11/11/2016 Conceptsofprofitorlossandothercomprehensiveincome|P2CorporateReporting|ACCAQualification|Students|ACCAGlobal

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CONCEPTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME
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Thisarticleexplainsthecurrentrulesandtheconceptualdebateastowhereinthestatementof
comprehensiveincome,profitsandlossesshouldberecognisediewhenshouldtheyberecognisedin
profitorlossandwhenintheothercomprehensiveincome.Further,itexploresthedebateastowhether
itisappropriatetorecogniseprofitsorlossestwice!

Theperformanceofacompanyisreportedinthestatementofprofitorlossandothercomprehensive
income.IAS1,PresentationofFinancialStatements,definesprofitorlossasthetotalofincomeless
expenses,excludingthecomponentsofothercomprehensiveincome.Othercomprehensiveincome
(OCI)isdefinedascomprisingitemsofincomeandexpense(includingreclassificationadjustments)that
arenotrecognisedinprofitorlossasrequiredorpermittedbyotherIFRSs.Totalcomprehensiveincome
isdefinedasthechangeinequityduringaperiodresultingfromtransactionsandotherevents,other
thanthosechangesresultingfromtransactionswithownersintheircapacityasowners.

Itisamyth,andsimplyincorrect,tostatethatonlyrealisedgainsareincludedinprofitorloss(P/L)and
thatonlyunrealisedgainsandlossesareincludedintheOCI.Forexample,gainsontherevaluationof
landandbuildingsaccountedforinaccordancewithIAS16,PropertyPlantandEquipment(IAS16
PPE),arerecognisedinOCIandaccumulateinequityinOtherComponentsofEquity(OCE).Onthe
otherhand,gainsontherevaluationoflandandbuildingsaccountedforinaccordancewithIAS40,
InvestmentProperties,arerecognisedinP/LandarepartoftheRetainedEarnings(RE).Bothsuch
gainsareunrealised.Thesamepointcouldbemadewithregardtothegainsandlossesonthefinancial
assetofequityinvestments.IfsuchfinancialassetsaredesignatedinaccordancewithIFRS9,Financial
Instruments(IFRS9),atinceptionasFairValueThroughOtherComprehensiveIncome(FVTOCI)then
thegainsandlossesarerecognisedinOCIandaccumulatedinequityinOCE.Whereasifmanagement
decidesnottomakethiselection,thentheinvestmentwillbydefaultbedesignatedandaccountedforas
FairValueThroughProfitorLoss(FVTP&L)andthegainsandlossesarerecognisedinP/Landbecome
partofRE.

Thereisatpresentnooverarchingaccountingtheorythatjustifiesorexplainsinwhichpartofthe
statementgainsandlossesshouldbereported.TheIASBsConceptualFrameworkforFinancial
Reportingissilentonthematter.Soratherthanhaveaclearprinciplesbasedapproachwhatwecurrently
haveisarulesbasedapproachtothisissue.Itisdowntoindividualaccountingstandardstodirectwhen
gainsandlossesaretobereportedinOCI.Thisisclearlyanunsatisfactoryapproach.Itisconfusingfor
users.

InJuly2013theInternationalAccountingStandardsBoard(IASB)publishedadiscussionpaperonits
ConceptualFrameworkforFinancialReporting.Thisaddressedtheissueofwheretorecognisegainsand
losses.ItsuggeststhattheP/Lshouldprovidetheprimarysourceofinformationaboutthereturnanentity
hasmadeonitseconomicresourcesinaperiod.AccordinglytheP/Lshouldrecognisetheresultsof
transactions,consumptionandimpairmentsofassetsandfulfilmentofliabilitiesintheperiodinwhichthey
occur.InadditiontheP/Lwouldalsorecognisechangesinthecostofassetsandliabilitiesaswellasany
gainsorlossesresultingfromtheirinitialrecognition.TheroleoftheOCIwouldthenbetosupportthe
P/L.GainsandlosseswouldonlyberecognisedinOCIifitmadetheP&Lmorerelevant.Inmyview
whilstthismaybeanimprovementonthecurrentabsenceofanyguidanceitdoesnotprovidetheclarity
andcertaintyuserscrave.

