Presentation of specific items of income and expense

Net finance costs

Presentation of ‘net’ finance costs

In the October 2004 edition of IFRIC Update, the IFRIC (now the IFRS Interpretations Committee) reported on its discussions regarding whether it is acceptable to present a line item for ‘net finance costs’ in profit or loss without presenting separately the finance revenue and finance costs comprising the net amount.

The Committee noted that, at that time, IAS 1(2003) required line items for revenue and finance costs to be presented on the face of the income statement (correspondingly, IAS 1 now requires line items for revenue and finance costs to be presented on the face of the statement of comprehensive income). The Committee therefore agreed that:

• taken together with the requirements of IAS 1 (prohibition on netting of income and expenses unless required or permitted by a Standard or an Interpretation), this precludes the presentation of ‘net finance costs’ (or a similar term) in the income statement (now the statement of comprehensive income) without showing the finance revenue and finance costs comprising the net amount; but
• this does not preclude the presentation of finance revenue followed immediately by finance costs and a subtotal (e.g., ‘net finance costs’) in the income statement (now the statement of comprehensive income), as illustrated below.

Presentation of negative interest

Presentation of negative interest on financial assets in the statement of comprehensive income

Under some economic conditions, the overall effective interest rate on some financial assets may be negative.

For example, during an economic downturn, strong demand for ‘safe harbor‘ assets can increase their prices sufficiently to result in negative yields.

Another example of this phenomenon arises in jurisdictions where, as a matter of monetary policy, negative central bank interest rates are set, resulting in the origination of financial assets with negative interest rates.

Negative interest arising on financial assets should be presented in the statement of comprehensive income within an appropriate expense classification rather than as interest revenue. Negative interest does not meet the definition of revenue in IFRS 15 because it does not represent an increase in economic benefits.

Entities should consider whether negative interest is required to be presented as a separate line item in accordance with IAS 1 (i.e., when such separate presentation is relevant to an understanding of the entity’s financial performance).

If this approach is adopted, and the negative interest is presented in a separate, suitably titled line item, presentation of a subtotal including this item (e.g., ‘net interest income/expense’) in the statement of comprehensive income is not precluded.

When a separate line item is not presented, entities should develop an accounting policy on the appropriate classification for a negative interest expense in accordance with IAS 8 (e.g., to present negative interest on financial assets in the same line as interest expense in the statement of comprehensive income).

If the amount is material, entities will also need to consider whether separate presentation is required in the notes to the financial statements in accordance with IAS 1.

This conclusion is consistent with the views expressed by the IFRS Interpretations Committee (see January 2015 IFRIC Update) who considered this issue in the context of IAS 18 (the predecessor Standard to IFRS 15).

Presentation of negative interest on financial liabilities in the statement of comprehensive income

From a borrower’s perspective, the economic conditions described may give rise to negative effective interest rates on issued financial liabilities.

Negative interest arising on financial liabilities should be presented in the statement of comprehensive income within an appropriate income classification rather than as interest expense. Negative interest on liabilities does not meet the definition of expense in the Conceptual Framework for Financial Reporting because it does not result in a decrease of an asset or an increase in liabilities. Rather, it meets the definition of income.

Revenue is defined in IFRS 15 as “income arising in the course of an entity’s ordinary activities“. If the negative interest occurs in the normal course of business, the interest would constitute interest revenue.

Accordingly, if the negative interest is calculated using the effective interest rate method and it arises in the normal course of business, the income should be included in the separate line item required by IAS 1.

If the negative interest does not constitute interest revenue, an entity should consider whether it is required to be presented as a separate line item in accordance with IAS 1 (i.e., when such separate presentation is relevant to an understanding of the entity’s financial performance).

If this approach is adopted, and the negative interest is presented in a separate, suitably titled line item, presentation of a subtotal including this item (e.g., ‘net interest income/expense’) in the statement of comprehensive income is permitted.

When a separate line item is not presented, entities should develop an accounting policy on the appropriate classification for negative interest income in accordance with IAS 8 (e.g., to present negative interest on financial liabilities in the same line as interest income in the statement of comprehensive income).

If the amount is material, entities will also need to consider whether separate presentation is required in the notes to the financial statements in accordance with IAS 1, and whether additional disclosure may be required in accordance with IAS 1.

In an agenda decision published in the March 2018 IFRIC Update, the IFRS Interpretations Committee noted that “the requirement in IAS 1 to present separately an interest revenue line item calculated using the effective interest method applies only to those assets that are subsequently measured at amortised cost or fair value through other comprehensive income (subject to any effect of a qualifying hedging relationship applying the hedge accounting requirements in IFRS 9 or IAS 39)“.

It is reasonable to consider that this is meant to distinguish assets measured at amortised cost or fair value through other comprehensive income from other assets. As such, it is reasonable to conclude that in some circumstances negative interest on financial instruments constitutes interest revenue is not inconsistent with the March 2018 agenda decision.

Presentation as revenue of net loss arising from financial assets classified as FVTPL

Entity A holds a number of financial assets classified as held for trading in accordance with IFRS 9, with changes in fair value for each period being recognised in profit or loss (FVTPL).

As permitted by IAS 1, Entity A presents gains and losses on its held-for-trading assets on a net basis.

Entity A is permitted to present changes in the fair value of these held-for-trading financial assets as revenue, even if they are negative (i.e., net loss on FVTPL assets), as long as they arise from the ordinary activities of Entity A. Appendix A of IFRS 15 defines revenue as “income arising in the course of an entity’s ordinary activities“.

The nature of a negative movement in the fair value of a financial asset is the same as the nature of a positive movement; consequently, it would be inappropriate to include fair value gains in revenue but exclude fair value losses derived from the same activities. It would equally distort amounts presented as revenue if the net fair value movement on financial assets were excluded from revenue when it becomes negative because the change in fair value of the same asset could then be presented within revenue in some reporting periods but as an expense in others.

The presentation of changes in fair value which can be either positive or negative for the same instrument can be distinguished from the presentation of negative effective interest rates because the effective interest rate on a financial asset or financial liability is fixed for a specific period such that each asset or liability will either generate income (if the asset has a positive effective interest rate or the liability has a negative effective interest rate) or an expense (if the asset has a negative effective interest rate or the liability has a positive effective interest rate) for that period.

By IAS 1, an entity should present additional line items (e.g., by disaggregating the total revenue amount) if such presentation is relevant to an understanding of its financial performance.

Results of operating activities

Entities may choose to present a subtotal for ‘profit from operations’ in the statement(s) of profit or loss and comprehensive income. Although this is not one of the line items listed in IAS 1, it permits the presentation of additional subtotals when such presentation is relevant to an understanding of the entity’s financial performance. Entities will also need to have regard to the requirements in IAS 1.

Presentation of profit from operations

IAS 1 does not require the results of operating activities to be disclosed as a line item on the face of the statement of comprehensive income; the Board omitted this requirement on the basis that the term is not defined and that it is inappropriate to require disclosure of an undefined item.

However, the Board recognizes that an entity may elect to disclose the results of operating activities, or a similar line item, even though the term is not defined. IAS 1 notes that, in such cases, it is necessary to ensure the amount presented is representative of activities that would normally be considered as ‘operating’. In the Board’s view, it would be misleading and would impair the comparability of financial statements if items of an operating nature were excluded from the results of operating activities, even if that had been industry practice. For example, it would be inappropriate to exclude items related to operations (e.g., inventory write-downs and restructuring or relocation expenses) because they occur irregularly or infrequently or are unusual in amount. Similarly, it would be inappropriate to exclude items because they do not involve cash flows, such as depreciation and amortization expenses.

A line item ‘profit from operations’ is often presented after all income and expenses other than finance costs and income from associates and joint ventures. Investment income would usually be shown below profit from operations (unless the entity is a financial institution or similar entity). Based on the Board’s views expressed in IAS 1, it would not be appropriate to exclude items such as restructuring costs. There does, however, appear to be flexibility to disclose the results of associates and joint ventures either within or below profit from operations.

Entities should also have regard for the requirements of local regulators, particularly as regards the inclusion and labeling of non-GAAP measures in the financial statements.

Results of associates and joint ventures accounted for using the equity method

The share of the profit or loss of associates and joint ventures accounted for using the equity method is one of the line items required to be presented in profit or loss.

Presentation on an after-tax basis of the entity’s share of profits or losses of associates and joint ventures accounted for using the equity method

This item should be presented on an after-tax basis. The separate statement of profit or loss shown in the illustrative financial statements accompanying IAS 1 notes that “[t] he means the share of associates’ profit attributable to owners of the associates, i.e., it is after tax and non-controlling interests in the associates”. The same principle applies to the share of profits or losses of joint ventures accounted for using the equity method (not shown in the illustrative financial statements accompanying IAS 1).

Presentation of an investor’s share of the profit or loss of an associate or a joint venture within a single line item in profit or loss

The investor’s share of the profit or loss of an individual associate or a joint venture accounted for using the equity method should be presented within a single line item in the profit or loss section of the statement of comprehensive income (or, when relevant, the separate statement of profit or loss) and should not be separated over different line items (revenue, expenses, etc.).

Disaggregation of an investor’s share of the profits or losses of associates or joint ventures over different line items in profit or loss

The investor is permitted to present its share of the profits or losses of associates or joint ventures accounted for using the equity method over different line items in the profit or loss section of the statement of comprehensive income (or, when relevant, the separate statement of profit or loss). IAS 1 permits the line items disclosed under IAS 1 to be disaggregated if this is relevant to an understanding of the entity’s performance. When an entity chooses to disaggregate the profits or losses of different associates and joint ventures over different line items, it is not necessary to present a total for such items.

For example, an entity might choose to show separately the profits or losses for associates and joint ventures. Disaggregation on this basis would ensure compliance with the requirement under IFRS 12 to disclose the investor’s share of the profits or losses of associates separately from its share of the profits or losses of joint ventures. Equally, an entity might present its share of the profits or losses of different associates and joint ventures in different line items if such presentation would be considered relevant to an understanding of the financial statements.

Presentation of the profits or losses of associates and joint ventures accounted for using the equity method as part of profit from operations

It is acceptable for an entity to present its share of the profits or losses of some or all of its investments accounted for using the equity method as part of the profit from operations when such a sub-total is presented. Such a presentation might be useful for any of an entity’s associates or joint ventures accounted for using the equity method that is considered to be part of its operations.

Is the entity’s share of the profits or losses of associates and joint ventures accounted for using the equity method required to be presented above the tax line?

Given that the results of equity-method investments are presented on an after-tax basis (see above), the question arises as to whether these amounts are required to be presented above the tax expense line in profit or loss. In the list of items in IAS 1, the share of profits or losses of investments accounted for using the equity method appears above tax expense. In the statement of comprehensive income shown in the illustrative financial statements accompanying IAS 1, the item is presented before the tax expense but after all other expenses (including finance costs).

