Module 010 Week004-Finacct3 Statement of Comprehensive Income

FINANCIAL ACCOUNTING & REPORTING 3
1
Statement of Comprehensive Income
Module 010 Week004- FinAcct3 Statement of

Comprehensive Income
Companies generally include in income all revenues, expenses, gains, and
losses recognized during the period. These items are classified within the
income statement so that financial statement readers can better understand
the significance of various components of net income. Changes in accounting
principles and correction of errors are excluded from the calculation of net
income because their effects related to prior periods.
In recent years, there is increased use of fair values for measuring assets and
liabilities. Furthermore, possible reporting of gains and losses related to
changes in fair value have placed a strain on income reporting. Because fair
values are continually changing, some argue that recognizing these gains and
losses in net income is misleading.
Companies includes items that bypass the income statement in a measure
called comprehensive income. Comprehensive income includes all changes
in equity during a period except those resulting from investments by owners
and distributions to owners. Comprehensive income, therefore, includes the
following: all revenues and gains, expenses and losses reported in net
income, and all gains and losses that bypass net income but affect
shareholders’ equity. These items are referred to as other comprehensive
income.
At the end of this module, you will be able to:

1. Understand the definition and usefulness of the statement of
comprehensive income
2. Enumerate the components of comprehensive income
3. Identify and define the two approaches to income measurement
4. Identify and define the three bases for recognition of income
Course Module
2
Definition of statement of comprehensive income
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
income.
In other words, this is the “bottom line” in the traditional income statement.
Other comprehensive income
Other comprehensive income comprises items of income and expense including
reclassification adjustments that are not recognized in profit or loss as required or
permitted by PFRS.
The components of “other comprehensive income” include the following:
1. Unrealized gain or loss on investments in equity instruments measured at fair value
through other comprehensive income.
2. Gain or loss from translating the financial statements of a foreign operation.
3. Revaluation surplus during the year.
4. Unrealized gain or loss from derivative contracts designated as cash flow hedge
5. Remeasurements of defined benefit plan, such as actuarial gain or loss, the difference
between actual return on plan assets and interest income on fair value of plan assets,
and change in the effect of the asset ceiling.
6. Gain or loss attributable to credit risk of a financial liability designated at fair value
through profit or loss.
Presentation of other comprehensive income (OCI)
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.
Course Module
3
OCI that will be reclassified subsequently to profit or loss

a) Gain or loss from translating financial statements of a foreign operation.
b) Unrealized gain or loss on derivative contracts designated as a cash flow hedge.
OCI that will not be reclassified subsequently to profit or loss
a) Unrealized gain or loss on investments in equity instruments measured at fair value
through OCI.
b) Change in revaluation surplus.
c) Remeasurements of a defined benefit plan.
d) Gain or loss attributable to credit risk of a financial liability designated at fair value
through profit or loss.
Presentation of comprehensive income
PAS 1, paragraph 81, provides that an entity has two options of presenting comprehensive
income, namely:
1. Two-statement approach
1. An income statement showing the components of profit or loss.
2. A statement of comprehensive income beginning with profit or loss as shown
in the income statement plus or minus the components of other
comprehensive income.
2. Single statement approach
This is the combined statement showing the components of profit or loss and
components of other comprehensive income in a single statements of
comprehensive income.
Approaches to income measurement
What is an income statement?

