Module 5 Statement of Comprehensive Income and Income Statement

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Module 5 Statement of Comprehensive Income and Income Statement

Transcript Of Module 5 Statement of Comprehensive Income and Income Statement

IFRS for SMEs® Standard (2015) + Q&As
IFRS® Foundation—Supporting Material for the IFRS for SMEs Standard
Module 5—Statement of Comprehensive Income and Income Statement

IFRS® Foundation Supporting Material
for the IFRS for SMEs® Standard
including the full text of Section 5 Statement of Comprehensive Income and Income Statement
of the IFRS for SMEs Standard issued by the International Accounting Standards Board in October 2015
with extensive explanations, self-assessment questions and case studies
IFRS® Foundation Columbus Building 7 Westferry Circus
Canary Wharf London E14 4HD United Kingdom Telephone: +44 (0)20 7246 6410 Email: [email protected] Web: www.ifrs.org Publications Department Telephone: +44 (0)20 7332 2730 Email: [email protected]

This module has been prepared by IFRS Foundation (Foundation) education staff. It has not been approved by the International Accounting Standards Board (Board). The module is designed to assist users of the IFRS for SMEs® Standard (Standard) to implement and consistently apply the Standard. All rights, including copyright, in the content of this publication are owned by the IFRS® Foundation. Copyright © 2018 IFRS Foundation. All rights reserved. Email: [email protected] Web: www.ifrs.org Disclaimer: All implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy, are excluded to the extent that they may be excluded as a matter of law. To the extent permitted by applicable law, the Board and the Foundation expressly disclaim all liability howsoever arising whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omissions) to any person in respect of any claims or losses of any nature, arising directly or indirectly from: (i) anything done or the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any part of the contents of this publication; and (ii) the use of any data or materials contained in this publication or otherwise. To the extent permitted by applicable law, the Board, the Foundation, the authors and the publishers shall not be liable for any loss or damage of any kind arising from use of and/or reliance on the contents of this publication or any translation thereof, including but not limited to direct, indirect, incidental or consequential loss, punitive damages, penalties or costs. Information contained in this publication does not constitute advice and should not be used as a basis for making decisions or treated as a substitute for specific advice on a particular matter from a suitably qualified professional person. For relevant accounting requirements, reference must be made to the Standard issued by the Board. Any names of individuals, companies and/or places used in this publication are fictitious and any resemblance to real people, entities or places is purely coincidental. Right of use: Although the Foundation encourages you to use this module for educational purposes, you must do so in accordance with the terms of use below. If you intend to include our material in a commercial product, please contact us as you will need a separate licence. For details on using our Standards, please visit www.ifrs.org/issued-standards. You must ensure you have the most current material available from our website. Your right to use this module will expire when this module is withdrawn or updated, at which time you must cease to use it and/or make it available. It is your sole responsibility to ensure you are using relevant material by checking the Foundation’s website for any amendments to the Standard, SME Implementation Group Q&As not yet incorporated and/or new versions of the modules. Terms of Use 1) You can only reproduce the module in whole or in part in a printed or electronic stand-alone document provided that:
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Contents
INTRODUCTION __________________________________________________________ 1 Which version of the IFRS for SMEs Standard? __________________________________ 1 This module ______________________________________________________________ 1 IFRS for SMEs Standard ____________________________________________________ 2 Introduction to the requirements_______________________________________________ 3 What has changed since the 2009 IFRS for SMEs Standard ________________________ 3 REQUIREMENTS AND EXAMPLES ___________________________________________ 4 Scope of this section _______________________________________________________ 4 Presentation of total comprehensive income _____________________________________ 5 Analysis of expenses ______________________________________________________ 20 SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 24 COMPARISON WITH FULL IFRS STANDARDS ________________________________ 25 TEST YOUR KNOWLEDGE ________________________________________________ 27 APPLY YOUR KNOWLEDGE _______________________________________________ 32 Case study 1 ____________________________________________________________ 32 Answer to case study 1 ____________________________________________________ 34 Case study 2 ____________________________________________________________ 37 Answer to case study 2 ____________________________________________________ 39 Case study 3 ____________________________________________________________ 44 Answer to case study 3 ____________________________________________________ 46
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Module 5—Statement of Comprehensive Income and Income Statement
The accounting requirements applicable to small and medium-sized entities (SMEs) discussed in this module are set out in the IFRS for SMEs Standard, issued by the International Accounting Standards Board (Board) in October 2015. This module has been prepared by IFRS Foundation education staff. The contents of Section 5 Statement of Comprehensive Income and Income Statement of the IFRS for SMEs Standard are set out in this module and shaded grey. The Glossary of terms of the IFRS for SMEs Standard (Glossary) is also part of the requirements. Terms defined in the Glossary are reproduced in bold type the first time they appear in the text of Section 5. The notes and examples inserted by the education staff are not shaded. These notes and examples do not form part of the IFRS for SMEs Standard and have not been approved by the Board.