However, there is no requirement in the Standard that the items listed in IAS 1 must appear in any particular order. Therefore, it would be acceptable to present the share of profits or losses of investments accounted for using the equity method below the tax expense line (although, under IAS 1, it must always be presented before the ‘profit for the period’).

Tax-based structuring income

Tax-based structuring income – example

Bank A undertakes to lend money to Company B. Under its general lending rates, Bank A would charge 12 percent interest to a customer with Company B’s credit profile. However, Bank A structures the loan so that it receives a favorable tax deduction and recovers half of the interest that it would have charged Company B from this deduction. Consequently, it charges Company B interest at 6 percent and requires Company B to agree that if the tax deduction does not arise, or it is less than anticipated, Company B will pay the difference to Bank A as an increased interest charge.

Is it not acceptable for Bank A to recognize interest income of 12 percent in respect of its loan to Bank B and increase its tax expense accordingly?

The substance of the transaction is that Bank A has originated a loan that bears interest at 6 percent. Tax and interest are separate items; they should be accounted for separately and presented in the tax line and the interest line, respectively, of the statement of comprehensive income.

Exchange gains and losses

Classification of exchange gains and losses in profit or loss

IAS 21 requires an entity to disclose the number of exchange differences recognized in profit or loss, except for those arising on financial instruments measured at fair value through profit or loss by IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39).

IAS 21 is silent regarding the appropriate classification of profit or loss of foreign exchange gains and losses. Foreign exchange gains and losses should be classified based on the nature of the transactions or events that give rise to those foreign exchange gains or losses. For example, it may be appropriate to recognize foreign exchange gains and losses on operational items (trade receivables, payables, etc.) within income from operations, and foreign exchange gains and losses on issued debt as part of finance costs (but not within interest payable).

Classification of foreign exchange gains or losses in profit or loss is a matter of accounting policy that must be disclosed and applied consistently year-on-year. In addition, when the impact of foreign exchange gains or losses is material, by IAS 1, their nature and amount should be disclosed separately, either in the statement of comprehensive income or in the notes.

Therefore, for example, when an entity classifies foreign exchange gains or losses on operating items within income from operations, and the impact of these is material, the entity may elect to present foreign exchange gains and losses on operating items as a separate line item within income from operations.

Release of provisions

A provision should be used only for expenditures for which the provision was originally recognized. This means that when an entity finally settles the liability, the payment should be recorded against the provision.

Amount of cash payment differs from provision amount – for example

Company A recognized a restructuring provision under IAS 37 in 20X1 and the amount was included in ‘other expenses’. In 20X2, the expenditure was paid in cash and the amount paid was different from the amount recognized as a provision in the previous year. The difference between the two amounts will be recognized in 20X2, either as an additional expense or as a gain due to the release of the provision, in the same line item in which the related restructuring expense was recorded in 20X1 (i.e., it should be included in ‘other expenses’).

Presentation in the statement of profit or loss of recoveries on financial assets written off under IFRS 9

Presentation in the statement of profit or loss of recoveries on financial assets written off under IFRS 9 – example

IAS 1 requires that profit or loss includes a line item presenting “impairment losses (including reversals of impairment losses or impairment gains) determined by IFRS 9”.

Entity A is a lender. It recognizes impairment loss allowances on its loans at the end of each reporting period by IFRS 9. When appropriate, Entity A also writes off (i.e., reduces directly the gross carrying amount) individual loans in their entirety or a portion thereof when it does not have a reasonable expectation of recovering the loans or a portion of them by IFRS 9. Nevertheless, occasionally, it may recover subsequently (i.e., receive cash) amounts previously written off.

IFRS Standards do not contain specific guidance about the line item within profit or loss where recoveries of amounts written off under IFRS 9 should be presented. In particular, because a write-off constitutes a derecognition event under IFRS 9, recoveries in respect of a financial asset previously written off may be considered different (from an accounting perspective) from reversals of impairment.

Accordingly, Entity A may present recoveries of amounts previously written off under IFRS 9, in one of two ways to be applied consistently as an accounting policy choice.

• Approach 1: present the recoveries of amounts written off under IFRS 9 within the line item of “impairment losses (including reversal of impairment losses or impairment gains)”; this approach has the merit of showing such recoveries in the same line item as impairment reversals which are of similar economic nature to recoveries.
• Approach 2: present the recoveries of amounts written off under IFRS 9 in a separate line item; in this case, the amount should not be netted off against another line (e.g., it should not be netted off against an “other gains and losses” line).

Presentation of additional line items, headings, and subtotals

Additional line items, headings, and subtotals should be presented in the statement(s) presenting profit or loss and other comprehensive income when such a presentation is relevant to an understanding of the entity’s financial performance. For this purpose, the line items listed in IAS 1 may be disaggregated.

When an entity presents additional subtotals by IAS 1, those subtotals should:

• be comprised of line items made up of amounts recognized and measured by IFRS Standards;
• be presented and labeled in a manner that makes the line items that constitute the subtotal understandable. For example, if an entity presents a commonly reported subtotal, but excludes items that would normally be considered as part of that subtotal, the label should reflect what has been excluded;
• be consistent from period to period; and
• not be displayed with more prominence than the subtotals and totals required in IFRS Standards for the statement(s) presenting profit or loss and other comprehensive income.

Entities are required to present the line items in the statements(s) presenting profit or loss and other comprehensive income that reconcile any subtotals presented by IAS 1 with the subtotals or totals required in IFRS Standards for such statement(s).

The purpose of IAS 1 is to help users of financial statements understand the relationship between the additional subtotals presented by IAS 1 and the specific totals and subtotals required under IFRS Standards. Although this requirement is already implicit in existing IFRS requirements (because all recognized items of income and expense are required to be included in the statement(s) of profit or loss and other comprehensive income totals and, consequently, any intervening line items and subtotals necessarily reconcile), the Board decide to make this requirement more explicit.

Presentation of alternative performance measures

Presentation of alternative performance measures – general

Financial statements are often presented as part of a corporate or annual report. The form and content of that report can vary depending on the jurisdiction in which the entity is required to publish general-purpose financial statements – some such reports include a management commentary, strategic review, narrative report, or management discussion and analysis (MD&A).

Many entities include financial measures in their corporate reports that are not defined or specified by IFRS Standards. Those measures are often labeled as alternative performance measures (APMs) (also known as IFRS or non-GAAP measures).

Entities report APMs for different reasons. They sometimes use adjusted earnings to assess management performance. Some APMs are a legacy of the entity’s previous GAAP (e.g., ‘net debt’ – which was a required disclosure in some jurisdictions before IFRS Standards were adopted).

APMs have attracted the attention of securities regulators in many jurisdictions. Regulators are concerned that APMs are sometimes given more prominence than IFRS measures and that they are promoted by entities as conveying better information than the IFRS measures. APMs do not always have the discipline around them that is associated with IFRS measures.

Definition of alternative performance measures

IOSCO defines a non-GAAP financial measure as “a numerical measure of an issuer’s current, historical or future financial performance, financial position or cash flow that is not a GAAP measure”.

Individual securities regulators have their variation of this definition.

For example, the ESMA Guidelines define an APM as “a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework”. The US SEC defines APMs as financial measures that are not “required to be disclosed by GAAP, Commission rules or a system of regulation that applies to a registrant”.

The definitions of APMs and non-GAAP measures used by a cross-section of securities regulators seem to be broadly consistent – a financial measure other than a financial measure defined or specified in the accounting standards applied by the reporting entity.

Additional line items, headings, and sub-totals presented by IAS 1

Regulators have differing views about the nature of the additional line items, headings, and subtotals presented by IAS 1.

For example, measures such as EBIT and EBITDA can be legitimate additional line items in an income statement, provided that they simply provide a subtotal of items recognized and measured by applying IFRS Standards and do not conflict with IAS 1 which requires the classification of expenses based either on their nature or on their function. Yet some regulators consider EBIT and EBITDA to be non-IFRS measures.

The requirements differ from jurisdiction to jurisdiction, and an entity should be aware of the regulations and policies of any securities regulators with jurisdiction over its financial statements or reports. The requirements can also change quickly, as regulators make determinations about what they consider to be acceptable disclosure.

It is important to understand the specific requirements.

For example, although the US SEC generally prohibits a Foreign Private Issuer from including a non-IFRS measure in financial statements filed with the Commission, there are exceptions (e.g., a Foreign Private Issuer applying IFRS standards is permitted to include a measure that would otherwise be prohibited if it is explicitly accepted by the primary securities regulator in the home country jurisdiction or market of the Foreign Private Issuer’s).

Regulation of additional performance measures

Many securities regulators have taken steps to regulate or develop guidelines around the use of APMs in regulatory filings of financial statements, or financial reports, within their jurisdictions. Some of the requirements extend to press releases, websites, and marketing materials that provide financial information.

Some regulators prohibit reporting entities from presenting non-IFRS financial measures on the face of their financial statements or in the accompanying notes.

Other regulators allow APMs to be reported simultaneously in the management report and the financial statements, provided that their guidelines for APMs are applied.

Most regulations and guidelines are concerned with clarity of presentation and explanation that would enable the user to determine whether information has been extracted unaltered from the (audited) financial statements or whether it has been adjusted in some way.

Many regulators also place additional constraints on the use of APMs or impose some discipline around their use. The more common requirements are that:

• each APM is defined, or the reader is warned that it is a non-IFRS measure;
• comparative information is provided (for the same periods for which financial statements are presented);
• an explanation is given for why a particular APM has been reported and why it provides useful information;
• the APM is defined and calculated consistently from period to period. Regulators generally allow APMs to be changed, provided that the change is explained and justified and the comparative amounts are restated;
• the APMs are neutral, (i.e., entities should not adjust only for negative instances of an economic activity);
• labels used are not the same as, or confusingly similar to, a label specified or defined in IFRS Standards. The labels used to describe each APM should also be neutral, and ‘meaningful’, reflecting what the measure represents. Terms such as ‘core’ earnings or ‘underlying’ performance are discouraged by some regulators;
• regardless of the reason for reporting an APM, it should not be given more prominence, emphasis, or authority than, or distract from, measures directly stemming from the financial statements; and
• each APM is reconciled to the most directly reconcilable line item, subtotal or total presented in the financial statements of the corresponding period, identifying and explaining the material reconciling items.

Adaptations of formats

Disclosing the components of financial performance assists users in understanding the financial performance achieved and in making projections of future financial performance. To explain the elements of financial performance, it may be necessary to:

• include additional line items in the statement(s) presenting profit or loss and other comprehensive income;
• amend the descriptions used; and/or
• amend the ordering of items.

