ACC414_CH4_Reporting financial performance

Business model
- 3 components:
o Financing: obtaining cash funding
o Investing: use of funding to buy asset and invest in people
o Operating: use of asset and people to generate profit
Economic income vs. accounting income
- Economic income: increase in wealth of company
o Measure based on event instead of transaction
- Accounting income: transactional approach
- IFRS moves toward economic income by including unrealized value
o Asset & liabilities in fair value [PP&E and investment properties]
 Including biological asset
Comprehensive income statement
- Comprehensive income: all changes in owner’s equity that no result of transaction
o Why?
 Eliminate direct entries to equity: hurting stock price
 Separate recognized asset value change from non-recognized
- Other comprehensive income [OCI]
o Changes in value that have been recognized but not yet realized
o Foreign currency gain and losses
o Net actuarial gain or loss related to pension plan
- It includes
o Income statement
o Other comprehensive income [OCI]
- How to present?
o Single continuous statement = “statement of comprehensive income”
o Two separate statement
 Statement of earning
 Statement of comprehensive income
- Calculate investment at fair value
o Original investment at purchase date = purchase price + transaction cost
 Revalued at end of each reporting
o Interest = investment income by effective-interest rate method
o When investment is sold, gain/loss will be
 Recycled to net income [transfer from OCI to net income]
 “FV-OCI with recycling
 Transferred to retained earning [bypass net income]
 “FV-OCI without recycling”
Conceptual framework elements
Revenue
- Increase economic resource by inflow/ enhancement of asset/ reduction of liabilities
- From ordinary, ongoing operation
Expense
- Decrease economic resource by outflow/ reduction of assets/ incurrence of liabilities
- From ordinary revenue generating activities
Gain and losses
- Increase/ decrease in net asset
- From transaction related to line of business
Net income: how equity has changed over time from operation
- Link beginning and ending balance from 1. Change in owner’s equity to 2. Result of
operation
- 2 characteristics of net income
o Predictive value
 User can identify trends from information
 Best predictor of future performance is past performance
o Confirmatory/ Feedback value
 Comparison to prior year/ competitor
 Can identify risk related to future cash flow
Limitation of income statement
- Item cannot be measured = intangible asset
o Human resource in organization, customer equity value, brand loyalty
- Alternative accounting method  give different result
- Many estimate results to income manipulation
Quality of earnings
Characteristics
1. Nature of content
a. Neutrality
b. Representational faithfulness
c. Reflect earning from ongoing operation
d. Correlated with cash flow from operation
e. Justify with business model
2. Presentation
a. Rep. Faith + neutral = no misleading or disguise
b. Understandable
 - High earning quality NOT EQUAL to profitability
General presentation format
- Item to be included
o Revenue
o Finance cost
o Share of earning from joint venture
o Income tax on continuing operation
o Profit/loss from discontinued operation
o Net earning
o Earning per share
- Disclose to notes or on statement:
o Inventory amount charged to expense
o Depreciation & amortization
o Employee benefit
- Report profit on continuous basis: revenue – expense = net earning
- Classification of expense
o By nature: raw material, fuel, wages and benefit
o By function: cost of goods sold, selling cost, general admin, operating expense
 Employee benefit allocated across different functional area
- Earning per share  on earning not comprehensive income
o Public companies need to report
o Including
 Continuing operation
 Discontinued operation
 Net earning
o How?
 Use weighted average number of share outstanding
 Basic earning per share: income to common share/ WA.Share
 Fully diluted earning per share: # of share included option, conversion
privileges on bond
- Format
o Single step format
 Total revenue – total expense
 Not use in Canada as income tax must be shown separately
o Multiple step format: subtotal each step
 Gross profit
 Operating profit
 Non-operating rev/exp/gain/loss
 Financial cost
 Income tax
 Discontinued operation = show separately
Other comprehensive income statement
- Includes:
o Net profit
o Other comprehensive income
 Item that may be classified to earning later
 Item that never be reclassified to earning
o Then total comprehensive income
 Allocate comprehensive income to
 Shareholder
 Non-controlling interest
ASPE
- Separately show all item except employee benefit
- Income from investment in total but broken down into earning from:
o Non-consolidated subsidiaries
o Investment by equity method
o All other investment at cost
o All other investment at fair value
- Exchange gain/loss include in income
- Show separately
o Depreciation
o Amortization of intangible
o Impairment losses of goodwill/ intangible asst
- Show separately on interest expense
o Current liabilities
o Long-term liabilities
o Capital leases
- Held-of-sale asset
o Classify asset into current/ non-current
o Recognize increase only amount of initial remeasurement

Key remembering
- In case incorrect gain or loss on disposal: correctio in next period
o Supported by explanation in not to financial statement
 Correction would receive same treatment as change in estimate
o Adjustment in net income, income tax and separate EPS disclosure
- All asset & liabilities to discontinued subsidiary = “held-for-sale”
o In current asset and current liabilities
- Other comprehensive income need to be deducted by tax rate
- Under ASPE, unrealized gain will include in net income with all previously will be
recorded in net income and closed to retained earnings
- Income statement
o Depreciation need to be allocated to each function
 Selling expense or administrative expense
- For investor
o prefer the multiple-step format because income from operations is calculated
before other revenues and gains are added
 single-step does not imply priority of revenue or expense over another
o multiple-step: matches expense with revenue