INTRODUCTION
Which version of the IFRS for SMEs® Standard?
When the IFRS for SMEs Standard was first issued in July 2009, the Board said it would undertake an initial comprehensive review of the Standard to assess entities’ experience of the first two years of its application and to consider the need for any amendments. To this end, in June 2012, the Board issued a Request for Information: Comprehensive Review of the IFRS for SMEs. An Exposure Draft proposing amendments to the IFRS for SMEs Standard was subsequently published in 2013, and in May 2015 the Board issued 2015 Amendments to the IFRS for SMEs Standard. The document published in May 2015 only included amended text, but in October 2015, the Board issued a fully revised edition of the Standard, which incorporated additional minor editorial amendments as well as the substantive May 2015 revisions. This module is based on that version. The IFRS for SMEs Standard issued in October 2015 is effective for annual periods beginning on or after 1 January 2017. Earlier application was permitted, but an entity that did so was required to disclose the fact. Any reference in this module to the IFRS for SMEs Standard refers to the version issued in October 2015.
This module Section 3 Financial Statement Presentation of the IFRS for SMEs Standard sets out general presentation requirements and Sections 4–8 focus on the requirements for the presentation of the financial statements. This module focuses on the general requirements for the presentation of the statement of comprehensive income and the income statement in accordance with Section 5 Statement of Comprehensive Income and Income Statement. It introduces the subject and reproduces the official text along with explanatory notes and examples designed to enhance understanding of the requirements. The module identifies the significant judgements required in presenting the Statement of Comprehensive Income and Income Statement. In addition, the module includes questions designed to test your understanding of the requirements and case studies that
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Module 5—Statement of Comprehensive Income and Income Statement
provide a practical opportunity to apply the requirements to present those statements in applying the IFRS for SMEs Standard. Upon successful completion of this module, you should, within the context of the IFRS for SMEs Standard, be able to: • understand the choice between the single-statement approach and the two-statement
approach; • present a statement of comprehensive income; • present an income statement; • identify which items of income and expenses are presented as other comprehensive income
and how to group them on the basis of whether they are potentially reclassifiable to profit or loss; • identify a discontinued operation; and • analyse expenses classified by nature and by function.
IFRS for SMEs Standard
The IFRS for SMEs Standard is intended to apply to the general purpose financial statements of entities that do not have public accountability (see Section 1 Small and Medium-sized Entities). The IFRS for SMEs Standard is comprised of mandatory requirements and other non-mandatory material. The non-mandatory material includes: • a preface, which provides a general introduction to the IFRS for SMEs Standard and explains
its purpose, structure and authority; • implementation guidance, which includes illustrative financial statements and a table of
presentation and disclosure requirements; • the Basis for Conclusions, which summarises the Board’s main considerations in reaching
its conclusions in the IFRS for SMEs Standard issued in 2009 and, separately, in the 2015 Amendments; and • the dissenting opinion of a Board member who did not agree with the issue of the IFRS for SMEs Standard in 2009 and the dissenting opinion of a Board member who did not agree with the 2015 Amendments. In the IFRS for SMEs Standard, Appendix A: Effective date and transition, and Appendix B: Glossary of terms, are part of the mandatory requirements.
In the IFRS for SMEs Standard, there are appendices to Section 21 Provisions and Contingencies, Section 22 Liabilities and Equity and Section 23 Revenue. These appendices provide non-mandatory guidance.
The IFRS for SMEs Standard has been issued in two parts: Part A contains the preface, all the mandatory material and the appendices to Section 21, Section 22 and Section 23; and Part B contains the remainder of the material mentioned above.
Further, the SME Implementation Group (SMEIG), which assists the Board with supporting implementation of the IFRS for SMEs Standard, publishes implementation guidance as ‘questions and answers’ (Q&As). These Q&As provide non-mandatory, timely guidance on specific accounting questions raised with the SMEIG by entities implementing the IFRS for SMEs
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Module 5—Statement of Comprehensive Income and Income Statement
Standard and other interested parties. At the time of issue of this module (August 2018) the SMEIG has not issued any Q&As relevant to this module. Introduction to the requirements
The objective of general purpose financial statements of a small or medium-sized entity is to provide information about the entity’s financial position, performance and cash flows that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs. Such users include, for example, owners who are not involved in managing the business, existing and potential creditors and credit rating agencies.
The objective of Section 5 is to prescribe general requirements for presenting an entity’s financial performance for the period. In particular, Section 5 requires an entity to make an accounting policy choice between presenting total comprehensive income for a period either in a single statement or in two separate statements. It specifies line items to be presented in those statements, prohibits the presentation or description of any items of income or expense as ‘extraordinary items’ and requires presentation of an analysis of expenses using a classification based on either the nature of expenses or the function of expenses within the entity, whichever provides information that is reliable and more relevant. It also requires items of other comprehensive income to be grouped into those that, in accordance with the IFRS for SMEs Standard, will not be reclassified subsequently to profit or loss and those that will be reclassified subsequently to profit or loss when specific conditions are met.
