12/20/2015

Conceptsofprofitorlossandothercomprehensiveincome|P2CorporateReporting|ACCAQualification|Students|ACCAGlobal

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CONCEPTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME
RELATED LINKS
StudentAccountanthubpage
Thisarticleexplainsthecurrentrulesandtheconceptualdebateastowhereinthestatementof
comprehensiveincome,profitsandlossesshouldberecognisediewhenshouldtheyberecognisedin
profitorlossandwhenintheothercomprehensiveincome.Further,itexploresthedebateastowhether
itisappropriatetorecogniseprofitsorlossestwice!
Theperformanceofacompanyisreportedinthestatementofprofitorlossandothercomprehensive
income.IAS1,PresentationofFinancialStatements,definesprofitorlossasthetotalofincomeless
expenses,excludingthecomponentsofothercomprehensiveincome.Othercomprehensiveincome
(OCI)isdefinedascomprisingitemsofincomeandexpense(includingreclassificationadjustments)that
arenotrecognisedinprofitorlossasrequiredorpermittedbyotherIFRSs.Totalcomprehensiveincome
isdefinedasthechangeinequityduringaperiodresultingfromtransactionsandotherevents,other
thanthosechangesresultingfromtransactionswithownersintheircapacityasowners.
Itisamyth,andsimplyincorrect,tostatethatonlyrealisedgainsareincludedinprofitorloss(P/L)and
thatonlyunrealisedgainsandlossesareincludedintheOCI.Forexample,gainsontherevaluationof
landandbuildingsaccountedforinaccordancewithIAS16,PropertyPlantandEquipment(IAS16
PPE),arerecognisedinOCIandaccumulateinequityinOtherComponentsofEquity(OCE).Onthe
otherhand,gainsontherevaluationoflandandbuildingsaccountedforinaccordancewithIAS40,
InvestmentProperties,arerecognisedinP/LandarepartoftheRetainedEarnings(RE).Bothsuch
gainsareunrealised.Thesamepointcouldbemadewithregardtothegainsandlossesonthefinancial
assetofequityinvestments.IfsuchfinancialassetsaredesignatedinaccordancewithIFRS9,Financial
Instruments(IFRS9),atinceptionasFairValueThroughOtherComprehensiveIncome(FVTOCI)then
thegainsandlossesarerecognisedinOCIandaccumulatedinequityinOCE.Whereasifmanagement
decidesnottomakethiselection,thentheinvestmentwillbydefaultbedesignatedandaccountedforas
FairValueThroughProfitorLoss(FVTP&L)andthegainsandlossesarerecognisedinP/Landbecome
partofRE.
Thereisatpresentnooverarchingaccountingtheorythatjustifiesorexplainsinwhichpartofthe
statementgainsandlossesshouldbereported.TheIASBsConceptualFrameworkforFinancial
Reportingissilentonthematter.Soratherthanhaveaclearprinciplesbasedapproachwhatwecurrently
haveisarulesbasedapproachtothisissue.Itisdowntoindividualaccountingstandardstodirectwhen
gainsandlossesaretobereportedinOCI.Thisisclearlyanunsatisfactoryapproach.Itisconfusingfor
users.
InJuly2013theInternationalAccountingStandardsBoard(IASB)publishedadiscussionpaperonits
ConceptualFrameworkforFinancialReporting.Thisaddressedtheissueofwheretorecognisegainsand
losses.ItsuggeststhattheP/Lshouldprovidetheprimarysourceofinformationaboutthereturnanentity
hasmadeonitseconomicresourcesinaperiod.AccordinglytheP/Lshouldrecognisetheresultsof
transactions,consumptionandimpairmentsofassetsandfulfilmentofliabilitiesintheperiodinwhichthey
occur.InadditiontheP/Lwouldalsorecognisechangesinthecostofassetsandliabilitiesaswellasany
gainsorlossesresultingfromtheirinitialrecognition.TheroleoftheOCIwouldthenbetosupportthe
P/L.GainsandlosseswouldonlyberecognisedinOCIifitmadetheP&Lmorerelevant.Inmyview
whilstthismaybeanimprovementonthecurrentabsenceofanyguidanceitdoesnotprovidetheclarity
andcertaintyuserscrave.

