Week 7 Everything

Question 1

The financial report is composed by 5 documents:

Answer 1

– statement of financial position

– statement of profit and loss and other
comprehensive income

– statement of cash flows

– statement of changes in equity

– notes to its financial statements

Question 2

Income

Answer 2

Increases in economic benefits during the accounting 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 equity participants

Question 3

Revenues

Answer 3

income generated by the entity’s ordinary activities, e.g.

sales revenue, fee revenue, rent revenue

Question 4

Gains

Answer 4

Income which may or may not be generated by entity’s ordinary activities, e.g. gain on sale of shares

Question 5

Expenses

Answer 5

Decreases in economic benefits during the accounting 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 equity participants

Question 6

Profit or Loss =

Answer 6

Income - expenses

Question 7

Recognition of income & expenses

Answer 7

Generally, income and expenses are recognised for a particular year, and included in the calculation of the profit/loss for that year if it is probable that any future economic benefit will flow to or from the entity and if they have a cost or value that can be measured reliably but there is always professional judgement and discretion involved.

Question 8

There is always professional judgement and discretion involved.

For example:

Answer 8

Professional judgements made to measure some income and expenses, (e.g. depreciation of PPE – assumptions about useful life, residual value, pattern of benefits)

Professional judgements made regarding whether to capitalise expenditure as an asset. If expenditure is not capitalised, it will be expensed, (e.g. expenditures on internally generated intangibles)

Professional judgements about how to measure inventory, which affects the measurement of cost of good sold

Question 9

Due to some amendments to AASB 101 Presentation of Financial Statements, the traditional Income statement was replaced in 2009 by the Statement of Profit or Loss and other comprehensive income.

Answer 9

Practically, this change introduced an additional section to the traditional income statement (profit and loss), which reports “Other comprehensive income”.

Question 10

All items of income and expense in a period should be recognised by an entity in
profit or loss

unless

Answer 10

a particular AASB accounting standard requires or permits otherwise [AASB101.88]

Question 11

All items of income and expense in a period should be recognised by an entity in
profit or loss

unless

a particular AASB accounting standard requires or permits otherwise [AASB101.88]

Answer 11

Some AASB accounting standards require or permit particular income and expenses to be omitted from profit or loss for the reporting period (e.g. gains from asset revaluations; gains and loss from long-term investments in shares). But these income and expenses are to be included in ‘other comprehensive income’ of the reporting period.

Question 12

The Statement of Profit or Loss and other Comprehensive Income

Answer 12

The statement of Profit and Loss and other comprehensive income calculates the Total Comprehensive Income for the reporting period, which is calculated as profit/loss + other comprehensive income = total comprehensive income for the period

Question 13

The other comprehensive income is defined as follows:

Answer 13

Other comprehensive income comprises items of income and expense that are not recognised in profit or loss as required or permitted by other
AASB Accounting Standards [AASB101.7]

Question 14

Other Comprehensive Income: Example of item

Revaluation of Property, Plant and Equipment to Fair Value

Answer 14

When an item of property, plant and equipment is revalued upwards to fair value, the revaluation increment is recognised directly in revaluation surplus (an equity account) and not included in the calculation of profit for the year. This is example of an income item where a specific AASB accounting standard prohibits the recognition of the gain on revaluation in profit and loss. AASB116.39 requires the gain on revaluation of property, plant and equipment to be recognised in other comprehensive income in the statement of profit and loss and other comprehensive income for the reporting period.

Question 15

Other components of ‘OCI’ would include:

Answer 15

gains and losses on remeasurement of specific financial assets and
liabilities,

foreign exchange gains and losses arising from translating foreign currency financial statements of a foreign subsidiary

some gains and losses from hedging instruments

gains and losses on remeasurement of defined benefit superannuation plan surplus/deficiency

Question 16

Other Comprehensive Income:

Reclassification adjustments

Answer 16

Income and expense items recognised directly in Other Comprehensive Income may be reclassified to profit or loss in the current or a subsequent reporting period, where permitted or required by a specific AASB accounting standard. Typically unrealised gains (income) and losses (expenses) are reclassified upon realisation of the gain or loss. E.g. gains and losses on revaluation to fair value of long term investments in shares must be reclassified to profit or loss when the shares are sold [AASB9.5.7.10].

Question 17

Reclassification Adjustment

Answer 17

Amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods’ [AASB101.7]

Question 18

When an income or expense is reclassified:

1 out of 2

Answer 18

The income or expense is reversed out of Other Comprehensive Income in the current period, (e.g. the unrealised gains on revaluing investments in shares to fair value are deducted from OCI);

Question 19

When an income or expense is reclassified:

2 out of 2

Answer 19

The income or expense is included in Profit or Loss in the current period, (e.g. the unrealised gains on revaluing investments in shares to fair value are added to Profit);

Question 20

Objective of reclassification adjustments:

Answer 20

Avoid double-counting of income and expenses

Disclosure of reclassification adjustments provide users with information necessary to assess the effect of such reclassifications on profit or loss and other comprehensive income

Without this information, users of the financial statements may find it difficult to assess the effect of reclassifications of income and expenses on profit or loss, and other comprehensive income

Question 21

The Statement of Profit or Loss and Other Comprehensive Income may be presented in two different formats:

Answer 21

A single statement, consisting of two sections: profit or loss; and other comprehensive income

Two separate statements:
A statement of profit or loss;

A statement of other comprehensive income (which starts with the profit or loss for the year, taken from end of the first statement)

Question 22

Why profit and loss is not enough and must be combined with “other comprehensive income”

Answer 22

With the profit or loss only, users would not get a full picture of the entity’s income and expenses which were recognised in the current period, because profit or loss excludes those income and expenses taken directly to other comprehensive income. Instead, the joint consideration of the entity’s profit or loss and other comprehensive income allows users to fully appreciate all the income and expenses for the reporting period, therefore have a more complete picture of the entity’s financial performance.

Question 23

What about the social and environmental performance

of the company?

Answer 23

Entities may be very successful financially, but may be causing extensive damage to the environment and/or to the local communities where it operates. Traditional financial accounting ignores environmental and social impacts of the entity’s operations (difficult to measure, not required)

Question 24

What about other stakeholders’ interests?

Answer 24

Interests of investors might be put above the interests of other stakeholders

Question 25

Measures of Financial performance are not comprehensive

measures of

Answer 25

the entity’s total performance

Question 26

The statement of changes in equity provides:

Answer 26

A reconciliation of opening and closing equity, for total equity, and each component of equity,

Details about the effect of Profit or Loss, and Other Comprehensive Income upon total equity, and each component of equity during the reporting period

Information about the effects of transactions with owners in their capacity as owners (i.e. dividends and share issues, share buy-backs) upon total equity, and each component of equity

Question 27

As a consequence:

when professional judgment/discretion is used, different professional judgements / accounting choices are made, resulting in different amounts of profit or loss

Are they all providing a true and fair representation of the financial position and performance of the company?

Answer 27

Yes they are true and fair views provided the judgments made are reasonable and complies with the AASB accounting standards