Although IAS 1 uses the terms ‘profit or loss’, ‘other comprehensive income’, and ‘total comprehensive income’, other terms may be used to describe the totals as long as the meaning is clear.

For example, the term ‘net income’ may be used to describe profit or loss.

Factors to be considered include materiality and the nature and function of the items of income and expense.

For example, a financial institution may amend the descriptions of line items to provide information that is relevant to the operations of such an institution. However, income and expense items should not be offset unless the criteria in IAS 1 are met.

Subtotals and totals required to be presented

The statement of profit or loss and other comprehensive income (statement of comprehensive income) is required to present, in addition to the profit or loss and other comprehensive income sections:

• profit or loss;
• total other comprehensive income; and
• comprehensive income for the period, being the total of profit or loss and other comprehensive income.

If an entity presents a separate statement of profit or loss, it should not present the profit or loss section in the statement presenting comprehensive income.

If a one-statement approach is adopted, the single statement presents separate sections for

(1) profit or loss, and

(2) other comprehensive income, with totals shown for each and the aggregate of the two presented as a final total.

If a two-statement approach is adopted, the separate statement of profit or loss is presented to arrive at a total for profit or loss; this total is then the starting point for the second statement which presents items of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income (the aggregate of profit or loss and other comprehensive income).

Both of these approaches are illustrated in the illustrative financial statements accompanying IAS 1.

Allocation of profit or loss and other comprehensive income

The following items are required to be presented as allocation of profit or loss and other comprehensive income for the period:

• profit or loss for the period attributable to:

o             non-controlling interests; and

o             owners of the parent; and

• comprehensive income for the period attributable to:

o             non-controlling interests; and

o             owners of the parent.

If an entity presents profit or loss in a separate statement, the allocation of the profit or loss for the period should be presented in that separate statement.

The reference to presentation ‘as allocation of profit or loss‘ means that these items are not items of income or expense. This presentation is consistent with IFRS 10, which requires non-controlling interests to be presented within equity because they do not meet the definition of a liability in the Conceptual Framework.

The illustrative financial statements accompanying IAS 1 show how these requirements can be met. A presentation that shows the profit for the period as a subtotal, and then deducts non-controlling interests to arrive at the profit attributable to the equity holders of the parent, would not be regarded as meeting the requirements of IAS 1.

Columnar presentation in the statement of comprehensive income

There is nothing in IAS 1 to prevent the presentation of additional information in the statement of comprehensive income provided that it is not misleading. Such additional information is sometimes presented using a columnar layout, where the total column gives the amounts required by IAS 1 and the additional columns provide an analysis of some or all of those amounts.

For example, separate columns might be used to present the results of two operating segments in the statement of comprehensive income. They may also be used to segregate certain types of income or expenses such as those required to be disclosed separately under IAS 1.

Any columnar presentation will need to comply with the requirements of IAS 1. In particular, to avoid the risk that the additional information may be misleading when this approach is used, the description of the columns should be unambiguous and as factual as possible.

The descriptions should be clear enough to be understood by a general reader of the financial statements without further explanation. The use of terms such as ‘core performance’, ‘underlying performance’, and ‘special items’ should be avoided because they may be ambiguous or, in the extreme, misleading. When necessary, a clear definition should be provided for those items included in a separate column.

Entities should also consider the requirements of local regulators, particularly as regards the inclusion and labeling of non-GAAP measures in financial statements.

Information to be presented in the income statement

The following items should be presented in the income statement:

1. Revenue, presenting separately interest revenue calculated using the effective interest method.
2. Gains and losses arising from the de-recognition of financial assets measured at amortized cost.
3. Finance costs.
4. Impairment losses (including reversals of impairment losses or impairment gains) are determined by IFRS 9.
5. Share of the profit and loss of associates and joint ventures accounted for using the equity method.
6. If a financial asset is reclassified out of the amortized cost measurement category so that it is measured at fair value through profit or loss, any gain arising from a difference between the previous amortized cost of the financial asset and its fair value at the reclassification date (as defined in IFRS 9).
7. If a financial asset is reclassified out of the fair value through another comprehensive income measurement categories so that it is measured at fair value through profit or loss, any cumulative gain or loss previously recognized in other comprehensive income that is reclassified to profit or loss.
8. Tax expense.
9. A single amount for the total of discontinued operations.

This comprises the total of:

1. the post-tax profit or loss of discontinued operations; and
2. the post-tax gain or loss recognized on the measurement to fair value fewer costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.

Is the order of the line items mandatory? The line items are normally presented in the order set out in IAS 1. The entity should re-order the profit or loss line items only where this is necessary to explain the elements of performance. Management should consider the materiality and the nature and function of the items concerned. For example, it is generally acceptable and common practice to present finance cost as the last item before pre-tax profit, so as to separate financing activities from the activities that are being financed.

Associates and joint ventures are highly significant to the group The share of profit of associates is normally presented after finance costs. This recognises that the share of profits from associates arises from what is essentially an investing activity, rather than part of the group’s operating activities. It might be more appropriate to show finance costs after the share of profit of associates and joint ventures where associates (and joint ventures) are an integral vehicle for the conduct of the group’s operations and its strategy. In such cases, it might be appropriate either to insert a sub-total ‘profit before finance costs’ or to include the share of profits from associates and joint ventures in arriving at operating profit (if disclosed). It would not, however, be appropriate to include the share of associates and joint ventures within ‘revenue’ (and, therefore, within ‘gross profit’). The share of associates and joint ventures does not represent a ‘gross inflow of economic benefits’ that is ‘revenue’.

Presentation of tax on share of associates and joint ventures Profit or loss from associates and joint ventures is presented net of their related tax. Although the tax treatment of the profit or loss of associates and joint ventures is not explicit in the list of mandatory profit or loss line items, the footnote to the ‘share of profits in associates’ line item in the statement of other comprehensive income shown in the ‘Guidance on implementing IAS 1’ states: “this means the share of associates’ profit attributable to owners of the associates, that is, it is after tax and noncontrolling interests in the associates”.

Presentation of interest for derivatives and other financial instruments measured at FVTPL Banking and capital markets Interest revenue calculated using the effective interest method should be separately presented as a component of revenue on the face of the income statement. Question 1: If an entity’s revenue includes interest income, can interest on financial instruments measured at fair value through profit or loss (FVTPL) be included in the line item representing interest revenue calculated using the effective interest method? Solution 1: No. The separate line item for interest revenue calculated using the effective interest method (that might be labelled ‘interest revenue’ or ‘interest income’ or similar) only includes: ·        interest on instruments measured at amortised cost and fair value through other comprehensive income in accordance with IFRS 9; and ·        gains and losses arising from related qualifying hedging relationships to which hedge accounting is applied in accordance with IFRS 9 or IAS 39. Under IFRS 9, the effective interest method does not apply to derivatives and other instruments measured at FVTPL. Hence, interest arising on such instruments should not be included in the same line item (except for gains and losses arising on related hedging instruments that are accounted for as hedges under IFRS 9 or IAS 39). This is the case even if interest could be calculated by applying the effective interest rate to the amortised cost of the instrument (For example, if the instrument meets the SPPI requirements but its business model is not ‘held to collect’ or ‘held to collect and sell’). Question 2: Can an entity choose to present one or more separate line items on the face of the income statement for ‘interest’ on instruments measured at FVTPL, in addition to the required line item for interest on instruments measured at amortised cost or FVOCI? Solution 2: Yes. IAS 1 permits an entity to present additional line items in the income statement where such a presentation is relevant to an understanding of the entity’s financial performance. This is consistent with IFRS 7 which envisage that an entity can present interest separately from other movements in fair value on financial assets and financial liabilities measured at FVTPL. Changes in the fair value of an interest rate swap, for example, can be split into ‘interest’ calculated as the accrued and realised cash flows on the swap and other changes in fair value, with each component being presented in separate line items. An entity can include ‘interest’ on derivatives (other than those accounted for as hedges in accordance with IFRS 9 or IAS 39) and other instruments measured at FVTPL as a separate line item within net interest margin, using any reasonable method that results in relevant information. Such a presentation might, for example, be judged to result in relevant information for economic hedges in accordance with the entity’s risk management strategy. If such a presentation is adopted, each component is required to be appropriately presented and labelled in accordance with IAS 1. In addition, the entity’s accounting policy, including how such amounts are calculated and on which instruments, should be disclosed in accordance with IAS 1. If adopted, as a matter of accounting policy, such a presentation might look something like the following (in the example below, for illustrative purposes and to achieve a consistent presentation, a similar presentation is used for both interest income and interest expense; however, there is no equivalent requirement in IAS 1 to present interest expense calculated using the effective interest method on liabilities at amortised cost separately from other similar expenses): Interest revenue (calculated using the effective interest method on assets at amortised cost and FVOCI) X Other similar income1 (method of calculation, and on which assets, to be explained in the notes) X Interest expense (calculated using the effective interest method on liabilities at amortised cost) (X) Other similar expenses (method of calculation, and on which liabilities, to be explained in the notes) (X) Net interest margin X Alternatively, an entity might present ‘interest’ on all or some of its instruments measured at FVTPL as part of fair value gains or losses on those items. Some local regulators have expressed views on the presentation of interest income for financial instruments measured at FVTPL, in which case regard should be had to those views. 1This might have other labels, such as ‘other interest income’.

An entity is required to analyze the single amount for the total of discontinued operations between:

• revenue,
• expenses,
• pre-tax profit,
• tax on profit,
• gain or loss recognized on the measurement to fair value fewer costs to sell or on the disposal of the assets of disposal group(s) constituting the discontinued operation, and
• tax on that gain or loss.

An entity can provide this analysis in the statement of comprehensive income or the notes.

Information to be presented in the other comprehensive income section

Items of other comprehensive income, classified by nature, should be grouped into those that will not be reclassified subsequently to profit or loss and those that will be reclassified subsequently to profit or loss where specific conditions are met.