RECYCLING(THERECLASSIFICATIONFROMEQUITYTOP&L)
Nowletusconsidertheissueofrecycling.ThisiswheregainsorlossesarereclassifiedfromequitytoP/L
asareclassificationadjustment.InotherwordsgainsorlossesarefirstrecognisedintheOCIandthenin
alateraccountingperiodalsorecognisedintheP/L.Inthiswaythegainorlossisreportedinthetotal
comprehensiveincomeoftwoaccountingperiodsandincolloquialtermsissaidtoberecycledasitis
recognisedtwice.Atpresentitisdowntoindividualaccountingstandardstodirectwhengainsandlosses
aretobereclassifiedfromequitytoP/Lasareclassificationadjustment.Soratherthanhaveaclear
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Conceptsofprofitorlossandothercomprehensiveincome|P2CorporateReporting|ACCAQualification|Students|ACCAGlobal

principlesbasedapproachonrecyclingwhatwecurrentlyhaveisarulesbasedapproachtothisissue.
Thisisclearly,again,anunsatisfactoryapproachbutalsoasweshallseeoneaddressedbytheJuly
2013IASBdiscussionpaperonitsConceptualFrameworkforFinancialReporting
IAS21,TheEffectsofChangesinForeignExchangeRates(IAS21),isoneexampleofastandardthat
requiresgainsandlossestobereclassifiedfromequitytoP/Lasareclassificationadjustment.Whena
grouphasanoverseassubsidiaryagroupexchangedifferencewillariseontheretranslationofthe
subsidiarysgoodwillandnetassets.InaccordancewithIAS21suchexchangedifferencesare
recognisedinOCIandsoaccumulateinOCE.Onthedisposalofthesubsidiary,IAS21requiresthatthe
netcumulativebalanceofgroupexchangedifferencesbereclassifiedfromequitytoP&Lasa
reclassificationadjustmentiethebalanceofthegroupexchangedifferencesinOCEistransferredto
P/Ltoformpartoftheprofitondisposal.
IAS16PPEisoneexampleofastandardthatprohibitsgainsandlossestobereclassifiedfromequity
toP/Lasareclassificationadjustment.Ifweconsiderlandthatcost$10mwhichistreatedinaccordance
withIAS16PPE.Ifthelandissubsequentlyrevaluedto$12m,thenthegainof$2misrecognisedinOCI
andwillbetakentoOCE.Wheninalaterperiodtheassetissoldfor$13m,IAS16PPEspecifically
requiresthattheprofitondisposalrecognisedintheP/Lis$1miethedifferencebetweenthesale
proceedsof$13mandthecarryingvalueof$12m.Thepreviouslyrecognisedgainof$2misnot
recycled/reclassifiedbacktoP/Laspartofthegainondisposal.Howeverthe$2mbalanceintheOCE
reserveisnowredundantastheassethasbeensoldandtheprofitisrealised.Accordingly,therewillbea
transferintheStatementofChangesinEquity,fromtheOCEof$2mintoRE.

DOUBLEENTRY
Forthosewholovethedoubleentryletmeshowyouthepurchase,therevaluation,thedisposalandthe
transfertoREinthisway.
Onpurchase

$m

$m

DrLandPPE

10

CrCash

10

Onrevaluation

DrLandPPE

CrOCEandrecognisedinOCI

Ondisposal

13

CrLandPPE

12

CrP/L

Ontransfer

DrOCE

CrRetainedearnings

DrCash

IfIAS16PPEallowedthereclassificationfromequitytoP&Lasareclassificationadjustment,theprofit
ondisposalrecognisedinP&Lwouldbe$3mincludingthe$2mreclassifiedfromequitytoP&Landthe
lasttwodoubleentriesabovereplacedwiththefollowing.
OnreclassificationfromequitytoP/L

$m

$m

13

CrLandPPE

12

CrP/L

DrOCE

DrCash

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IFRS9alsoprohibitstherecyclingofthegainsandlosseonFVTOCIinvestmentstoP/Londisposal.The
noreclassificationruleinbothIAS16PPEandIFRS9meansthatsuchgainsonthoseassetsareonly
everreportedonceinthestatementofprofitorlossandothercomprehensiveincomeieareonly
includedonceintotalcomprehensiveincome.Howevermanyusers,itappears,ratherignorethetotal
comprehensiveincomeandtheOCIandjustbasetheirevaluationofacompanysperformanceonthe
P/L.Theseusersthenfinditstrangethatgainsthathavebecomerealisedfromtransactionsinthe
accountingperiodarenotfullyreportedintheP/Loftheaccountingperiod.Assuchwecanseethe
argumentinfavourofreclassification.Withnoreclassificationtheearningspersharewillneverfully
includethegainsonthesaleofPPEandFVTOCIinvestments.
Thefollowingextractfromthestatementofcomprehensiveincomesummarisesthecurrentaccounting
treatmentforwhichgainsandlossesarerequiredtobeincludedinOCIand,asrequired,discloseswhich
gainsandlossescanandcannotbereclassifiedbacktoprofitandloss.
Extractfromthestatementofprofitorlossandothercomprehensiveincome

