Hi.
Else here.
And today, we're talking about the statement
of income, comprehensive income under IFRS.
I have already produced a series of videos
where I introduce students to all the financial statements
using IFRS, but at the introductory accounting level.
If you have not watched those videos,
I highly recommend you do so.
So back to the statement of income,
comprehensive income for intermediate accounting.
First, it's important to understand
that IFRS allows a lot of freedom
with regards to the format of financial statements.
Why?
Because the objective of financial reporting
is to provide financial information which
is useful for decision making--
generally decisions that investors, lenders,
and other creditors make about money.
They're called capital providers for a reason.
The information a mining company needs
to provide to stakeholders to be useful
may not be the same as the information a bank
would provide, because the industries
differ in significant ways.
That's why IFRS allows a lot of freedom with regard
to the format of the financial statements.
Different industries need to show different things
to be useful to their stakeholders, their decision
makers.
Having said that, IFRS does not allow total freedom.
To ensure a minimum level of information for all businesses,
IFRS has some basic presentation requirements.
Let's go through the listing of basic items
that need to be presented on the statement of income,
comprehensive income under IFRS.
There are nine required line items.
First is revenues.
Second, costs incurred for financing the business.
Third, profit or loss from associates or joint ventures
accounted for using the equity method.
Fourth, income taxes spent or refund
from continuing operations.
Fifth, discontinued operations, net of income taxes.
Six, profit or loss, also called net income or net loss.
Seven, earnings per share for continuing and discontinuing
operations.
Eight, other comprehensive income with details.
Nine, comprehensive income.
Now that we've listed all of the items,
let's look at each in detail so you
get a better idea of what each of these line items requires.
First, revenues are likely the most important number
on the income statement, because it
is the key to a business's performance, which is what
the income statement measures.
It must be grouped by type.
For example, income from selling products
must be separated from interest income and income
from investments.
Each category of revenue, if it's material,
must be reported separately, either on the face
of the statement or in the notes.
What does that mean?
On the face of the financial statement means
it is placed on the actual financial statement,
broken down line by line item and providing a total.
However, in some cases, it is impossible to provide
all the details in the statements,
since it's just too detailed.
That problem is solved by providing a condensed statement
and then providing supplementary schedules in the notes
to the financial statements.
These schedules in the notes support the total
on the face of the financial statement.
This can reduce the statement to just a few lines
on a single page.
Anyone wishing to know the details
must pay attention to the supporting schedules,
which are located in the notes.
Revenues, categorized by type.
The second line item is financing costs,
and they must be reported separately.
What did it cost the company to finance
their growth and expansion and their day-to-day operations?
The cost of financing may seriously
affect the business's performance,
and it will absolutely affect the assessment
of how risky the business is.
This is with regards to providing the business
with additional capital, such as a loan,
at some point in the future.
Because it is so important, it must
be included as a separate line item
on the face of the statement.
Third is the profit or loss from investments which are accounted
for using the equity method.
What are we talking about here?
Let's break it down for a moment.
Earnings are lost from what investments?
From either joint ventures or associates.
What are they?
For a joint venture, we're talking
about a joint arrangement, as defined under IFRS 11.
A joint arrangement is where two or more entities agree
to partner together for a specific reason,
like an activity, and they sign a contract which states
how the partnering will work.
The arrangement usually has a limited life
and a carefully-defined set of activities or objectives.
An example would be two mining companies
who have a joint arrangement to explore
a specific geographical area in Canada.
Once that exploration is finished,
so is the joint arrangement.
Key to a joint arrangement is that the parties
have joint control, meaning that any strategic decisions must
be agreed to by all the parties, a unanimous consent.
In a joint venture, the investor--
the entity who makes the investment--
has a right to the net assets of the joint venture.
The other type of investment is an associate.
This is where the investor owns over 20% of the shares
of an other entity.
The 20% is a rule of thumb, meaning
that if the ownership share is 20% or greater,
we assume there an associate.
But really, we would have to look at the facts
before we make this decision.
If that 20% rule applies, then the investor
is assumed to have significant influence.
This means they have the power to involve themselves
in the operations of the entity they are invested in.
This is often demonstrated by things
such as being able to vote in a member of the board
of directors or having one of your senior managers work
in the investee company.
Both of these things would indicate that the investor has
significant influence, and the investment is therefore
categorized as an associate.
If that is the case, then the associate
must use the equity method to account for their investment.
What does this mean?
Well, on the balance sheet, it means that the investor
will report their share--
say, 28%-- of the net assets of the investee's business.
It would be a one-line item under assets
that must be fully described in the notes
of the financial statements.
On the income statement, it would
mean that the investor's share of the investor's profit
or loss is reported as one line item on the income statement
with the full details described in the notes
to the financial statements.
To summarize, profit or loss from the investments accounted
for under the equity method is the income or loss
from a joint venture or associate which
is reported on one line in the income statement,
but detailed in the notes.
Why is this required?
Because unlike normal revenues and expenses
from continuing operations, these investments
are only partially under the control of management,
and therefore, an important factor
for shareholders to know so that they can appropriately
assess the profitability of the business.
Four is income tax, also a required line item.
This is either the income tax expense,
because the company has revenues greater than expenses,
or an income tax refund, because the company has expenses that
are greater than the revenues.
Income tax expense reduces the profit,
and it's recorded as a debit.