Components of other comprehensive income

Other comprehensive income (OCI) comprises items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by IFRS Standards and include:

• changes in revaluation surplus (see IAS 16 and IAS 38);
• remeasurements of defined benefit plans (see IAS 19);
• gains and losses arising from translating the financial statements of a foreign operation (see IAS 21);
• for entities that have adopted IFRS 9

o             gains and losses from investments in equity instruments designated as at fair value through other comprehensive income by IFRS 9;

o             gains and losses on financial assets measured at fair value through other comprehensive income by IFRS 9;

o             the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income by IFRS 9;

o             for particular liabilities designated as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liability’s credit risk (see IFRS 9);

o             changes in the value of the time value of options when the intrinsic value and the time value of an option contract are separated and only the changes in the intrinsic value are designated as the hedging instrument; and

o             changes in the value of the forward elements of forward contracts when the forward element and the spot element of a forward contract are separated and only the changes in the spot element are designated as the hedging instrument, and changes in the value of the foreign currency basis spread of a financial instrument when it is excluded from the designation of that financial instrument as the hedging instrument;

• for entities that have not yet adopted IFRS 9:

o             gains and losses on remeasuring available-for-sale financial assets; and

o             the effective portion of gains and losses on hedging instruments in a cash flow hedge;

• for entities that have adopted IFRS 17:

o Insurance finance income and expenses from contracts issued within the scope of IFRS 17 are excluded from profit or loss when total insurance finance income or expenses is disaggregated to include in profit or loss an amount determined by a systematic allocation applying IFRS 17, or by a amount that eliminates accounting mismatches with the finance income or expenses arising on the underlying items, applying IFRS 17); and

o             finance income and expenses from reinsurance contracts are excluded from profit or loss when total reinsurance finance income or expenses are disaggregated to include in profit or loss an amount determined by a systematic allocation applying IFRS 17.

The credit recognized in equity for equity-settled share-based payments by IFRS 2 should not be included in OCI. This is because it arises from a transaction with owners in their capacity as such. The net credit represents either the proceeds of the grant of an equity instrument or, when a subsidiary recognizes an expense for a grant of its parent’s equity instruments, a capital contribution from the parent.

Presentation of items of other comprehensive income

General requirements for presentation of items of other comprehensive income

The other comprehensive income section of the statement of comprehensive income is required to present line items for amounts for the period of:

(a) items of other comprehensive income (excluding amounts required to be disclosed under IAS 1, classified by nature and grouped into those that, by other IFRS Standards:

(i) will not be reclassified subsequently to profit or loss; and

(ii) will be reclassified subsequently to profit or loss when specific conditions are met; and

(b) the share of other comprehensive income of associates and joint ventures accounted for using the equity method, separated into the share of items that, by other IFRS Standards:

(i) will not be reclassified subsequently to profit or loss; and

(ii) will be reclassified subsequently to profit or loss when specific conditions are met.

Note that there is nothing to prevent disaggregation to show the OCI of associates separately from the OCI of joint ventures, or to present the OCI of different associates and joint ventures in different line items if such presentation would be considered relevant to an understanding of the financial statements.

Income tax relating to items of other comprehensive income

The amount of income tax relating to each item of OCI, including reclassification adjustments, should be disclosed either in the statement of profit or loss and other comprehensive income or in the notes.

As explained in IAS 1, the purpose of this requirement is to provide users with tax information relating to the items of OCI because they often have tax rates different from those applied to profit or loss.

The items of OCI may be presented either:

• net of related tax effects; or
• before related tax effects with one amount shown for the aggregate amount of income tax relating to those items.

This permits a choice of presentation in the statement of comprehensive income.

As explained in IAS 1, there are advantages to each method of presentation and the Board decided to permit either to be used. However, when the income tax effects are aggregated into a single item on the face of the statement of comprehensive income, it is still necessary to disclose in the notes the amount of tax attributable to each item of OCI as required by IAS 1.

If the latter approach is taken (i.e., items of OCI are presented gross with a single amount shown for the aggregate amount of income tax), the amount of tax is required to be allocated between the items that might be reclassified subsequently to profit or loss and those that will not be reclassified subsequently to profit or loss.

The disclosure requirements of IAS 1 do not apply to the tax of an associate or a joint venture that is already reflected in the investor’s share of other comprehensive income of the associate or joint venture.

However, if the investor itself is liable for tax in respect of its share of other comprehensive income of the associate or joint venture, then IAS 1 would apply to this tax.

Reclassification adjustments

Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognized in OCI in the current or previous periods.

Other IFRS Standards specify whether and when amounts previously recognized in OCI should be reclassified to profit or loss. Such reclassifications are referred to in IAS 1 as ‘reclassification adjustments’.

A reclassification adjustment is included with the related component of OCI in the period that the adjustment is reclassified to profit or loss.

The amounts that are reclassified may have been recognized in OCI as unrealized gains in the current or previous periods. Those unrealized gains must be deducted from OCI in the period in which the realized gains are reclassified to profit or loss to avoid including them twice in total comprehensive income.

Reclassification adjustments arise, for example:

• on disposal of a foreign operation; and
• for entities that have adopted IFRS 9, when some hedged forecast cash flows affect profit or loss.

Reclassification adjustments do not arise on changes in revaluation surplus recognized by IAS 16 or IAS 38. They also do not arise on remeasurements of defined benefit plans recognized by IAS 19. These components are recognized in OCI and are not reclassified to profit or loss in subsequent periods. Changes in revaluation surplus may be transferred to retained earnings in subsequent periods as the asset is used or when it is derecognized.

IAS 1 requires reclassification adjustments relating to components of OCI to be disclosed. Such reclassification adjustments may be presented in the statement(s) of profit or loss and other comprehensive income or in the notes. When reclassification adjustments are presented in the notes, the items of OCI are stated after any related reclassification adjustments.

Items of comprehensive income that will be subsequently reclassified to profit or loss

The following items of comprehensive income will be subsequently reclassified to profit or loss.

• Gains and losses arising from translating the financial statements of a foreign operation (see IAS 21).
• Gains and losses arise on hedging instruments designated in hedges of the net assets in a foreign operation.
• For entities that have adopted IFRS 9:

o             gains and losses on financial assets measured at fair value through other comprehensive income by IFRS 9;

o             the effective portion of gains and losses on hedging instruments in a cash flow hedge;

o             changes in the value of the time value of options when the intrinsic value and the time value of an option contract are separated and only the changes in the intrinsic value are designated as the hedging instrument;

o             changes in the value of the forward elements of forward contracts when the forward element and the spot element of the forward contract are separated and only the changes in the spot element are designated as the hedging instrument; and

o             changes in the value of the foreign currency basis spread of a financial instrument when it is excluded from the designation of that financial instrument as the hedging instrument.

• For entities that have not yet adopted IFRS 9:

o             gains and losses on remeasuring available-for-sale financial assets; and

o             the effective portion of gains and losses on hedging instruments in a cash flow hedge.

• For entities that have adopted IFRS 17:

o             insurance finance income and expenses from contracts issued within the scope of IFRS 17 are excluded from profit or loss when total insurance finance income or expenses are disaggregated to include in profit or loss an amount determined by a systematic allocation applying IFRS 17, or by an amount that eliminates accounting mismatches with the finance income or expenses arising on the underlying items, applying IFRS 17; and

o             finance income and expenses from reinsurance contracts are excluded from profit or loss when total reinsurance finance income or expenses are disaggregated to include in profit or loss an amount determined by a systematic allocation applying IFRS 17.

• Income tax related to these amounts.
• Share of these amounts of associates and joint ventures.

Items of comprehensive income that will not be subsequently reclassified to profit or loss

The following items of comprehensive income will not be subsequently reclassified to profit or loss.

• Changes in revaluation surplus (see IAS 16 and IAS 38).
• Remeasurements of defined benefit plans (see IAS 19).
• For entities that have adopted IFRS 9:

o             gains and losses from investments in equity instruments designated as at fair value through other comprehensive income by IFRS 9;

o             the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income by IFRS 9; and

o             for particular liabilities designated as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liability’s credit risk.

• Income tax related to these amounts.
• Share of these amounts of associates and joint ventures.

Gains and losses on hedging instruments entered into as part of hedges subject to basis adjustments

For entities that have adopted IFRS 9, it permits an entity to apply cash flow hedging to a hedged forecast transaction that is expected to result in the recognition of a non-financial asset or non-financial liability.

IFRS 9 requires the amounts in the cash flow hedge reserve to be included in the initial cost or other carrying amount of the asset or the liability except in limited circumstances (for example, if the amount is a loss that is not expected to be recovered in a future period or, in certain circumstances, if hedge accounting is discontinued).

A similar approach to adjusting the initial cost of the non-financial item applies when an entity accounts for the time value of options, forward element of forward contracts, and foreign currency basis spreads of financial instruments as described in IFRS 9.

To describe the IAS 1 requirements these are collectively referred to as ‘basis adjustments’ as they adjust the basis of the initial cost or other carrying amount of the non-financial item.

Reclassification adjustments do not arise on basis adjustments because these amounts are directly transferred from the cash flow hedge reserve (or the separate component of equity) to assets or liabilities.

Nevertheless, these basis adjustments will ultimately affect profit or loss through depreciation, impairment, or derecognition of the related non-financial items.

Hence, while these amounts are not reclassification adjustments in the sense that they do not move directly from other comprehensive income to profit or loss, they may be viewed as items that will be subsequently reclassified to profit or loss (albeit not directly reclassified).

Accordingly, entities can choose as an accounting policy to present basis adjustments either as items that will be subsequently reclassified to profit or loss or as items that will not be subsequently reclassified to profit or loss. The same accounting policy should be applied consistently to all basis adjustments.

Entity has no items of other comprehensive income in the current or prior periods

When an entity has no items of OCI to recognize in either the current or the comparative reporting period, the question arises as to how the statement of comprehensive income should be presented.

In the absence of explicit guidance in IAS 1, the following treatments, among others, are acceptable (subject to regulatory/jurisdictional requirements):

• presentation of a statement of profit or loss ending with ‘profit for the year’, followed by a narrative statement to the effect that there were no items of comprehensive income in the current or prior year other than the profit for the year and, accordingly, no statement of comprehensive income is presented; or
• presentation of a single statement of comprehensive income ending with a total line for ‘profit for the year and total comprehensive income’.

Profit or loss for the period

All items of income and expense recognized in a period should be included in the profit or loss for the period unless a standard or interpretation requires or permits otherwise. Items of income and expense excluded from the profit or loss for the period are recognized as other comprehensive income in the statement of comprehensive income.

An entity should disclose the amount of income from continuing operations and discontinued operations attributable to owners of the parent. These disclosures can be presented either in the notes or in the income statement.

An entity should present the total profit and total comprehensive income allocated between the non-controlling interest and the parent’s owners. IFRS 10 requires the non-controlling interest to be presented within equity, rather than as a liability.

Analysis of expenses: classification by nature or function

Entities should present an analysis of expenses using a classification based on either the nature of expenses or their function within the entity, whichever provides information that is reliable and more relevant.

The sub-classification by nature or function is given to highlight components of financial performance that might differ in terms of frequency, potential for gain or loss, and predictability.

IAS 1 encourages entities to present the additional analysis of expenses on the face of the statement. Those entities that do not provide this analysis on the face of the statement should do so in the notes.

Entities applying the ’by nature’ method classify expenses according to their nature (For example, depreciation, purchases of materials, transport costs, employee benefits and advertising costs). The expenses are not allocated among various functions within the entity.

