4_module_4_-_statement_of_comprehensive_income_ae_17_intermediate_accounting_3

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MODULE 4 PACKET AE 17 - INTERMEDIATE ACCOUNTING 3 STATEMENT OF COMPREHENSIVE INCOME AND STATEMENT OF CHANGES IN EQUITY Welcome to Module 4 In this module, we will discuss the nature, purpose and relevance of the statement of comprehensive income and statement of changes in equity. Further, we shall also be discussing the concept of comprehensive income, profit or loss, other comprehensive income and equity. During the discussion, you should be able to actively participate by giving examples of transactions and determining the element of the transactions related to comprehensive income and proper classification for presentation in the statement of comprehensive income. You will also be required to appraise yourselves with the recognition of the adjustments related to comprehensive income and be able to prepare a properly classified statement of comprehensive income following the functional and natural presentation. We shall also identify the items directly affecting the retained earnings and the components that comprise equity. When you see this symbol that is shown across the printed discussion, this represents an important point for discussion or appreciation/appraisal to be rendered by the student. At the end of this module, you will be answering multiple choice questions and straight problems focusing on the requirements to be disclosed in the notes to the financial statements.

CONSULTATION HOURS: Virtual time: During your class schedule (either Monday or Tuesday) Phone or Messenger: Every Thursday from 8am to 11am and 1pm to 4pm

LEARNING OUTCOMES: By the end of this module, the students will be able to: 1. Discuss the nature, relevance and importance of the income statement, statement of retained earnings and statement of changes in equity. 2. Understand the concept of comprehensive income, profit or loss and other comprehensive income as well as retained earnings and equity. 3. Identify the components of other comprehensive income, statement of retained earnings and changes in equity. 4. Present the income statement, statement of retained earnings and changes in equity in its proper format as required under PFRS.

ASSESSMENT PLAN: 1. Graded recitation through interactive participation in a question and answer format during discussion 2. Problem solving games (points awarded to the first 5 students who can submit the correct answer and solution) 3. Individual Submission and discussion of homework or learning tasks through research online 4. Summative examinations in multiple choice question format

LEARNING PLAN/SCHEDULE OF ACTIVITIES

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BACHELOR OF SCIENCE IN ACCOUNTANCY ACTIVITIES A. Assigned Reading  Read 1. Conceptual Framework on Statement of Financial Position & Recognition Concepts 2. Basic Accounting on Components of Statement of Financial Position 3. Intermediate Accounting on Line Items Required for Statement of Financial Position B. Lecture discussion 1. Read Chapter 2 of IA3 2. Watch Video 3. Interactive participation thru Q&A 4. Graded recitation

1.

2.

3.

4.

1. 2. 3. 4. 5. 6. 7.

C. Synthesize the main points  Graded recitation

1. 2.

STRATEGIES/DESCRIPTION/TOPICS/ COURSE CONTENT Read the definition and the transactions that are required to be classified and presented as comprehensive income and other comprehensive income Discuss your understanding of the nature, relevance and purpose of the comprehensive income, profit or loss and other comprehensive income as well as retained earnings and equity. Understand and give examples for each of the components of comprehensive and other comprehensive income Determine how retained earnings and equity specifically are presented in the financial statements.

TIME TO COMPLETE 0.5 hours

Discuss the concept and significance of the statement of comprehensive income; Identify the components and forms of the statement of comprehensive income; Prepare the statement of comprehensive income complying with the requirements of PAS 1; Enumerate material items of income and expense requiring separate disclosure Differentiate separate statement of comprehensive income from single statement of comprehensive income Discuss the requirements and steps in preparing the statement of retained earnings Discuss the requirements and steps in preparing the statement of changes in equity Teacher summarizes the main points discussed. Students will be required to recite by sharing their understanding/learnings specifically pointing out the important aspects that have just been discussed regarding the transactions and/or factors that must be considered in preparing the statements of comprehensive income, retained earnings and changes in

0.5 hours 4.1 hours

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

2.0 hours

1.0 hour 2.0 hours 1.5 hours

1.5 hours 1.0 hour

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D. Assignment

E. Summative Quiz

equity. 3. This will validate the achievement of learning outcomes. 1. Search for a complete set of financial statements of business entity(ies) that include the statements of comprehensive income, retained earnings and changes in equity. 2. Identify and give examples of each of the components of the other comprehensive income as well as the retained earnings and changes in equity and what is the nature of each and what each represents. 3. Answer all questions and solve all problems from the textbook. 1. Take multiple question quiz for (to be announced)