An income statement is a formal statement showing the financial performance 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 its resources. It is also
known as the results of operations.
The income statement covers a period, unlike a statement of financial position which is
prepared as of given date or particular moment in time.
It presents the income, expenses, gains, losses and net income or loss recognized during the
period and thereby presents an indication in conformity with PFRS of the results of the
profit-directed activities during the period.
Course Module
4
It provides investors and creditors with information that helps them predict the amounts,
timing, and uncertainty of future cash flows.
It helps users of financial statements predict future cash flows in a number of ways. For
example, investors and creditors use the information to:
a) Evaluate the past performance of the company. Examining revenues and
expenses indicates how the company performed and allows comparison of its
performance to its competitors.
b) Provide a basis for predicting future performance. Information about past
performance helps to determine important trends that, if continued, provide
information about future performance.
c) Help assess the risk or uncertainty of achieving future cash flows. Information
on the various components of income – revenues, expenses, gains, and losses –
highlights the relationships among them.
Approaches to income statement: Transaction Approach
The transaction 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 net loss.
The transaction approach is the direct result of the application of the principle of matching
costs with revenue that is why, this procedure is also called the matching approach.
This approach has proved to be the acceptable procedure of determining income. It offers a
detailed presentation of all the income and expenses incurred in earning the revenue.
Approaches to income statement: Capital Maintenance Approach
The “capital maintenance approach” means that net income occurs only after the capital used
from the beginning of the period is maintained.
In other words, net income is the amount an entity can distribute to the owners and be as
“well-off” at the end of the year as at the beginning.
The distinction between return of capital and return on capital is important to the
understanding of net income.
Shareholders invest in entity to earn a return on capital or an amount in excess of their
original investment.
Return of capital is an erosion of the capital invested in the entity.
Course Module
5
Bases for recognition of income
Most companies use accrual-basis accounting. They recognize revenue when the
performance obligation is satisfied and expenses in the period incurred, without regard to
the time of receipt or payment of cash.
Thus, the essence of this approach is the recognition of accounts receivables, accounts
payable, accrued income, deferred income, accrued expense and prepaid expense.
Some companies, however, use a strict or modified cash-basis approach. Under the strict
cash basis, companies record revenue only when they receive cash. They record expenses
only when they disperse cash. Determining income on the cash basis rests upon collecting
revenue and paying expenses. The cash basis ignores two principles: the revenue recognition
principle and the expense recognition principle. Consequently, cash basis financial
statements are not in conformity with generally accepted accounting standards.
In short, cash-basis accounting violates the accrual concept underlying financial reporting.
The modified cash basis is a mixture of the cash basis and the accrual basis. It is based on
the strict cash basis but with modifications that have substantial support, such as capitalizing
and depreciating plant assets or recording inventory. This method is often followed by
professional services firms and by retail, real estate, and agricultural operations.
References and Supplementary Materials
Books and Journals

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.
Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 1; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.
Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting;

United States; John Wiley & Sons, Inc.
Online Supplementary Reading Materials

IAS 18 Revenue; http://www.ifrs.org/issued-standards/list-of-standards/ias-18-
revenue/; December 1, 2017
Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition

(Topic 605), and Revenue from Contracts with Customers (Topic 606);
https://asc.fasb.org/imageRoot/15/115597515.pdf; December 1, 2017
Course Module
6
Online Instructional Videos

Balance Sheet and Income Statement Relationship;
https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-
financial-stateme/financial-statements-tutorial/v/balance-sheet-and-income-statement-
relationship; January 10, 2018
Income Statement Explained: Comprehensive Income Statement Tutorial- Profit & Loss
Statement;
https://www.bing.com/videos/search?q=statement+of+comprehensive+income&&view=d
etail&mid=7483CCBE7F3A38AD2C2D7483CCBE7F3A38AD2C2D&FORM=VRDGAR;
January 10, 2018
Course Module

Module 010 Week004-Finacct3 Statement of Comprehensive Income

Uploaded by

Copyright:

Available Formats

Module 010 Week004-Finacct3 Statement of Comprehensive Income

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Module 010 Week004-Finacct3 Statement of Comprehensive Income

Uploaded by

Copyright:

Available Formats

FINANCIAL ACCOUNTING & REPORTING 3

Module 010 Week004- FinAcct3 Statement of

At the end of this module, you will be able to:

Definition of statement of comprehensive income

OCI that will be reclassified subsequently to profit or loss

Approaches to income measurement

What is an income statement?

Bases for recognition of income

References and Supplementary Materials

Books and Journals

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting;

Online Supplementary Reading Materials

Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition

Online Instructional Videos

You might also like