Can an entity present some expenses by function and others by nature? Entities should not generally mix ‘by function’ and ‘by nature’ classifications of expenses by, for example, excluding some expenses, such as inventory write-downs, employee termination benefits and impairment charges, from the functional classifications to which they relate. Mixing function and nature and the inclusion of additional line items in the income statement might be acceptable if all of the following criteria are met: ·        The presentation of the income statement is neutral (free of bias). A biased presentation (For example, a presentation that gives undue prominence to certain line items) is not acceptable. ·        The breakdown of expenses by nature is disclosed in the notes. ·        The presentation is applied consistently and explained in the accounting policies. A mixed presentation should not have the effect of understating cost of sales and overstating gross profit. For example, depreciation should generally be included in cost of sales in a business where depreciation is clearly linked to the cost of goods sold, such as in a manufacturing business. It might be appropriate to exclude depreciation from cost of sales in a business where it is not closely linked to the cost of goods sold. If so, cost of sales should be clearly labelled as excluding depreciation, and a gross profit sub-total should not be reported. In determining the most appropriate presentation, management should consider local regulatory requirements. A collection of expenses of one or more natures is not necessarily the expenses of a function of the business. For example, the aggregate of restructuring costs (such as redundancy payments, inventory write-downs) and the aggregate of occupancy costs (depreciation, property insurance) should not normally be shown as a single line in a functional analysis, because neither restructuring nor occupancy is a function of the business. An entity that presents under a functional analysis discloses the combined cost of performing a particular activity (For example, administration or distribution) in pursuit of its business objectives.

What types of expenses are included in cost of sales, distribution costs, administrative expenses and finance costs? IAS 1 does not provide specific guidance to determine what should be included in ‘cost of sales. ‘Cost of sales’ refers to the costs directly associated with generating revenues. Therefore, ‘cost of sales‘ should include costs directly associated with fulfilling performance obligations under IFRS 15. Expenses that should be included in “cost of sales” will depend on the nature of costs and the performance obligation being satisfied. Cost of sales might include: Opening (less closing) inventories. Direct materials. Other external charges (such as the hire of plant and machinery or the cost of casual labour used in the productive   process). Direct labour. All direct production overheads, including depreciation and impairment of property, plant and equipment, and        indirect overheads that can reasonably be allocated to the production function. Amortisation of development expenditure previously capitalised as an intangible asset. Cash discounts received on ‘cost of sales’ expenditure (this is not an offsetting, but an effective reduction in the purchase price of an item). Inventory write-downs. Transport costs when delivering the goods is a separate performance obligation in accordance with IFRS 15. Advertising costs related to delivering advertising services to a customer in accordance with IFRS 15. Distribution costs are generally interpreted widely and often include selling and marketing costs. Items that might be included are: Payroll costs of the sales, marketing and distribution functions. Advertising costs that are not incurred to satisfy performance obligations under IFRS 15. Salespersons’ travel and entertaining. Warehouse costs for finished goods. Transport costs arising on the distribution of finished goods. All costs of maintaining sales outlets. Agents’ commission payable. Administrative expenses will normally include: The costs of general management. All costs of maintaining the administration buildings. Professional costs. An entity could include an additional item where it incurs significant operating expenses that it considers do not fall under any one of the headings ‘cost of sales’, ‘distribution costs’ and ‘administrative expenses’. An entity should analyse its operating expenses consistently from year to year and in a manner that provides the most relevant information. Where an entity includes, in any line item, an estimate of an expense and, in a subsequent year, that estimate is shown to be in excess of the actual expense, the reversal of the ‘excess expense’ should be recognised in the same line item as the original expense estimate. IAS 2 specifically requires this treatment in respect of a reversal of an inventory write-down. Finance costs will normally include: Interest payable on bank overdrafts and current and non-current borrowings. Unwinding of discounts on provisions. Finance charges in respect of leases (finance leases under IAS 17). Dividends on preference shares classified as debt. Amortisation of discounts and premiums on debt instruments that are liabilities. Foreign exchange losses on foreign currency borrowings. Changes in the fair value of some derivative financial instruments. Interest on tax payable, where the interest element can be identified separately.

Expense classification by nature IAS 1 sets out an example of a classification using the nature of expense method as follows: Revenue X Other income X Changes in inventories of finished goods and work in progress X Raw materials and consumables used X Employee benefits expense X Depreciation and amortisation expense X Other expenses X Total expenses (X) Profit before tax X

Expense classification by function IAS 1 sets out an example of a classification using the function of expense method as follows: Revenue X Cost of Sales X Gross Profit X Other income X Distribution Costs (X) Administrative Expenses (X) Other expenses (X) Profit before tax X

How should capitalised expenses be dealt with? The implementation guidance accompanying IAS 1 gives an example of an income statement with expenses classified by nature. This example includes ‘work performed by the entity and capitalised’ as a line item. This is necessary where an entity adopts a natural analysis of expenses and presents its operating expenses on a ‘gross’ basis, before the deduction of any amounts capitalised. For example, in that case, the line item ‘raw materials and consumables used’ will be the total of all raw materials used, even if those raw materials are used to construct property, plant and equipment (‘PPE’). An entity that uses C1,000 of raw materials, of which C100 is capitalised, will show, as separate line items, C1,000 as ‘raw materials and consumables used’ and C100 as ‘work performed by the entity and capitalised’. (The capitalised raw materials will affect the depreciation charge and/or profit or loss on disposal of PPE in due course.) The example in the implementation guidance of the functional analysis of expenses does not include a line item for ‘work performed by the entity and capitalised’. When operating expenses are presented by function, the amounts should be shown ‘net’ of any expenses capitalised, to show the amounts attributable to the particular function. In the example above, C900 would be included within cost of sales (or whichever other function used the raw materials that were not capitalised), but the C100 would not be presented within a separate line in the statement of comprehensive income. A functional analysis shows the costs allocated to each function; it does not show the ‘gross’ amounts of each type of expense less allocations of those expenses. This approach is extended to the presentation of costs that are, for example, ‘allocated’ to PPE or capitalised as development costs. We believe that it is most appropriate for the income statement to present finance costs net of the amount capitalised, where the nature of expense method is used and finance costs are capitalised. The gross amount of finance costs and the amount capitalised should be disclosed in the notes to the financial statements, if they are not otherwise presented separately on the face of the statement. The presentation of finance costs on a gross basis, accompanied by the inclusion of capitalised finance costs within an amalgamated total of ‘work performed by the entity and capitalised’, would increase the measure of operating profit that would be presented in or derived from the statement of an entity using the nature of expense method, as compared with an entity that presents finance costs on a net basis. But there is some diversity in practice in this regard.

Entities applying a ‘by function’ method should also disclose additional information on the nature of expenses. This additional information should disclose, by nature, details of all of the entity’s expenses. IAS 1 specifically requires depreciation, amortization, and employee benefits expenses to be disclosed.

Items classified as other income (expense) An entity might include the following as other income or other expense, as appropriate): Interest income on investments.Dividend income. Fair value gains and losses on financial assets at fair value through profit or loss. Gains and losses on trading derivatives.

Placement of other items

Finance income should not be netted against finance costs. This does not preclude an entity from presenting finance income followed by finance costs and a sub-total (For example, ‘net finance costs’) on the face of the statement of comprehensive income (or if present, the income statement).

Finance income presentation Interest income should be included within ‘revenue’ where earning interest income is part of the entity’s ordinary activities, rather than an incidental benefit. For example, a retailer that earns interest income from offering extended credit arrangements should include this interest income in ‘revenue’. A diversified conglomerate which has a financing business should also include its finance income in ‘revenue’. Entities might consider that finance income, to the extent that it is not included in the ‘revenue’, is most appropriately included as ‘other operating income’ or as separate line items in arriving at operating profit (if disclosed). Entities might consider that it is appropriate to include finance income that arises from treasury activity (For example, income on surplus funds invested for the short-term) outside operating profit, but to include other types of finance income as operating items. The presentation policy adopted should be applied consistently and disclosed if material. Finance income normally includes items such as: Interest income on cash and cash equivalents. Unwinding of discounts on financial assets.

Negative interest IAS 1 requires an entity to present revenue, presenting separate interest revenue calculated using the effective interest method. In addition, IFRS 15 states that an entity should present the effects of financing (interest revenue or interest expense) separately from revenue from contracts with customers in the statement of comprehensive income. An entity could present negative effective interest on a financial asset as a separate line item on the face of the income statement either within ‘net finance costs’ (being finance income, finance costs, and negative interest) or as another expense category. It could be included in finance costs. Negative effective interest arising on a financial liability should be presented within interest income or other income. Negative interest income or expense could be presented separately on the face of the income statement, or it could be disclosed separately in the notes to the financial statements. Management should apply its selected presentation consistently.

An entity is not required to present finance income separately even though it is required to present finance costs on the face of the statement of comprehensive income. The classification of finance income will depend on an entity’s accounting policy for such items.

How should foreign exchange gains and losses be dealt with? An entity usually classifies foreign exchange gains and losses that relate to borrowings and cash and cash equivalents as part of finance income/finance cost. Other foreign exchange gains and losses are usually classified as ‘other operating gains/losses’, ‘other operating income and expense’, or similar line items. An entity’s accounting policy might be to present all foreign exchange gains and losses either in ‘other operating gains/losses’ (or similar line items) or in ‘finance income’/ ‘finance cost’. Foreign exchange gains and losses, including those on trade receivables (and unbilled revenue), should not be presented as part of revenue. Exchange gains or losses that arise on borrowing in a foreign currency undertaken to hedge a net investment in a foreign subsidiary are, if the hedge accounting criteria are met, generally recognized in other comprehensive income in the consolidated financial statements. These gains and losses are reclassified from equity when the group disposes of the net investment. Exchange differences that are reclassified to profit or loss as part of disposal or partial disposal, are generally presented in the same line in which the gain or loss on disposal is presented – that is, ‘other income’ or ‘other expenses.

Gain or loss on repurchase of debt An entity that repurchases its debt at an amount that reflects the debt’s value in the market recognizes the difference between the carrying amount of the debt extinguished and the consideration paid as a gain or loss in the income statement. IFRS does not specify where the gain or loss should be presented within the income statement. IAS 1 requires the effects of transactions to be represented faithfully. For an entity that is not a financial institution, a debt-buy-back transaction is like a financing activity (not an operating activity), as it changes the entity’s borrowings. So, the gain or loss arising from extinguishing the debt should be recorded in the income statement under finance income or finance cost, respectively.