2.0 hours

1 hour

REFERENCES 1. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Conceptual framework and accounting standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218 V173c 2019 2. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume one. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 1 3. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume two. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 2 4. Valix, C. T., Peralta, J. F. & Valix, C. A. M. (2019). Intermediate accounting : volume three. 2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 3 5. Cabrera, M. E. B. & Cabrera, G. A. B. (2019). Financial accounting and reporting fundamentals. 2019-2020 edition. FIL 657.48 C117f 2019 6. Millan, Zeus Vernon B. Intermediate Financial Accounting III. Baguio City: Bandolin Enterprise 2016

COURSE CONTENT DISCUSSION 4.2 STATEMENT OF COMPREHENSIVE INCOME  What is an income statement ?  An income statement is a formal statement showing the financial performance or profit or loss of an entity for a specified period of time.  The financial performance of an entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient utilization of resources. 2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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BACHELOR OF SCIENCE IN ACCOUNTANCY  What is financial performance?  The financial performance refers to the results of operations.  What does income statement show ?  The income statement for a period presents the income, expenses, gains, losses and net income or loss recognized during the specified period of time.  How is the income statement prepared accordingly with PFRS?  The transaction approach is the conventional or traditional preparation of income statement in conformity with PFRS.  How is transaction approach undertaken in computing for net income or loss of an entity?  This approach of computing net income or loss requires the determination of how much income was earned during the year and how much expenses were incurred in earning the revenue.

 Why do entities need to measure its financial performance ?  Information about the financial performance of an entity, in particular its profitability, is useful in predicting the capacity of the entity to generate cash flows from existing resources.

 What is a comprehensive income?  Comprehensive income is the change in equity during a period resulting from transactions and other events, other than the changes resulting from transactions with owners in their own capacity as owners.  This includes the profit or loss and other comprehensive income.

 What is profit or loss ?  Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.  We often call it the “bottom line”  in the traditional income statement where a red “bottom line” means a loss.  Alternatively, an entity may use net income or net loss to describe profit or loss.

 What is other comprehensive income or OCI?  Other comprehensive income comprises items of income and expense including reclassification adjustments that are not recognized in profit or loss as required or permitted by Philippine Financial Reporting Standards.

 What are the components of other comprehensive income? a. Unrealized gain or loss on equity investment measured at fair value through other comprehensive income b. Unrealized gain or loss on debt investment measured at fair value through other comprehensive income c. Gain or loss from translating the financial statements of a foreign operation

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BACHELOR OF SCIENCE IN ACCOUNTANCY d. Revaluation surplus during the year e. Unrealized gain or loss from derivative contracts designated as cash flow hedge f. Change in fair value attributable to credit risk of a financial liability designated at fair value profit or loss

 How is the other comprehensive income presented in the financial statements?  PAS 1 paragraph 82A provides that the other comprehensive income section shall present line items for amounts of other comprehensive income in the period, classified by nature.  How should we classify OCI for presentation in the financial statements?  The line items for amounts of OCI shall be grouped as follows: a. OCI  that will be reclassified subsequently to profit or loss when specific conditions are met 1. Gain or loss from translating financial statements of a foreign operation 2. Unrealized gain or loss on derivative contracts designated as cash flow hedge 3. Unrealized gain or loss on debt investment measured at fair value through OCI b. OCI that will not be reclassified subsequently to profit or loss but to retained earnings 1. Unrealized gain or loss on equity investment measured at fair value through OCI o Under PFRS 9, the unrealized gain or loss is reclassified to retained earnings upon the disposal of the investment. 2. Change in revaluation surplus o The realization of the revaluation surplus is through retained earnings 3. Remeasurements of a defined benefit plan. o The remeasurements are not recycled subsequently to profit or loss but may be transferred within equity or retained earnings 4. Gain or loss attributable to credit risk of a financial liability designated at fair value through profit or loss o The gain or loss may be recycled subsequently within equity or retained earnings.  What are reclassification adjustments?  Reclassification adjustments refer to amounts reclassified to profit or loss in the current period that were recognized in other comprehensive income in the current or previous periods.  What is the presentation format for the statement of comprehensive income?  PAS 1  paragraph 81 provides that an entity has two options of presenting comprehensive income,  namely: 1. Two-statement approach a. An income statement showing the components of profit or loss b. A statement of comprehensive income beginning with profit or loss as shown in the income statement plus or minus the components of other comprehensive income 2.  Single statement approach o this is the combined statement showing the components of profit or loss and components of other comprehensive income in a single statement of comprehensive income, 2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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BACHELOR OF SCIENCE IN ACCOUNTANCY  What are the sources of income? a. Sales of merchandise to customers  The income from sales shall include all sales to customers minus sales returns,  allowances and discounts b.  rendering of services  Income from rendering of services, among others, includes professional fees, media advertising commission, insurance agency commissions, admission fees for artistic performance and tuition fees c.  use of entity resources  The income includes interest, rent, royalty and dividend income d.  disposal of resources other than products  Examples include gain on sale of investment, gain on sale of property, plant and equipment and gain on sale of intangible assets