RECYCLING(THERECLASSIFICATIONFROMEQUITYTOP&L)
Nowletusconsidertheissueofrecycling.ThisiswheregainsorlossesarereclassifiedfromequitytoP/L
asareclassificationadjustment.InotherwordsgainsorlossesarefirstrecognisedintheOCIandthenin

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11/11/2016 Conceptsofprofitorlossandothercomprehensiveincome|P2CorporateReporting|ACCAQualification|Students|ACCAGlobal
alateraccountingperiodalsorecognisedintheP/L.Inthiswaythegainorlossisreportedinthetotal
comprehensiveincomeoftwoaccountingperiodsandincolloquialtermsissaidtoberecycledasitis
recognisedtwice.Atpresentitisdowntoindividualaccountingstandardstodirectwhengainsandlosses
aretobereclassifiedfromequitytoP/Lasareclassificationadjustment.Soratherthanhaveaclear
principlesbasedapproachonrecyclingwhatwecurrentlyhaveisarulesbasedapproachtothisissue.
Thisisclearly,again,anunsatisfactoryapproachbutalsoasweshallseeoneaddressedbytheJuly2013
IASBdiscussionpaperonitsConceptualFrameworkforFinancialReporting

IAS21,TheEffectsofChangesinForeignExchangeRates(IAS21),isoneexampleofastandardthat
requiresgainsandlossestobereclassifiedfromequitytoP/Lasareclassificationadjustment.Whena
grouphasanoverseassubsidiaryagroupexchangedifferencewillariseontheretranslationofthe
subsidiarysgoodwillandnetassets.InaccordancewithIAS21suchexchangedifferencesare
recognisedinOCIandsoaccumulateinOCE.Onthedisposalofthesubsidiary,IAS21requiresthatthe
netcumulativebalanceofgroupexchangedifferencesbereclassifiedfromequitytoP&Lasa
reclassificationadjustmentiethebalanceofthegroupexchangedifferencesinOCEistransferredto
P/Ltoformpartoftheprofitondisposal.

IAS16PPEisoneexampleofastandardthatprohibitsgainsandlossestobereclassifiedfromequity
toP/Lasareclassificationadjustment.Ifweconsiderlandthatcost$10mwhichistreatedinaccordance
withIAS16PPE.Ifthelandissubsequentlyrevaluedto$12m,thenthegainof$2misrecognisedinOCI
andwillbetakentoOCE.Wheninalaterperiodtheassetissoldfor$13m,IAS16PPEspecifically
requiresthattheprofitondisposalrecognisedintheP/Lis$1miethedifferencebetweenthesale
proceedsof$13mandthecarryingvalueof$12m.Thepreviouslyrecognisedgainof$2misnot
recycled/reclassifiedbacktoP/Laspartofthegainondisposal.Howeverthe$2mbalanceintheOCE
reserveisnowredundantastheassethasbeensoldandtheprofitisrealised.Accordingly,therewillbea
transferintheStatementofChangesinEquity,fromtheOCEof$2mintoRE.

DOUBLEENTRY
Forthosewholovethedoubleentryletmeshowyouthepurchase,therevaluation,thedisposalandthe
transfertoREinthisway.

Onpurchase $m $m

DrLandPPE 10

CrCash 10

Onrevaluation

DrLandPPE 2

CrOCEandrecognisedinOCI 2

Ondisposal

DrCash 13

CrLandPPE 12

CrP/L 1

Ontransfer

DrOCE 2

CrRetainedearnings 2

IfIAS16PPEallowedthereclassificationfromequitytoP&Lasareclassificationadjustment,theprofit
ondisposalrecognisedinP&Lwouldbe$3mincludingthe$2mreclassifiedfromequitytoP&Landthe
lasttwodoubleentriesabovereplacedwiththefollowing.

OnreclassificationfromequitytoP/L $m $m

DrCash 13

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11/11/2016 Conceptsofprofitorlossandothercomprehensiveincome|P2CorporateReporting|ACCAQualification|Students|ACCAGlobal
CrLandPPE 12

CrP/L 3

DrOCE 2

IFRS9alsoprohibitstherecyclingofthegainsandlossesonFVTOCIinvestmentstoP/Londisposal.
ThenoreclassificationruleinbothIAS16PPEandIFRS9meansthatsuchgainsonthoseassetsare
onlyeverreportedonceinthestatementofprofitorlossandothercomprehensiveincomeieareonly
includedonceintotalcomprehensiveincome.Howevermanyusers,itappears,ratherignorethetotal
comprehensiveincomeandtheOCIandjustbasetheirevaluationofacompanysperformanceonthe
P/L.Theseusersthenfinditstrangethatgainsthathavebecomerealisedfromtransactionsinthe
accountingperiodarenotfullyreportedintheP/Loftheaccountingperiod.Assuchwecanseethe
argumentinfavourofreclassification.Withnoreclassificationtheearningspersharewillneverfully
includethegainsonthesaleofPPEandFVTOCIinvestments.

Thefollowingextractfromthestatementofcomprehensiveincomesummarisesthecurrentaccounting
treatmentforwhichgainsandlossesarerequiredtobeincludedinOCIand,asrequired,discloseswhich
gainsandlossescanandcannotbereclassifiedbacktoprofitandloss.