Can derivative gains and losses be included in ‘revenue’? Gains and losses on derivatives used to hedge revenue should only be included in revenue where they are in a designated and highly effective hedge accounting relationship. The derivative gains and losses arising from the effective portion of a cash flow hedge of revenue are recognized in other comprehensive income and are reclassified subsequently to profit or loss at the same time as the related revenue is recognized. These reclassified gains and losses can be included in revenue from contracts with customers. The ineffective portion of the changes to the derivative’s fair value should not be included in revenue. Ineffectiveness is recognized immediately in profit or loss, which might be before the goods or services are delivered and the revenue recognition criteria are met. The gain or loss on the ineffective portion of the hedge is normally included in ‘other operating income/costs. The gain or loss on derivatives used in a hedge of trade receivables should not be included in revenue because movements on the receivable after initial recognition are usually related to interest or foreign exchange exposures and not to the original revenue transaction. Such gains and losses are normally included in ‘other operating income/costs. IFRS 9 introduces the notion of ‘costs of hedging’. If an entity adopts the cost of hedging model it can recognize fair value movements on forward points, currency basis, and time value of derivatives in other comprehensive income, reclassifying them to profit or loss when the hedged item affects profit or loss. Where those derivatives are used to hedge revenue, the reclassification adjustment could be included in revenue. Other alternative acceptable treatments would include the presentation in ‘other operating income/costs’ or in ‘finance income/expense’. IFRS 15 defines ‘revenue’, a required line item for the income statement, as “income arising in the course of an entity’s ordinary activities”. IFRS 15 also requires an entity to disclose revenue recognized from contracts with customers and to disclose other sources of revenue separately. An entity can disclose these items either in the income statement or in the notes. Derivative gains and losses that are not part of an effective cash flow hedge do not arise from contracts from customers so they should not be included in ‘revenue from contracts with customers.

How should an entity present fair value changes and sales proceeds from commodity contracts that are accounted for as derivative financial instruments under IFRS 9 (or IAS 39)? Contracts to sell non-financial assets that can be settled net in cash or another financial asset are accounted for as if they were derivative financial instruments under IFRS 9 (or IAS 39) unless they were entered into and continue to be held for the delivery by the entity’s expected sale requirements. Take the example as follows: On 1 February 20X0, Entity A enters into a contract with a customer to sell 100 Mt of cocoa with physical delivery for C 3,000/Mt on 1 May 20X0. Entity A has assessed that the contract is accounted for as a derivative financial instrument under IFRS 9 (or IAS 39). Accordingly, the contract is accounted for at fair value through profit or loss. However, the contract is not held for trading purposes, and entity A expects to settle it by gross physical settlement (that is, by delivering cocoa in return for cash). Entity A’s reporting period ends on 31 March 20X0. The sales contract is settled on 1 May 20X0 by entity A delivering cocoa in return for cash of C300,000. The forward price of cocoa and the fair value of the contract are as follows: Forward price [C] Fair value [C]* 1 February 20X0 31 March 20X0 1 May 20X0 * For simplicity, the effect of discounting has been ignored. Accounting throughout the life of the contract Changes in the fair value of the derivative financial instrument during the life of the contract do not meet the definition of ‘revenue from contracts with customers. C C 31 March 20X0 Dr Other operating expense (or another appropriate line item) 10,000 Cr Derivative 10,000 1 May 20X0 Dr Other operating expense (or another appropriate line item) 15,000  Cr Derivative 15,000 Accounting at the date of delivery The accounting at the date of delivery is less clear. One approach is that the contract continues to be accounted for as a derivative financial instrument within the scope of IFRS 9 (or IAS 39) and not within the scope of IFRS 15, and so it does not give rise to ‘revenue from contracts with customers’ or related cost of sales. The accounting entries would be as follows: Delivery date C C Dr. Derivative 25,000 Dr. Cash 300,000 Cr. Inventory * 325,000 * For simplicity, the accounting entries assume that the inventory is measured at fair value. There would likely be a gain or loss on the de-recognition of the inventory if the inventory is measured at cost. The accounting entries in this example do not include any ‘mark to market’ adjustments that might have been necessary. It can, however, also be argued that, although the contract is accounted for as a derivative financial instrument, it is nevertheless a contract with a customer to sell physical commodities that are an output of the entity’s ordinary activities. In particular, Appendix A to IFRS 15 defines a customer as “a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration”. Under this view, the gross proceeds that result from the contract give rise to revenue under IFRS 15 that should be presented within the line item ‘revenue from contracts with customers. Under this view, the accounting entries in the example above would be as follows. They reflect that, at delivery, two transactions take place: the settlement of a derivative with a fair value of C25,000 as at the settlement date; and the delivery of goods (for which the sale price and the carrying amount is C325,000). The view that a derivative instrument that will be settled gross is a contract containing both an obligation to deliver the underlying asset and a derivative instrument is consistent with the concept of an all-in-one hedge. Provided that certain conditions are met, an entity is allowed to designate a fixed-price contract to sell a commodity as a cash flow hedge of the variability of the consideration to be received on the sale of the commodity, even though the fixed-price contract is the contract under which the commodity is sold. Delivery date C C Dr. Derivative 25,000 Dr. Cash 300,000 Cr Revenue Dr. Cost of Sales 325,000 Cr Inventory * 325,000 * For simplicity, the accounting entries assume that the inventory is measured at fair value. There would likely be a gain or loss on the de-recognition of the inventory if the inventory is measured at cost. The accounting entries in this example do not include any ‘mark to market’ adjustments that might have been necessary. In March 2019, the IFRS IC issued an agenda decision ‘Physical Settlement of Contracts to Buy or Sell a Non-financial Item’. The accounting suggested by the agenda decision is consistent with the accounting treatment illustrated above in the case where gross revenue is presented. The IFRS IC noted that a journal entry to reverse the accumulated fair value gain or loss on a derivative that does not meet the own-use scope exception and is measured at FVTPL under IFRS 9 is neither permitted nor required. The IFRS IC also noted that there is no gain or loss on the derivative caused by settlement. The IFRS IC also observed that IAS 1 does not specify requirements for the presentation of amounts related to the remeasurement of derivatives. The IFRS IC also observed that IFRS 7 specifies disclosure requirements for net gains or net losses on financial assets or financial liabilities that are mandatorily measured at FVTPL applying IFRS 9. We think that both views explained above are acceptable and that an entity has an accounting policy choice on whether or not it recognizes revenue and related cost of sales at the date of delivery. We also think that the chosen accounting policy should be applied consistently. Furthermore, we expect entities to disclose within the notes which approach they have applied. The agenda decision also addresses the case where an entity is purchasing the commodity and therefore recognizes inventory for the non-financial item. The same principle is applied, and a journal entry to reverse the accumulated fair value gain or loss on a derivative that does not meet the own-use scope exception and is measured at FVTPL under IFRS 9 is neither permitted nor required.

How should other derivative gains and losses be presented? The gains and losses on derivatives in designated hedge accounting relationships (other than revenue) are usually included in the same line item as the related hedged item. A derivative that is an effective hedge will often have an ineffective element. The presentation of the gain or loss attributable to this hedge’s ineffectiveness should be consistent with the entity’s policy on presenting the results of trading derivatives. This might mean that the results of the hedge ineffectiveness, failed hedges or economic hedges are included in the same line item as the impact of the related hedged item. For example, in the case of a hedge of fuel cost by an airline, if the hedge meets the criteria for hedge accounting and is 85% effective, the 15% ineffective element of the gain or loss is included in profit or loss and could be included in the cost of sales. If the hedge becomes less effective (and no longer qualifies for hedge accounting), 100% of the gain or loss is included in the profit or loss. This could also be included in the cost of sales if it is in line with the entity’s documented derivative presentation policy. An entity might have some derivatives that are not in a designated hedge accounting relationship but are nonetheless regarded by management as hedges (often known as ‘economic hedges’). Gains and losses on derivatives that are ‘economic hedges and gains and losses on other trading derivatives should be presented in the same place in the income statement. IFRS does not recognize ‘economic hedges. Under IFRS 9, hedge accounting is only available for hedges that meet the hedge accounting criteria all other derivatives are not hedges for accounting purposes, even if management regards them as such. The results of trading derivatives and derivatives that are not part of a designated hedge accounting relationship are usually most appropriately shown within ‘other operating gains and losses’, or ‘other operating income and expense’, or as a separate line item if the amount is significant. An entity might classify each major type of derivative separately. An entity might, for example, establish an accounting policy that all interest rate derivatives are included in finance costs whether in a hedge accounting relationship or not. There is limited guidance in IAS 1 on the income statement geography of derivative gains and losses so this would be an acceptable policy. Gains and losses on commodity derivatives should not be classified as part of finance costs as they do not relate to financing activities. It is not appropriate to ‘recycle’ fair value gains and losses that are presented separately in arriving at profit or loss to other parts of profit or loss when they are realized. This is not to be confused with the reclassification of certain components of other comprehensive income (that is, certain income and expenses not dealt with in profit or loss).

Additional line items, headings, and sub-totals

An entity presents additional line items, headings, or sub-totals in the statement of profit or loss and other comprehensive income if such information is relevant to understanding the entity’s financial performance. ‘Additional line items’ includes the disaggregation of the line items required by IAS 1. This is in addition to the requirement for an entity to disclose, either on the face of the primary statement or in the notes, material items of income and expense.

An entity’s various activities, transactions, and other events differ in frequency, potential for gain or loss, and predictability. Disclosing additional items can help users to understand the entity’s past financial performance and to forecast future financial performance.

Entities need to exercise judgment in determining whether additional line items or sub-totals are necessary, subject to the overriding IAS 1 requirement to present information in a manner that provides relevant, reliable, comparable, and understandable information. Different entities might take different views of the best way to present information.

There might be several methods of presentation that are equally valid, just as there might be more than one acceptable accounting policy for a transaction. Regulators also generally have a view on the appropriateness of the use of additional line items or sub-totals, and so regulated companies should exercise caution when departing from a ‘standard’ presentation.

Additional line items will not provide more understandable information where they result in a cluttered income statement that obscures the entity’s performance. Additional line items should only be inserted in respect of a material item or a combination of items that is material. Additional line items, where used, should generally be inserted beside other items that are similar in nature or function. Entities will need to ensure that each line item contains all of the revenue or expense that relates to that particular line item.

An entity that presents sub-totals should ensure that those sub-totals:

• are comprised of line items made up of amounts recognized and measured by IFRS;
• are presented and labeled in a manner that makes the line items that constitute the sub-total clear and understandable;
• are consistent from period to period; and
• are not displayed with more prominence than the sub-totals and totals required by IFRS.

The entity is required to present line items in the statement(s) presenting profit or loss and other comprehensive income that reconcile any additional sub-totals presented with those required by IFRS.

Entities are prohibited from showing any items of income and expense as extraordinary, either on the face of the statement of profit or loss and other comprehensive income or in the notes.