 What are the components of expense? a. b. c. d. e.

cost of goods sold or cost of sales distribution costs or selling expenses administrative expenses Other expenses.  income tax expense

 What comprises the cost of goods sold of a merchandising entity? Beginning inventory Net purchases Goods available for sale Ending inventory Cost of goods sold

500,000 2,000,000 2,500,000 (300,000) 2,,200,000

Gross purchases Freight in Total Purchase returns, allowances and discounts Net purchases

1,900,000 150,000 2,50,000 (50,000) 2,000,000

 What comprises the cost of goods sold of a manufacturing entity?  Beginning raw materials  Net purchases  Raw materials available for use  Ending raw materials  Raw materials used  Direct labor  Factory overhead  Total manufacturing cost  Beginning goods in process  Total cost of goods in process  Ending goods in process 2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

500,000 2,000,000 2,500,000 (300,000) 2,200,000 3,000,000 1,300,000 6,500,000 900,000 7,400,000 (1,000,000)

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BACHELOR OF SCIENCE IN ACCOUNTANCY  Cost of goods manufactured  Beginning finished goods  Goods available for sale  Ending finished goods  Cost of goods sold

6,400,000 1,600,000 8,000,000 (1,500,000) 6,500,000

 What are the classifications of expenses? a. Distribution cost for selling expenses constitute costs which are directly related to selling, advertising and delivery of goods to customers. 1. Salesmen’s salaries 2. Sales commissions 3. Traveling and marketing expenses 4. Advertising and publicity expenses 5. Freight out 6. Depreciation of delivery equipment and store equipment b. Administrative expenses constitute cost of administering the business.  This ordinarily includes all operating expenses not related to selling and cost of goods sold. 1. administrative expenses include: 2. doubtful accounts 3. office salaries and expenses of general executives 4. office supplies expense 5. contributions to charity 6. professional fees 7. depreciation of office building and office equipment 8. amortisation of intangible asset c. Other expenses are those expenses which are not directly related to the distribution and administrative function  the other expenses are the expenses and losses from peripheral or incidental transactions of the entity 1. loss on sale of trading investment  2. Loss on sale of property, plant and equipment 3. loss on sale of noncurrent investment 4. loss on sale of intangible asset 5. casualty loss from earthquake, typhoon, hurricane, tsunami, flood, fire, storm surge and other natural disaster 6. expropriation loss

 Are entities still required to present extraordinary items?  PAS 1 paragraph 87 specifically mandates that an entity shall not present any items of income and expense as extraordinary items, in the income statement or statement of comprehensive income or in the notes.  Unusual and infrequent items of income and expense are considered components of income from continuing operations  Examples of extraordinary items: a. expropriation loss b. casualty loss from earthquake, typhoon, flood, fire and other natural disasters

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BACHELOR OF SCIENCE IN ACCOUNTANCY  What disclosure is required for items of income and expense?  PAS 1 paragraph 97 provides that when items of income and expense are material, their nature and amount shall be disclosed separately.