What has changed since the 2009 IFRS for SMEs Standard
The following are the main changes made to Section 5 by the 2015 Amendments: • Clarification that the single amount presented for discontinued operations includes any
impairment of the discontinued operation measured in accordance with Section 27 (see paragraph 5.5(e)(ii)). • Addition of a requirement to group items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss—based on Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) issued in June 2011 (see paragraph 5.5(g)). In addition, consequential changes have been made to Section 5 as a result of changes made to other section. For example, paragraph 5.4(b) has been changed to reflect the changes made to Section 17 permitting entities to measure property, plant and equipment using the revaluation model.
There have also been other minor or editorial amendments; these have been included but not highlighted above.
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Module 5—Statement of Comprehensive Income and Income Statement
REQUIREMENTS AND EXAMPLES
Scope of this section
5.1 This section requires an entity to present its total comprehensive income for a period— ie its financial performance for the period―in one or two financial statements. It sets out the information that is to be presented in those statements and how to present it.
Notes
The Glossary defines total comprehensive income as ‘[t]he change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners (equal to the sum of profit or loss and other comprehensive income)’. Profit or loss (sometimes called net income) is frequently used as a measure of performance or as the basis for other measures, such as return on investment or earnings per share. The elements directly related to the measurement of profit are income and expenses. Paragraph 5.4(b) specifies four items of income and expenses that are recognised outside of profit or loss in other comprehensive income. Profit or loss together with other comprehensive income combine to give total comprehensive income. Section 5 specifies the presentation of an entity’s income and expenses. Other sections of the IFRS for SMEs Standard specify requirements for recognising and measuring income and expenses. Income is defined in the Glossary as ‘[i]ncreases in economic benefits during the reporting 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 owners.’ Expenses are defined in the Glossary as ‘[d]ecreases in economic benefits during the reporting 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 owners.’ Distinguishing between items of income and expense and combining them in different ways also permits several measures of an entity’s performance to be displayed. An entity is required to present additional line items, headings and subtotals in its financial performance statements when such presentation is relevant to an understanding of the entity’s financial performance (paragraph 5.9). For example, as additional subtotals it could display gross profit and either profit or loss from ordinary activities before taxation or profit before tax.
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Module 5—Statement of Comprehensive Income and Income Statement
Presentation of total comprehensive income
5.2 An entity shall present its total comprehensive income for a period either: (a) in a single statement of comprehensive income, in which case the statement of comprehensive income presents all items of income and expense recognised in the period; or
(b) in two statements—an income statement and a statement of comprehensive income—in which case the income statement presents all items of income and expense recognised in the period except those that are recognised in total comprehensive income outside of profit or loss as permitted or required by this Standard.
5.3 A change from the single-statement approach to the two-statement approach, or vice versa, is a change in accounting policy to which Section 10 Accounting Policies, Estimates and Errors applies.
Notes
The choice presented in paragraph 5.2 (ie single-statement approach or a two-statement approach) is an accounting policy choice. Paragraph 10.7 requires an entity to select and apply its accounting policies consistently. Moreover, an entity cannot voluntarily change its accounting policy unless the change would result in its financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows (see paragraph 10.8(b)). Following a change from a single-statement approach to a two-statement approach, or vice versa, the comparative statement or statements will also be re-presented.
Single-statement approach
5.4 Under the single-statement approach, the statement of comprehensive income shall include all items of income and expense recognised in a period unless this Standard requires otherwise. This Standard provides different treatment for the following circumstances: (a) the effects of corrections of errors and changes in accounting policies are presented as retrospective adjustments of prior periods instead of as part of profit or loss in the period in which they arise (see Section 10); and (b) four types of other comprehensive income are recognised as part of total comprehensive income, outside of profit or loss, when they arise: (i) some gains and losses arising on translating the financial statements of a foreign operation (see Section 30 Foreign Currency Translation); (ii) some actuarial gains and losses (see Section 28 Employee Benefits);
(iii) some changes in fair values of hedging instruments (see Section 12 Other Financial Instrument Issues); and
(iv) changes in the revaluation surplus for property, plant and equipment measured in accordance with the revaluation model (see Section 17 Property, Plant and Equipment).
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Module 5—Statement of Comprehensive Income and Income Statement