Examples of adaptation and additional line items IAS 1 refers to ‘distribution costs’ and ‘administrative expenses’. Other similar adaptations might include: Selling and distribution costs. Marketing, selling, and distribution costs. Distribution costs, including marketing. Administrative and selling expenses. Selling and general administration expenses. Examples of additional items in a functional analysis of expenses include: Product support costs. Research and development. Public relations costs. Exploration costs. Examples of additional items in a natural analysis of expenses include: Insurance costs. Occupancy costs. Professional fees. Abortive acquisition costs.

Material and exceptional items

An entity discloses each material item of income and expense.

Material items: compensation for loss of revenue Entity A operates under the terms of a government license in a regulated industry in country X. The entity received C3 million from the government, as compensation for the loss of income that the entity suffered because the license agreement was modified. The original license granted entity A exclusive rights to operate in country X, and the modification allowed competition from locally owned businesses. Receipt of the payment was unconditional and, accordingly, was recognized by entity A, on receipt, in the income statement. The compensation represents approximately 30% of the current year’s profit before tax. How should the compensation be presented in Entity A’s income statement? Entity A should recognize the compensation from the government as ‘other income’. It is not revenue, because it does not arise from the sale of goods and services in the ordinary course of business. The nature and size of the income are such that management should disclose it in a separate line on the face of the income statement. This line should normally be presented within operating profit where operating profit is being disclosed; otherwise, it should be disclosed in the operating line items appearing before ‘finance costs.

Financial guarantee given on disposal of business A manufacturing entity sold a business on 31 December 20X1, the last day of the accounting period. The business that was sold leased certain properties. The lessor has recourse to the entity under the terms of the lease for the unpaid rentals for a specified period of the lease. The entity recognized the recourse arrangement as a financial guarantee and recorded the liability at its fair value of C100,000 at the date of disposal, reducing the gain on disposal shown in the income statement from C900,000 to C800,000. The financial liability was remeasured on 31 December 20X2 and was stated at C80,000 in the balance sheet at that date. The purchaser of the business defaulted on the last lease payment due in the specified period, which has now expired; so, in 20X3, the entity was called on to pay C85,000. How should the entity present the changes in the carrying value of the financial guarantee and the loss arising from the default in the income statement? The financial guarantee was an intrinsic part of the disposal transaction, so subsequent adjustments to its carrying value should be dealt with in the same line of the statement in which the gain on disposal was shown in the earlier year, whether as part of continuing or discontinued operations. In 20X2, the entity should record C20,000 (C100,000 − C80,000) as a gain on disposal. In 20X3, the entity should record C5,000 (C85,000 − C80,000) as a loss on disposal. The overall gain/loss on disposal of the business over the three years is, therefore, C815,000, being the C900,000 ‘pre-guarantee gain’ less C85,000 paid out under the guarantee. This properly reflects the overall profitability of the disposal transaction.

The following items should be separately disclosed if material:

• Write-downs of inventories to net realizable value, or impairments of property, plant, and equipment, as well as the reversal of such write-downs or impairments.

• Restructuring provisions or their reversal.
• Disposals of items of property, plant, and equipment.
• Disposals of investments.
• Discontinued operations.
• Litigation settlements.

• Other reversals of provisions.

Gain on sale of subsidiaryEntity A had a foreign subsidiary, B, which it sold during the period. The gain on disposal of subsidiary B represents 80% of the group’s profit for the year. How should the gain on disposal be treated in Entity A’s consolidated financial statements? In its consolidated financial statements, entity A should present the gain on disposal of this subsidiary separately on the face of the entity’s income statement. A separate presentation is required because of the nature and size of the amounts involved. The positioning within the statement will depend on whether the subsidiary is a discontinued operation under IFRS 5. Continuing operation The gain or loss on disposal of a subsidiary that does not qualify as a discontinued operation will normally be shown within operating profit if this is disclosed, or in the line items before finance costs if it is not (as shown below). But, where it is clear that the disposal is a one-off transaction (that is, it is not expected that the entity will have a similar future transaction and there is no history of similar transactions), the gain or loss on disposal can be shown after operating profit but before finance costs. 20X1 20X0 Revenue xxx xxx Cost of Sales (xxx) (xxx) Gross Profit xxx xxx Other Income xxx xxx Distribution Costs (xxx) (xxx) Administrative Expenses (xxx) (xxx) Other Expenses (xxx) (xxx) Gain on disposal of subsidiary B xxx xxx Finance Costs (xxx) (xxx) Share of profit of associates xxx xxx Profit before tax xxx xxx Income tax expense (xxx) (xxx)                               Profit for the period xxx xxx Discontinued operation The gain or loss on disposal of a subsidiary that qualifies as a discontinued operation should be included in the single amount comprising the total of (i)               the post-tax profit or loss of discontinued operations and (ii)              the post-tax gain or loss recognized on the measurement to fair value fewer costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation. Further analysis of this single amount is required but can be given either on the face of the statement or within the notes. An entity that elects to give the disclosure on the face of the income statement should present it in a separate section of the statement and not mingle it with the results of continuing operations. In particular, it is not permissible to show, for example, total revenue as the sum of revenue from continuing and discontinued operations. ‘Revenue’ is revenue from continuing operations only. IAS 1 prescribes a position in the income statement for discontinued operations; entities are not permitted to promote elements of that disclosure to a higher position in the statement. Example – Discontinued operations analyzed on the face of the income statement 20X1 20X1 20X0 20X0                Continuing Operations: Revenue xxx xxx Cost of sales xxx xxx Gross profit xxx xxx Other income xxx xxx Distribution costs xxx xxx Administrative expenses xxx xxx Other expenses xxx xxx Finance costs xxx xxx Share of profit of associates xxx xxx Profit before tax xxx xxx Income tax expense xxx xxx Profit from continuing operations xxx xxx                Discontinued operations: Revenue xxx xxx Expenses xxx xxx Profit before tax xxx xxx Income tax expense xxx xxx Gain on disposal of discontinued operation xxx xxx Income tax expense xxx xxx xxx xxx Profit for the period xxx xxx

Notes to the profit or loss section or statement of comprehensive income

Employee benefits expense

An entity that presents expenses according to their nature presents employee benefits expenses on the face of the income statement. An entity that presents a functional analysis of expenses discloses employee benefits expenses in the notes to the financial statements. ’Employee benefits’ has the same meaning as in IAS 19. Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.

Practical problems relating to employee benefits expense Problems might arise where employees work for one entity, but their contracts of service are with another entity (For example, the holding entity). Further complications might arise when that other entity pays the wages and salaries of these employees. An entity disclosing only the cost of those individuals that it employs might be misleading. The entity should disclose additional information, in such cases, so that its financial statements give a fair presentation. The examples below deal with the disclosure of both employee benefits expense and employee numbers. There is no requirement under IFRS to disclose employee numbers, but entities can do so voluntarily or to meet local legal requirements. Example 1 – Contracts of service with another group entity Employees work full-time for and are paid by, a subsidiary entity, but their contracts of service are with the parent entity. It would be misleading if there were no disclosure of employee benefits expenses in the subsidiary’s financial statements. The wages and salaries that the subsidiary pays to those employees should be disclosed as ‘employee benefits expense’ in its financial statements. The notes to the subsidiary’s financial statements should explain that those staff have contracts of service with another group entity. They should also explain why their remuneration and number (if provided) are disclosed in the financial statements. The parent’s consolidated financial statements will show the employee benefits expense of the group as a whole. The parent’s separate financial statements should explain that some employees, having service contracts with the entity, work for and are paid for wholly by a subsidiary entity. The employee benefits expense should be disclosed and the entity might disclose the number of employees. The contracts of service might be with a fellow subsidiary. The fellow subsidiary should disclose in the notes to its financial statements that some employees, having service contracts with the entity, work for and are paid for wholly by a fellow subsidiary. The employee benefits expense should be disclosed and the entity might disclose the number of employees. The parent (or fellow subsidiary) might prepare a ‘nature of expense’ statement of comprehensive income. The employee benefits expense shown on the face of the statement will be the cost to that parent (or fellow subsidiary) of its employees. This will be less than the amounts paid to the persons with whom it has contracts of service, in the circumstances described above. This should be explained in the notes to the financial statements. Example 2 – Subsidiary entity incurs management charge Employees work full-time for the subsidiary entity, but they are not paid by the subsidiary entity and they do not have service contracts with it. The subsidiary entity bears a management charge for their services from the entity that pays the employees, and it can ascertain the proportion of the management charge that relates to employee benefits expense. It could be misleading if the subsidiary’s financial statements disclosed no information about employee costs. It might be appropriate to disclose the proportion of the management charge that relates to employee benefits expense in the subsidiary’s financial statements as employee benefits expense. The notes to the financial statements should explain that the employees do not have contracts of service with the entity. They should also explain why their costs and numbers (if provided) are disclosed in the financial statements. The parent’s consolidated financial statements will show the employee benefits expense of the group as a whole. The contracts of service might be with, and the employees paid by, the parent entity. The parent’s separate financial statements should disclose the employee benefits expense and might disclose employee numbers in respect of all of its employees. The parent’s separate financial statements should disclose details regarding the employee benefits expense that is recharged to the subsidiary and might disclose the number of employees that work for that subsidiary. The employees’ contracts of service might be with, and the employees paid by a fellow subsidiary. The fellow subsidiary’s financial statements should disclose the employee benefits expense and might disclose employee numbers in respect of all of its employees. The subsidiary’s financial statements should also disclose details regarding the employee costs that are recharged to the fellow subsidiary and might disclose the number of employees that work for that fellow subsidiary. Example 3 – Subsidiary entity incurs non-specific management charge The facts are the same as in Example 2, except that the subsidiary entity is unable to break down the management charge and ascertain the part of it that relates to employee benefits expense. The parent’s consolidated financial statements will show the employee benefits expense of the group as a whole. The parent’s separate financial statements should disclose the employees’ remuneration in its employee benefits expense if it pays the employees. The notes might disclose the number of employees involved. They should explain that the employees work for a subsidiary and that the entity recharges the cost of their employment to that subsidiary as part of a management charge. The notes to the subsidiary entity’s financial statements should explain that the employees’ contracts of service are with the parent and that their remuneration is included in the parent’s financial statements. The notes should also explain that the management charge made by the parent entity includes the cost of these employees, but that it is not possible to ascertain separately the element of the management charge that relates to employee benefits expense. The employees’ contracts of service might be with a fellow subsidiary, with the fellow subsidiary also paying the employees. The fellow subsidiary’s financial statements should disclose the employees’ remuneration in its employee benefits expense. The notes might disclose the number of employees involved and should explain that the employees work for a fellow subsidiary entity and that the entity recharges the cost of their employment to that fellow subsidiary as part of a management charge. Example 4 – Subsidiary entity does not incur management charge The facts are the same as in Example 2, except that no management charge is made for the employees’ services. This will often apply where staff work either full-time or part-time for small companies. A related party transaction is a transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged. The subsidiary is receiving the benefit of the employees’ services, paid for by another group entity (that is, a related party) even though no management charge is made. The notes to the subsidiary entity’s financial statements should explain that the entity is not charged for the services provided by the employees who work for it. The notes should also indicate, if appropriate, that the expense of these employees is included in the parent entity’s consolidated financial statements and, where the information is available, it might be appropriate to disclose the amount of that expense. The parent entity might employ and pay the employees. Its separate financial statements should include the cost of these employees in its employee benefits expense. The notes to the financial statements should, if appropriate, explain that these employees work for a subsidiary entity, but that no management charge is made for their services to that entity. A fellow subsidiary might employ and pay the employees. Its financial statements should include the cost of these employees in its employee benefits expense. The notes to the financial statements should, if appropriate, explain that these employees work for a subsidiary entity, but that no management charge is made for their services to that entity. The number of employees involved could be disclosed in the parent’s separate financial statements, or fellow subsidiary’s financial statements, as appropriate.