Profitfortheyear

$m
XX

Othercomprehensiveincome

Gainsandlossesthatcannotbereclassifiedbackto
profitorloss

Changesinrevaluationsurpluswheretherevaluation
methodisusedinaccordancewithIAS16

XX/(XX)

Remeasurementsofanetdefinedbenefitliabilityor
assetrecognisedinaccordancewithIAS19

XX/(XX)

GainsandlossesonremeasuringFVTOCIfinancial
assetsinaccordancewithIFRS9

XX/(XX)

Gainsandlossesthatcanbereclassifiedbacktoprofitorloss

Groupexchangedifferencesfromtranslatingfunctionalcurrenciesintopresentation
currencyinaccordancewithIAS21

Theeffectiveportionofgainsandlossesonhedginginstrumentsinacashflowhedge
underIFRS9

Totalcomprehensiveincome

XX/(XX)

XX/(XX)

XX/(XX)

THEFUTUREOFRECLASSIFICATION
IntheJuly2013discussionpaperontheConceptualFrameworkforFinancialReportingtheroleofthe
OCIandthereclassificationfromequitytoP/Lisdebated.

NOOCIANDNORECLASSIFICATION
Itcanbearguedthatreclassificationshouldsimplybeprohibited.Thiswouldfreethestatementofprofit
orlossandothercomprehensiveincomefromtheneedtoformallytoclassifygainsandlossesbetween
P/LandOCI.Thiswouldreducecomplexityandgainsandlossescouldonlyeverberecognisedonce.
Therewouldstillremaintheissueofhowtodefinetheearningsinearningspershare,aratiolovedby
investors,asclearlytotalcomprehensiveincomewouldcontaintoomanygainsandlossesthatwerenon
operational,unrealised,outsidethecontrolofmanagementandnotrelatingtotheaccountingperiod.

NARROWAPPROACHTOTHEOCI
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AnothersuggestionisthattheOCIshouldberestricted,shouldadoptanarrowapproach.Onthisbasis
onlybridgingandmismatchgainsandlossesshouldbeincludedinOCIandbereclassifiedfromequityto
P/L.
ArevaluationsurplusonafinancialassetclassifiedasFVTOCIisagoodexampleofabridginggain.The
assetisaccountedforatfairvalueonthestatementoffinancialpositionbuteffectivelyatcostinP/L.As
such,byrecognisingtherevaluationsurplusinOCI,theOCIisactingasabridgebetweenthestatement
offinancialpositionandtheP/L.OndisposalreclassificationensuresthattheamountrecognisedinP/L
willbeconsistentwiththeamountsthatwouldberecognisedinP/Lifthefinancialassethadbeen
measuredatamortisedcost.
Theeffectivegainorlossonacashflowhedgeofafuturetransactionisanexampleofamismatchgain
orlossasitrelatestoatransactioninafutureaccountingperiodsoneedstobecarriedforwardsothatit
canbematchedintheP/Lofafutureaccountingperiod.Onlybyrecognisingtheeffectivegainorlossin
OCIandallowingittobereclassifiedfromequitytoP/Lcanuserstoseetheresultsofthehedging
relationship.

BROADAPPROACHTOTHEOCI
AthirdpropositionisfortheOCItoadoptabroadapproach,byalsoincludingtransitorygainsandlosses.
TheIASBwoulddecideineachIFRSwhetheratransitoryremeasurementshouldbesubsequently
recycled.
Examplesoftransitorygainsandlossesarethosethatariseontheremeasurementofdefinedbenefit
pensionfundsandrevaluationsurplusesonPPE.

CONCLUSION
WhilsttheIASBhasnotyetdeterminedwhichapproachwillbeadopted,itschairmanHansHoogervorst
hasgoneontherecordassayingItisabsolutelyvitalthattheP/Lcontainsallinformationthatcanbe
relevanttoinvestorsandthatnothingofimportancegetsleftoutandtheIASBshouldbevery
disciplinedinitsuseofOCIasresortingtoOCItooeasilywouldunderminethecredibilityofnetincomeso
theOCIshouldonlybeusedasaninstrumentoflastresort.Nowthatsoundslikeapersonal
endorsementofthenarrowapproachtome!
TomClendonisalectureratFTMSbasedinSingaporeandistheauthorofthesecondedition
ofAStudent'sGuidetoGroupAccounts(publishedbyKaplanPublishing)

Lastupdated:4Dec2015

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