Extractfromthestatementofprofitorlossandothercomprehensiveincome

$m

Profitfortheyear XX

Othercomprehensiveincome

Gainsandlossesthatcannotbereclassifiedbackto
profitorloss

Changesinrevaluationsurpluswheretherevaluation
methodisusedinaccordancewithIAS16 XX/(XX)

Remeasurementsofanetdefinedbenefitliabilityor
assetrecognisedinaccordancewithIAS19 XX/(XX)

GainsandlossesonremeasuringFVTOCIfinancial
assetsinaccordancewithIFRS9 XX/(XX)

Gainsandlossesthatcanbereclassifiedbacktoprofitorloss

Groupexchangedifferencesfromtranslatingfunctionalcurrenciesintopresentation
currencyinaccordancewithIAS21 XX/(XX)

Theeffectiveportionofgainsandlossesonhedginginstrumentsinacashflowhedge
underIFRS9 XX/(XX)

Totalcomprehensiveincome XX/(XX)

THEFUTUREOFRECLASSIFICATION
IntheJuly2013discussionpaperontheConceptualFrameworkforFinancialReportingtheroleofthe
OCIandthereclassificationfromequitytoP/Lisdebated.

NOOCIANDNORECLASSIFICATION
Itcanbearguedthatreclassificationshouldsimplybeprohibited.Thiswouldfreethestatementofprofit
orlossandothercomprehensiveincomefromtheneedtoformallytoclassifygainsandlossesbetween
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11/11/2016 Conceptsofprofitorlossandothercomprehensiveincome|P2CorporateReporting|ACCAQualification|Students|ACCAGlobal
P/LandOCI.Thiswouldreducecomplexityandgainsandlossescouldonlyeverberecognisedonce.
Therewouldstillremaintheissueofhowtodefinetheearningsinearningspershare,aratiolovedby
investors,asclearlytotalcomprehensiveincomewouldcontaintoomanygainsandlossesthatwerenon
operational,unrealised,outsidethecontrolofmanagementandnotrelatingtotheaccountingperiod.

NARROWAPPROACHTOTHEOCI
AnothersuggestionisthattheOCIshouldberestricted,shouldadoptanarrowapproach.Onthisbasis
onlybridgingandmismatchgainsandlossesshouldbeincludedinOCIandbereclassifiedfromequityto
P/L.

ArevaluationsurplusonafinancialassetclassifiedasFVTOCIisagoodexampleofabridginggain.The
assetisaccountedforatfairvalueonthestatementoffinancialpositionbuteffectivelyatcostinP/L.As
such,byrecognisingtherevaluationsurplusinOCI,theOCIisactingasabridgebetweenthestatement
offinancialpositionandtheP/L.OndisposalreclassificationensuresthattheamountrecognisedinP/L
willbeconsistentwiththeamountsthatwouldberecognisedinP/Lifthefinancialassethadbeen
measuredatamortisedcost.

Theeffectivegainorlossonacashflowhedgeofafuturetransactionisanexampleofamismatchgain
orlossasitrelatestoatransactioninafutureaccountingperiodsoneedstobecarriedforwardsothatit
canbematchedintheP/Lofafutureaccountingperiod.Onlybyrecognisingtheeffectivegainorlossin
OCIandallowingittobereclassifiedfromequitytoP/Lcanuserstoseetheresultsofthehedging
relationship.

BROADAPPROACHTOTHEOCI
AthirdpropositionisfortheOCItoadoptabroadapproach,byalsoincludingtransitorygainsandlosses.
TheIASBwoulddecideineachIFRSwhetheratransitoryremeasurementshouldbesubsequently
recycled.

Examplesoftransitorygainsandlossesarethosethatariseontheremeasurementofdefinedbenefit
pensionfundsandrevaluationsurplusesonPPE.

CONCLUSION
WhilsttheIASBhasnotyetdeterminedwhichapproachwillbeadopted,itschairmanHansHoogervorst
hasgoneontherecordassayingItisabsolutelyvitalthattheP/Lcontainsallinformationthatcanbe
relevanttoinvestorsandthatnothingofimportancegetsleftoutandtheIASBshouldbevery
disciplinedinitsuseofOCIasresortingtoOCItooeasilywouldunderminethecredibilityofnetincomeso
theOCIshouldonlybeusedasaninstrumentoflastresort.Nowthatsoundslikeapersonal
endorsementofthenarrowapproachtome!

TomClendonisalectureratFTMSbasedinSingaporeandistheauthorofthesecondedition
ofAStudent'sGuidetoGroupAccounts(publishedbyKaplanPublishing)

Lastupdated:19Aug2016

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