Income Statement Flashcards
Uses of the Income Statement
Useful in determining profitability, value for investment purposes, credit worthiness, and future cash flows.
“IDA”
I - Income (Loss) From Continuing Operations: gross and net of tax
D - Income (Loss) From Discontinued Operations: net of tax
A - Cumulative Effect of Change in Accounting Principle: net of tax, on RE
Discontinued Operations (3 types)
- Impairment loss
- Gain/loss from actual operations
- Gain/loss on disposal
All are included in discontinued operations in the period in which they occur.
Component of an Entity
Part of an entity (the lowest level) for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the entity.
- operating segment, reportable segment, reporting unit, subsidiary, asset group
Held for Sale
Criteria (need all):
- Mgt commits to a plan to sell the component
- Component is available for immediate sale in its present condition
- Active program to locate a buyer
- Sale of component is probable and sale is expected to be complete within one year
- Sale of component is actively marketed
- Actions required to complete sale make it unlikely that there will be changes to the plan
US GAAP vs IFRS - Held for Sale
IFRS - tests individual assets and liabilities before classification of held for sale
GAAP - does impairment analysis of the whole component (all), instead of each individual asset.
Entities to be reported as Discontinued Operations
- component has been disposed of
- classified as held for sale
Conditions needed to be Discontinued Operations
A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations IF the disposal represents a “strategic shift” that has or will have a major effect on an entity’s operations and financial results.
“GEL”
examples of strategic shift/major effect on operations
G - Disposal of a major Geographical area
E - Disposal of a major Equity method investment
L - Disposal of a major Line of business
Types of Items included in Results of Discontinued Operations
1) Results of operations of the component
2) Gain or loss on disposal of the component (upon sale)
3) Impairment loss of the component
Initial and Subsequent Impairment Losses
A loss is recognized for recording the impairment of the component
Ex: SP/NRV = 7 and BV = 10, so there is an impairment of -3 and a write-down to 7.
Subsequent Increases in Fair Value
A gain is recognized for any subsequent increase in fair value minus the cost to sell (but not in excess of the previously recognized cumulative loss).
Ex: SP/NRV = 11 and CV = 7, so there is a gain of +4 but can only recognized gain to the amount of previous impairment of -3…so limited to gain of +3.
Held for Sale measurement/valuation
A component classified as held for sale is measured at the lower of its carrying amount or fair value less costs to sell.
Accounting Changes (3 types)
- Changes in accounting estimate (prospective)
- Changes in accounting principle (retrospective)
- Changes in accounting entity (restate)
Changes in Accounting Estimate
- not an error
- done prospectively
- affects current and future income from continuing operations
- disclosed in the notes to the financial statements