 What are these circumstances that may result in the materiality of income and expense that will require separate disclosure?  Paragraph 98 provides the circumstances that would give rise to the separate disclosure of items of income and expense a. Write down of inventory to net realizable value and reversal of such write down b. Write down of property, plant and equipment to  recoverable  amount and reversal of such write down c. Restructuring of the activities of an entity and reversal of any provision for the cost of restructuring d. Disposal of an item of property, plant and  equipment e. Disposal of investment f. Discontinued operation g. Litigation settlement other reversal of provision

 What are the line items required in the presentation to the statement of comprehensive income?  PAS 1  paragraph 82 provides that the line items in the statement of comprehensive income are: a. Revenue b. Gain or loss from derecognition of financial asset measured at amortized cost as required by PFRS 9 c. Finance cost d. Share of income or loss of associate and joint venture accounted for using the equity method e. Income tax expense f. A single amount comprising discontinued operations g. Profit or loss for the period h. Other comprehensive income i. Comprehensive income for the period

 What items are required to be presented on the face of the income statement and statement of comprehensive income?  The following items shall be disclosed on the face of the income statement and statement of comprehensive income: a. Profit or loss attributable to noncontrolling interest and owners of the parent b. Total comprehensive income attributable to noncontrolling interest and owners of the parent

 Can entities still add some more line items, headings and/or subtotals other than those prescribed under PAS 1?  An entity shall present additional line items, headings  and subtotals in the statement  of comprehensive income when presentation is relevant to an understanding of the financial performance of the entity.

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BACHELOR OF SCIENCE IN ACCOUNTANCY  What are the formats of income statement?  PAS 1 paragraph 99 provides that an entity shall present on the face of the income statement an analysis of expenses using a classification based on either the function of expenses or their nature within the entity, which ever provides information that is reliable and more relevant. (Conceptual framework of financial reporting qualitative characteristics) a. Functional presentation  Traditional and common form  Also known as the cost of goods sold method  Classifies expenses according to their function as part of the cost of goods sold, distribution costs, administrative expenses or activities and other activities  Entities classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation, amortization and employee benefit costs. b. Natural presentation  Referred to as the nature of expense method  Expenses are aggregated according to their nature and not allocated among the various functions within the entity  Expenses are not classified as cost of goods sold, distribution costs, administrative and other activities  the expense which are of the same nature are grouped or aggregated and presented as one item

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BACHELOR OF SCIENCE IN ACCOUNTANCY  Illustration of Functional Income Statement

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BACHELOR OF SCIENCE IN ACCOUNTANCY  Which form of income statement is preferred?  PAS1  paragraph 105 simply states that because each method of presentation vary for 

different types of entities, management is required to select the presentation that is reliable and more relevant. The cost of goods sold method usually would provide more relevant information to the users.

 What is the purpose of the statement of comprehensive income?  The purpose of this statement is to provide more comprehensive information on financial performance measured more broadly than the income as traditionally computed.  How is the statement of comprehensive income presented?  It starts with the net income or loss as shown in the income statement plus or minus the components of other comprehensive income.

 Illustration of Statement of Comprehensive Income in a Two-Statement Approach  Using the net income in the preceding illustration, in a two-statement method, the separate statement of comprehensive income may appear as follows: EXEMPLAR COMPANY Statement of Comprehensive Income Year Ended December 31, 2019  Net income  OCI to be reclassified to profit or loss: Foreign currency translation gain Unrealized loss on derivative contract designated as cash flow hedge Comprehensive income

1,550,000 150,000 (100,000)

50,000 1,600,000

 Comprehensive income includes the net income or loss for the period plus or minus the components of other comprehensive income

 However, the comprehensive income of 1,600,000 is not carried to retained earnings.  Only the net income of 1,550,000 is included in the determination of retained earnings unappropriated

 The net other comprehensive income of 50,000 is carried to “reserves” or shown separately in the statement of changes in equity.

 What is a single statement of comprehensive income?  Another option in presenting the components of profit or loss and components of other comprehensive income is to prepare a single statement of comprehensive income  This single statement is the combined income statement and statement of comprehensive income.

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BACHELOR OF SCIENCE IN ACCOUNTANCY  Illustration of the single statement of comprehensive income following the functional presentation

4.3 STATEMENT OF CHANGES IN EQUITY  What is equity ?  Equity is defined as the residual interest in the assets of an entity after deducting all of the liabilities.  Equity is the equivalent of net assets, meaning, total assets minus total liabilities.  Where is the equity reported?  It is subclassified and considered the third group of the major components presented in the statement of financial position.

