Prepared by: ABEJAY H.

SELDA, CPA__
E-mail Address: [email protected]________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

ACCTG 3100 LEC AND LAB / Intermediate Accounting 3

Module 4
Topic 4 Statement of Comprehensive Income
Overview
This module focuses on the requirements for the presentation of the
statement of comprehensive income and the income statement in accordance with
the Philippine Financial Reporting Standards. This module introduces the learner to
the subject, develops the learner’s understanding of the requirements through the
use of example and indicates significant standards that are required in presenting a
statement of comprehensive income. Furthermore, the module includes assessment
designed to test the learner’s knowledge of the requirements and to develop the
learner’s ability to present a statement of comprehensive income and the
income statement.

I. Objectives

At the end of this module, the learners are expected;

 To understand the nature and usefulness of the income statement

 To understand the concept of comprehensive income, profit or loss

and other comprehensive income

 To identify the components of other comprehensive

 To recognize the reclassification adjustment related to other

comprehensive income.

 To be able to present the income statement following the functional

and natural presentation
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II. Learning Activities

Income Statement

An income statement is a formal statement showing the financial performance or

profit or loss of an entity for a period of time.

The financial performance of an entity is primarily measured in terms of the level

of income earned by the entity through the effective and efficient utilization of
resources.

The financial performance is also known as the results of operations.

The income statement for a period presents the income, expenses, gains, losses
and net income or loss recognized during the period.

The transaction approach is the conventional of traditional preparation of income

statement in conformity with PFRS.

This approach of computing net income or loss requires the determination of how
much income was earned during the year and how much expenses were incurred
in earning revenue.

Information about the financial performance of an entity, in particular its

profitability, is useful in predicting the capacity of the entity to generate cash flows
from existing resources.

Comprehensive Income

Comprehensive income is the change in equity during a period resulting from

transactions and other events, other than changes resulting from transactions
with owners in their capacity as owners.

Accordingly, comprehensive income includes profit or loss and other

comprehensive income.

Profit or Loss

Profit or Loss is the total of income less expenses, excluding the components of
other comprehensive income.

This is amount is the “bottom line” in the traditional income statement.

An entity may use net income or net loss to describe profit or loss.

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Other Comprehensive income

Other comprehensive income comprises items of income and expense including

reclassification adjustments that are not recognized in profit or loss as required
or permitted by Philippine Financial Reporting Standards.

The components of other comprehensive income include the following:

1. Unrealized gain or loss on equity investment measured at fair value through

other comprehensive income.

2. Unrealized gain or loss on debt investment measured at fair value through

other comprehensive income.

3. Gain or loss from translating the financial statements of a foreign operation.

4. Revaluation surplus during the year

5. Unrealized gain or loss from derivative contracts designated as cash flow

hedge.

6. Remeasurements of defined benefit plan

7. Change in fair vale attributable to credit risk of a financial liability designated

at fair value profit or loss.

Presentation of other comprehensive income

PAS 1, paragraph 82A, provides that the other comprehensive income section
shall present line items for amounts of other comprehensive income in the
period, classified by nature.

The line items for amounts of OCI shall be grouped as:

a. OCI that will be reclassified subsequently to profit or loss when

specific conditions are met
b. OCI that will not be reclassified subsequently to profit or loss but
to retained earnings.

OCI that will be reclassified subsequently to profit or loss

1.Gain or loss from translating financial statements of a foreign operation.

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2. Unrealized gain or loss on derivative contracts designated as cash flow hedge.

3. Unrealized gain or loss on debt investment measured at fair value through

OCI

Reclassification adjustments are amounts reclassified to profit or loss in the

current period that were recognized in other comprehensive income in the
current or previous periods.

OCI that will be reclassified to retained earnings

1. Unrealized gain or loss on equity investment measured at fair value through

OCI

Under PFRS 9, the unrealized gain or loss is reclassified to retained earnings

upon disposal of investment

2. Change in revaluation surplus

The realization of the revaluation surplus is through retained earnings.