Examples—single-statement approach Ex 1 The statement of comprehensive income of an entity could be presented in a
single statement as follows:

SME A—statement of comprehensive income for the year ended 31 December 20X8

Note(1)

Revenue

6

Cost of sales

Distribution costs

Administrative expenses

Finance costs

8

Profit before tax

Income tax expense

9

Profit for the year

Other comprehensive income (none of which will be reclassified to profit or loss):

Actuarial gains on defined benefit pension obligations, net of tax* 15

Revaluation surplus, net of tax*

13

Other comprehensive income(3) for the year, net of tax

18

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

20X8 CU(2) 645,000 (500,000) (50,000) (30,000) (10,000) 55,000 (13,750) 41,250
10,260 3,800
14,060 55,310

20X7 CU
499,500 (400,000)
(30,000) (15,000)
(5,000) 49,500 (12,375) 37,125
(22,360) 4,230
(18,130) 18,995

* Alternatively, the items of other comprehensive income could be presented before their related tax effect. If so, the aggregate tax would need to be included as a separate line item within other comprehensive income.
Note: the format illustrated in this example aggregates expenses in the income statement part of the Statement of Comprehensive Income according to their function (see paragraph 5.11). Regardless of whether expenses are analysed by function or by nature in the income statement part of the Statement of Comprehensive Income, the items of other comprehensive income have to be classified by nature (see paragraph 5.5(g)). The items of other comprehensive income also have to be analysed into those that will not be reclassified to profit or loss and those that will be reclassified to profit or loss when specific conditions are met (see paragraph 5.5(g)). In addition, an entity shall present additional line items, headings and subtotals in the statement of comprehensive income when such presentation is relevant to an understanding of the entity’s financial performance (see paragraph 5.9).

(1) In this example, and in all other examples in this module, the notes have not been reproduced. (2) In this example, and in all other examples in this module, monetary amounts are denominated in ‘currency units’ (CU). (3) This example assumes that the entity has two of the four possible items of other comprehensive income.
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IncomeIfrsSmesModuleProfit