 How is the subclassification presented in the statement of financial position?  In a corporate entity, the following sub classifications may be shown separately: a. Share capital -  funds contributed by shareholders equal to the par or stated value  The holders of instruments classified as equity are simply known as ”owners”. b. Share premium c. Retained earnings

-  funds contributed by shareholders in excess of par or stated value which may be unappropriated and appropriated

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BACHELOR OF SCIENCE IN ACCOUNTANCY  What is the statement of changes in equity  The statement of changes in equity is a formal statement that shows the movements in the elements or components of the shareholders’ equity.  How is the statement of changes in equity presented?  An entity shall present a statement of changes in equity showing: a. Comprehensive income for the period b. For each component of equity, the effects of changes in accounting policies and correction of errors c. For each component of equity, a reconciliation between the carrying amount at the beginning and end of the period, separately disclosing changes from: 1. Profit or loss 2. Each item of other comprehensive income 3. Transactions with owners in their capacity as owners showing separately contributions by and distributions to owners  ILLUSTRATION OF STATEMENT OF CHANGES IN EQUITY EXEMPLAR COMPANY Statement of Changes in Equity Year ended December 31, 2019 Share Capital Balance - January 1 Correction of error resulting from prior year under depreciation Change in accounting policy from weightedaverage to FIFO - credit Issuance of 10,000 ordinary shares with p100 par at p150 per share Issuance of 5,000 preference shares with p50 par at p100 per share Comprehensive income: Net Income Net income   Other comprehensive income Dividends declared during the year Current appropriation for contingencies Balances -  December 31

Retained Earnings 2,000,000 1,000,000 (100,000)

Reserves

5,000,000

300,000 1,000,000 250,000

500,000 250,000 1,550,000 50,000

6,250,000

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

200,000 3,000,000

(400,000) (200,000) 2,150,000

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BACHELOR OF SCIENCE IN ACCOUNTANCY 4.4 STATEMENT OF RETAINED EARNINGS  What is a statement of retained earnings ?  The statement of retained earnings shows the changes affecting directly the retained earnings of equity.

 Is the statement of retained earnings presented apart or separate from the basic financial statements?  It is consolidated in the statement of changes in equity.    What are the important information that must be disclosed in the statement of retained earnings? a. Net income or loss for the period  Net income is added because it increases retained earnings and net loss is deducted because it decreases retained earnings b. Prior period errors  The prior period errors are shown as adjustment of the beginning balance of retained earnings to arrive at the corrected beginning balance o if the net income of the prior period is understated, the amount of error is added to retained earnings. o if the net income of the prior period is overstated, the amount of the error is deducted from retained earnings c. Dividends declared and paid to shareholders  The dividends declared or paid during the year shall be deducted from the retained earnings d. Effect of change in accounting policy  this is shown as an adjustment of the beginning balance of retained earnings o if the net income of prior period is understated because of change in accounting policy, the effect is added to the beginning retained earnings. o if the net income of prior period is overstated because of change in accounting policy, the effect is deducted from the beginning retained earnings e. Appropriation of retained earnings  the amount of appropriation is deducted from the unappropriated balance of retained earnings  conversely, if appropriation is subsequently cancelled, it is reverted or added back to the unappropriated balance  What are the instances when the retained earnings can be appropriated? 1. Legal requirement, as in the case of treasury shares 2. Contractual requirements, as in the case of bond redemption 3. Equity policy, as approach appropriation for  contingencies

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BACHELOR OF SCIENCE IN ACCOUNTANCY  ILLUSTRATION OF STATEMENT OF RETAINED EARNINGS

EXEMPLAR COMPANY Statement of Changes in Equity Year ended December 31, 2019

Retained earnings, January 1 Correction of error -  priori under depreciation Change in accounting policy for weighted average to FIFO inventory valuation resulting in increased

1,000,000 (100,000) 300,000

Corrected beginning balance

1,200,000

Net income for the period

1,550,000

Dividends declared during the year

(400,000)

Appropriated for contingencies

(200,000)

Retained earnings, December 31

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2,150,000

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