The director does not have an employment contract Directors and other key management personnel (as defined in IAS 24) might not have employment contracts with the entity. This might be the case where, for example, the entity engages a non-executive director and pays his ‘service entity’ for his services, the director providing similar services to several companies. Employee benefits are defined in IAS 19; for IAS 19, employees include directors and other management personnel. This could be interpreted as requiring all costs of engaging directors and key management, whether under employment contracts or otherwise, to be included in employee benefits expense. The most important consideration is the transparency of the disclosure and its consistency from year to year. IFRS requires additional disclosure in respect of directors and key management. Payments made to directors and key management should be disclosed in the notes, regardless of the disclosure within employee benefits expense.

Entities are required to disclose the individual elements of employee benefit expense and other matters related to employee benefits. Disclosure of the number of employees is not an IFRS requirement, but it is a legal disclosure requirement in many countries.

Depreciation and amortization

An entity that presents a functional analysis of expenses should also separately disclose depreciation and amortization expense.

Other comprehensive income

All items of income and expense recognized in a period should be included in profit or loss for the period unless a standard or interpretation requires or permits otherwise.

The statement of profit or loss and other comprehensive income presents all items of income and expense recognized in a period. Items of income and expense that are not taken to profit or loss, but are shown in the statement of profit or loss and comprehensive income as ‘other comprehensive income’, include the following:

• Revaluation gains and losses on property, plant, and equipment.
• Revaluation gains and losses on intangible assets.
• Gains and losses from investments in equity instruments are measured at fair value through other comprehensive income.
• Gains and losses on financial assets are measured at fair value through other comprehensive income.
• For particular liabilities measured as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liability’s credit risk.
• The portion of gains and losses on hedging instruments that are effective cash flow hedges.
• Changes in the value of the time value of options when separating the intrinsic value and time value of an option contract and designating as the hedging instrument only the changes in the intrinsic value.

Changes in the value of the forward element of forward contracts when separating the forward element and spot element of a forward contract and designating as the hedging instrument only the changes in the spot element, and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument.

Foreign currency exchange gains and losses arising on translation of the net investment in a foreign operation in the consolidated financial statements, where the foreign operation is a subsidiary.

Foreign exchange differences arise in the translation of an entity’s results and financial position from functional currency to presentation currency, if different. Remeasurements of defined benefit plans. The current and deferred tax charges or credits in respect of items taken to other comprehensive income.

An entity presents separately any cumulative income or expense recognized in other comprehensive income relating to a noncurrent asset or disposal group classified as held for sale.

The other comprehensive income section presents line items for amounts of other comprehensive income in the period, classified by nature. The share of the other comprehensive income of associates and joint ventures accounted for using the equity method (net of tax and non-controlling interests) is such a line item. The line items are grouped into those that, by other IFRS standards:

1. will not be reclassified subsequently to profit or loss; and
2. will be reclassified subsequently to profit or loss when specific conditions are met.

Tax on other comprehensive income

Current and deferred tax should be dealt with in profit or loss, unless it relates to items dealt with in other comprehensive income or items taken directly to equity, in which case the tax related to those items should be recognized in other comprehensive income or equity, as appropriate.

An entity should disclose the amount of income tax relating to each component of other comprehensive income (that is, income and expense not dealt with in profit or loss), including reclassification adjustments, either in the statement of profit or loss and other comprehensive income or in the notes.

Components of other comprehensive income can be presented on the face of the statement of comprehensive income net of the related tax effects or before the related tax effects, with one amount shown for the aggregate amount of income tax relating to those components.

An entity that presents items of other comprehensive income before related tax effects, with the aggregate tax shown separately, should allocate the tax between the items that might be reclassified subsequently to the profit or loss section and those that will not be reclassified. The illustrative examples in IAS 1 provide examples of the presentation of the tax effects of components of other comprehensive income.

Reclassification (‘recycling’) adjustments

Some IFRS standards require that amounts previously recognized in other comprehensive income are reclassified to profit or loss. These reclassification adjustments are included with the related component of other comprehensive income in the period that the adjustment is reclassified to profit or loss.

An entity discloses, either in the statement of comprehensive income or in the notes, ‘reclassification adjustments’ (also commonly referred to as ‘recycling adjustments’) that relate to components of other comprehensive income. The illustrative examples in IAS 1 provide examples of the presentation of reclassifications of other comprehensive income.

Where an entity discloses the reclassification adjustments in the notes, the amounts presented in the statement of comprehensive income as components of other comprehensive income should be presented net of any related reclassification adjustments.

Reclassification adjustments arise on the disposal of a foreign operation (IAS 21) and when some hedged forecast cash flows affect profit or loss (IFRS 9).

Reclassification adjustments do not arise on changes in revaluation surplus (recognized by IAS 16 or IAS 38) or remeasurements on defined benefit pension schemes (recognized by IAS 19). These components are recognized in other comprehensive income but they are not reclassified to profit or loss in subsequent periods.

An entity could transfer changes in revaluation surplus to retained earnings as the asset is used or when it is de-recognized; such transfers would be shown in the statement of changes in equity. Similarly, an entity might transfer, within equity, amounts recognized in other comprehensive income as remeasurements of defined benefit plans.

Statement of changes in equity

An entity presents a statement of changes in equity which includes all changes in equity. It includes both those relating to performance and those relating to owner changes in equity (from transactions and events that increase or decrease equity but are not part of performance). The statement of changes in equity includes the following information:

• Total comprehensive income for the period, showing separately the total amounts attributable to the parent’s owners and non-controlling interests.
• For each component of equity, the effects of retrospective application or retrospective restatement are recognized by IAS 8.
• For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately (as a minimum) disclosing changes resulting from:

1. profit or loss;
2. other comprehensive income; and

• transactions with owners in their capacity as owners, showing separate contributions by and distributions to owners, and changes in ownership interests in subsidiaries that do not result in a loss of control.

An entity can present the analysis of other comprehensive income by item either in the statement of changes in equity or within the notes, for each component of equity.

The increase or decrease in the entity’s net assets during the accounting period is represented by the change in the entity’s equity over that period. The overall change in equity is the sum of all income and expenses (whether those items are recognized in profit or loss or other comprehensive income) and transactions with owners, such as share issues and dividend payments.

The statement of changes in equity is required to present a reconciliation for each component of equity. It is not, therefore, acceptable to present a simple statement showing only the movements in total equity, with details of movements on individual components of equity provided in the notes.

There is no explicit requirement in the Standard to provide totals, across all components of equity, for each type of movement.

However, this is likely to be helpful in practice. For example, it will eliminate the effects of amounts transferred between different components of equity which do not affect total equity.

The statement of changes in equity set out in the illustrative financial statements accompanying IAS 1 adopts a columnar layout with a column for each component of equity and a total column. This format is not prescribed by the Standard but is commonly adopted in practice.

For IAS 1, components of equity include, for example, each class of contributed equity, the accumulated balance of each class of OCI, and retained earnings.

Examples of transactions with owners An entity presents the following transactions with owners (in their capacity as owners) in the statement of changes in equity: Share issues and redemptions. Purchase and sale of treasury shares. Equity component of convertible bonds issued. Dividends on instruments classified as equity. Credit entries reflecting the issue of equity instruments in connection with an equity-settled share-based payment arrangement. Transactions with non-controlling interests that do not result in a change of control.

Share of joint ventures and associates’ changes in equity IAS 28 is silent on how to present changes in the net assets of the associate that are neither profit or loss nor other comprehensive income transactions. The entity should develop, and apply consistently, an accounting policy that best reflects the substance of these transactions.

Adjustments for changes in accounting policies and correction of errors

IAS 1 requires disclosure in the statement of changes in equity of the total adjustment to each component of equity resulting, separately, from changes in accounting policies and from correction of errors. These adjustments are disclosed for each prior period and the beginning of the period.

IAS 8 requires that changes in accounting policies be applied retrospectively, to the extent practicable, except when the transition provisions in another IFRS require otherwise. IAS 8 also requires that restatements to correct errors be made retrospectively, to the extent practicable.

The effects of such retrospective adjustments and retrospective restatements are not changes in equity in the period, but they are included in the statement of changes in equity because they provide a reconciliation between the previous period’s closing balance and the opening balance in the statement of changes in equity.

An entity deals with changes in accounting policy and all corrections of errors, where practicable, retrospectively (where the effect is material).

Retrospective adjustments that affect the opening balance of net assets in the earliest comparative period presented are made against the balance of retained earnings unless an alternative treatment is required or permitted by another standard or interpretation.

The statement of changes in equity discloses separately the adjustment to each component of equity arising from changes in accounting policy and from the correction of errors. These adjustments are disclosed for each prior period and the beginning of the period.

Dividends

An entity discloses, either on the face of the statement of changes in equity or the notes, the amounts of dividends recognized as distributions to equity holders, and the related amount of dividends per share. An entity should not present dividends in the statement of profit or loss and other comprehensive income. This is because that statement presents items of performance and not owner changes in equity.

An entity discloses, in the notes, dividends proposed or declared after the end of the reporting period, and the related amount per share. Cumulative preference dividends not recognized should also be disclosed.

General disclosure requirements for dividends recognized as distributions to owners during the period

IAS 1 requires the amount of dividends recognised as distributions to owners during the period, and the related amount of dividends per share, to be presented either in the statement of changes in equity or the notes.

It is necessary to show dividends, at least in the aggregate, in the statement of changes in equity because they are one of the owner’s changes in equity.

However, details of individual dividends and the amounts per share will typically be shown in the notes, combined with the disclosures about dividends proposed or declared after the reporting period required by IAS 1.

The presentation of dividends in the statement of comprehensive income is not permitted. IAS 1 explains that this is because dividends are distributions to owners in their capacity as owners and the statement of changes in equity presents all owner changes in equity.