However, income tax refunds are recorded as credits,
meaning that they reduce expenses and technically are
similar to revenues, since revenues
are recorded as credits.
Let's do an example, just to clarify this concept.
If there is income before taxes of $10,000,
then there is income tax expense of $2,000
if the company has a 20% marginal tax rate.
Profit would then be $8,000.
But if there were losses before income tax of $6,000,
then the company would get a tax refund of $1,200.
This would reduce the amount of the loss.
So in this case, the $1,200 refund would reduce the $6,000
loss before taxes to only $4,800 loss after taxes.
Income taxes must be disclosed for both continuing operations
as well as discontinued operations.
Why?
Because it is only partially under the control
of management, and therefore, an important factor for
stakeholders to know so they can appropriately
assess the profitability of the business.
Line item 5 is discontinued operations.
We're not going to say much about this
now, because there will be a separate video
about discontinued operations.
But just so you know the basics, this
is when the business sells a major line, segment,
or geographical area.
And they sell it as a whole unit.
This line item must include both the losses from the write-down
of the assets and liabilities being sold--
net of income tax refunds--
and the profit or loss from operating
this part of the business before it
was discontinued-- net of income taxes that are applicable,
either an expense if there's a profit or a refund
if there's a loss.
Why are discontinued operations reported as a separate line
item?
Because the information has no predictive value.
This line of business will not continue into the future.
For this reason, it must be listed as a separate line
item on the statement.
Item 6 is profit or loss from the total operations,
which are all the lines we have already covered and expenses.
What?
You didn't catch this?
To see this, let's go back to our listing of line items.
Notice in our listing, there is no line item for expenses,
such as the cost of goods sold, depreciation expense,
utilities expense, et cetera.
We have financing costs and income taxes, but nothing else.
However, since we have to have a line item called profit or loss
from total operation, there must be a line item
for expenses on the statement.
It's just not a required line item officially.
Line item 6 is therefore a total of all the prior line
items and expenses, which must also be deducted.
Item 7 is earnings per share.
We'll have a separate video on how to calculate
earnings per share.
But on the face of the statements,
there must be the following--
basic earnings per share from continuing operations
and for discontinued operations plus a total earnings per share
for both operations together.
In addition, on the face of the statement,
there must be diluted earnings per share
from continuing operations and diluted
earnings per share from discontinued operations,
and then diluted earnings per share from both operations
together.
We'll discuss earnings per share in a future video,
because earnings per share is considered
a very important ratio with regard
to assessing a business's performance.
Next is other comprehensive income.
This area is so complex that I defer coverage
to a different video.
But we can say right now that other comprehensive income are
the gains and losses due to changes in equity that are not
part of the normal operations of the business.
These non-operating items can be used
to assess the riskiness of future earnings,
meaning they have predictive value, which
is why they are now included on the statement of income,
comprehensive income.
These are gains or losses which are unrealized and are
due to a number of items, such as the revaluing of investments
or foreign exchange differences.
We will cover more about other comprehensive income
in a future video.
Line 9 is simply the total of all the prior line
items and expenses, which must be deducted to get the total,
but not including earnings per share,
since this is a ratio and not something
that needs to be included in the calculation.
So are we done?
Not quite.
Notice at the top of my page was the words "statement of income
slash comprehensive income."
That's because businesses have a choice
to do one statement, called the statement
of comprehensive income, or they can
choose to do two statements-- one called
the statement of income, or income statement, which
is immediately followed by the statement
of comprehensive income, not the same
as the statement of comprehensive income
when we have one statement.
Let's see how the line items work under both scenarios.
I think that will clarify everything.
If a business chooses one statement,
it will be called the statement of comprehensive income.
The order of the items will be as follows.
Notice something?
Line 7, earnings per share, has been moved down
to the bottom of the statement.
That's right.
If a business chooses to use one statement format,
they will call it the statement of comprehensive income,
and the earnings per share would be moved down to
below the comprehensive income line.
Be sure to note this if you decide
to complete a statement of comprehensive income
all in one statement.
If a business decides to go with a two statement option instead,
they must produce a statement of income,
also called the income statement,
and then, placed immediately after this,
there must be a statement of comprehensive income, which
is different than the other statement
of comprehensive income we just talked about.
So what's included in each of these statements?
The income statement includes line items 1 to 7
with earnings per share at the bottom of the statement.
Notice that no information about comprehensive income
is permitted on this statement.
Next, the business must create a statement
of comprehensive income, which must
start with the required line item number
6, profit or loss from the overall business.
This is the same profit or loss from the total operations
that's at the bottom of the income statement, exactly
the same number.
The statement then lists the other comprehensive income
and total comprehensive income, which
is profit or loss from the operations
plus other comprehensive income gains
less other comprehensive income losses.
Notice the line item 7 is missing.
That's because the earnings per share
is already on the income statement.
This version of the statement of comprehensive income
is a very short statement.
The choice of whether to do one statement or two statements is
the business's-- either one statement,
called the statement of comprehensive income,
or two statements called the statement of income--
also income statement-- and the statement
of comprehensive income, which is, of course, not
the same statement as when we only
produce one statement of comprehensive income,
even though the name is the same.
Damn that IFRS.
Now it's the end thank you so much for watching my video.
Hopefully you found it helpful.
In my next video, I'll be introducing the concept
of other comprehensive income.