated
as cash flow hedge
6. Remeasurements of defined benefit plan:
a. Actuarial gain and loss on projected benefit obligation
b. The difference between actual return on plan assets and
interest income on fair value of plan assets
c. Change in the effect of asset ceiling minus interest on the
beginning effect of asset ceiling
7. Change in fair value attributable to credit risk of a financial
liability designated at fair value profit or loss
Presentation of other comprehensive
income
The amended PAS 1, paragraph 82A, provides that the other
comprehensive income section shall present line items for
amounts of other comprehensive income in the period, classified
by nature.
The line items for amounts of OCI shall be grouped as follows:
1. OCI that will be reclassified subsequently to profit or loss
when specific conditions are met.
2. OCI that will not be reclassified subsequently to profit or
loss but to retained earnings.
OCI that will be reclassified to profit or
loss
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.
c. Unrealized gain or loss on debt investment measured at fair
value through OCI.
Reclassification adjustments are amounts reclassified to profit
or loss in the current period that were recognized in other
comprehensive income in the current or previous periods.
OCI that will be reclassified to retained
earnings
a. Unrealized gain or loss on equity investment measured at
fair value through other comprehensive income
b. Revaluation surplus during the year
c. Remeasurements of a defined benefit plan, including actuarial
gain or loss.
d. Change in fair value attributable to credit risk of a financial
liability designated at fair value through profit or loss.
Reclassification adjustments are amounts reclassified to profit
or loss in the current period that were recognized in other
comprehensive income in the current or previous periods.
Presentation of comprehensive income
PAS 1, paragraph 81, provides that an entity has two options of
presenting comprehensive income, namely:
Income
• The Conceptual Framework defines income as increase in
economic benefit during the accounting period in the form of
inflow or increase in asset or decrease in liability that results in
increase in equity, other than contribution from equity
participants.
• It is the inflow of future economic benefit that increases equity,
other than contribution by owners.
Sources of income
a. Sales of merchandise to customers
Sales returns, allowances and discounts shall be deducted
from gross sales to arrive at net sales.
b. Rendering of services
Includes professional fees, media advertising commissions,
insurance agency commissions, admission fees for artistic
performance and tuition fees.
c. Use of entity resourcecs
Includes interest, rent, royalty and dividend income
d. Disposal of resources other than products
Include gain on sale of investments, gain on sale of property,
plant and equipment and gain on sale of intangible assets.
Expense
• Under the Conceptual Framework, expense is defined as decrease
in economic benefit during the accounting period in the form of
outflow or decrease in asset and increase in liability that results in
decrease in equity, other than distribution to equity participants.
• It is the outflow of future economic benefit that decreases equity,
other than distribution or dividend paid to owners.
• Expenses include the following:
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses
c. Administrative expenses
d. Other expenses
e. Income tax expense
Classifications of Expenses
• Distribution costs or selling expenses constitute costs which
are directly related to selling, advertising and delivery of goods
to customers. It includes:
a. Salesmen’s salaries
b. Sales commissions
c. Traveling and marketing expenses
d. Advertising and publicity expenses
e. Freight out
f. Depreciation of delivery equipment and store equipment
Classifications of Expenses
• Administrative expenses constitute cost of administering the
business. These ordinarily include all operating expenses not
related to selling and cost of goods sold. It includes:
a. Doubtful accounts
b. Office salaries and expenses of general executives
c. Office supplies expense
d. Contributions to charity
e. Professional fees
f. Depreciation of office building and office equipment
g. Amortization of intangible assets
Classifications of Expenses
• Other expenses are those expenses which are not directly
related to the distribution and administrative function. It
includes:
a. Loss on sale of trading investment
b. Loss on sale of property, plant and equipment
c. Loss on sale of noncurrent investment
d. Loss on sale of intangible asset
e. Casualty loss from earthquake, typhoon, hurricane,
tsunami, flood, fire, storm surge and other natural disaster
f. Expropriation loss
No more extraordinary items
PAS 1, paragraph 87, specifically mandates that:
Unusual and infrequent items of income and expense are
considered component of income from continuing operations.
Line items (PAS 1, paragraph 82-83)
Forms of income statement
PAS 1,paragraph 99, provides that:
Accordingly, the income statement may be presented in two
ways, namely functional and natural.
Functional presentation
• The functional presentation or cost of goods sold method
is the traditional and common form of income statement.
• Under this presentation, expenses are classified according to
their function in the enterprise operations. Expenses are
classified as:
a. Cost of sales,
b. Distribution or selling expenses
c. General or administrative expenses
d. Other expenses
Natural presentation
• This presentation is referred to as the nature of expense method.
• Under this form, expenses are aggregated according to their nature
and not allocated among the various functions within the entity.
Examples:
a. Purchases
b. Employee benefit costs
c. Advertising costs
d. Transport costs
e. Supplies
f. Depreciation
g. Other expenses
Which form of income statement?
• There is no prescribed format. PAS 1, paragraph 105, states
that:
Statement of Comprehensive Income
• The statement of comprehensive income starts with the net
income or loss as shown in the income statement plus or minus
the components of other comprehensive income.
• Its purpose is to provide a more comprehensive information on
financial performance measured more broadly than the income
as traditionally computed.
Thank you!