3. Remeasurements of a defined benefit plan

The remeasurements are not recycled subsequently to profit or loss but may be
transferred within equity or retained earnings.

4. Gain or loss attributable to credit risk of a financial liability designated at fair

value through profit or loss

The gain or loss may be recycled subsequently within equity or retained

earnings.

Presentation of other comprehensive income

PAS 1, paragraph 81, provides that an entity has two options of presenting
comprehensive income, namely:

1. Two- statement approach

a. An income statement showing the components of profit or loss

b. A statement of comprehensive income beginning with profit or loss as shown in

the income statement plus or minus the components of other comprehensive
income.

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2. Single statement approach

This is the combined statement showing the components of profit or loss and
components of profit or loss and components of other comprehensive income in
single statement of comprehensive income.

Sources of income

a. Sales of merchandise

The income from sales shall include all sales to customers during the period
minus sales returns, allowances, and discounts.

b. Rendering of Services

Income from rendering of services, among others, includes professional fees,

media advertising commissions, insurance agency commissions, admission fees
for artistic performance and tuition fees.

c. Use of entity resources

This income includes interest, rent, royalty and dividend income.

d. Disposal of resources other than products

Examples include gain on sale of investments, gain on sale of property, plant and
equipment and gain on sale of intangible assets.

Components of expense

a. Cost of goods sold or cost of sales

b. Distribution cost or selling expenses
c. Administrative expenses
d. Other expenses
e. Income Tax expense

Classifications of expense

Distribution costs or selling expenses constitute costs which are directly related
to selling, advertising and delivery of goods to customers.

Distributions cost includes:

a. Salesmen’s salaries
b. Sales commissions

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c. Travelling and marketing expenses

d. Advertising and publicity expenses
e. Freight out
f. Depreciation of delivery equipment and store equipment

Administrative expenses constitute cost of administering the business. These

ordinarily include all operating expenses not related to selling and cost of goods
sold.

Administrative expenses include:

a. Doubtful accounts
b. Office salaries and expenses of general executives
c. Office supplies expense
d. Contributions to charity
e. Professional fees
f. Depreciation of office building and office equipment
g. Amortization of intangible assets

Other expenses are those expenses which are not directly related to the
distribution and administrative function.

The other expenses are the expenses and losses from peripheral or incidental
transactions of the entity.

Other expenses include:

a. Loss on sale of trading investment

b. Loss on sale of property, plant and equipment

c. Loss on sale of noncurrent investment
d. Loss on sale of intangible asset
e. Casualty loss from earthquake, typhoon, hurricane, tsunami, flood, fire, storm
surge, and other natural disaster
f. Expropriation loss

No more extraordinary items

PAS 1, paragraph 87, specifically mandates, that an entity shall not present any
items of income and expense as extraordinary items, in the income statement or
statement of comprehensive income or in notes.

Unusual and infrequent items of income and expense are considered component
of income from continuing operations.

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Thus, expropriation loss and casualty loss from earthquake, typhoon, flood, fire,
storm surge, and other natural disaster are considered component of income from
continuing operations.

Separate disclosure

PAS 1, paragraph 97, provides that when items of income and expense are
material, their nature and amount shall be disclosed separately.

Paragraph 98 provides the circumstances that would give rise to the separate
disclosure of items of income and expense.

Items of income and expense requiring disclosure

1. Writedown of inventory to net realizable value and reversal of such writedown

2. Writedown of property, plant and equipment to recoverable amount and

reversal of such writedown

3. Restructuring of the activities of an entity and reversal of any provision for the
cost of restructuring

4. Disposal of an item of property, plant and equipment

5. Disposal of equipment

6. Disposal of investment

7. Discontinued operation

8. Litigation settlement

9. Other reversal of provision

Line items

PAS 1, paragraph 82, provides that the line items in the statement of
comprehensive are:

a. Revenue

b. Gain or loss from derecognition of financial asset measured at amortized cost

c. Finance cost

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d. Share of income or loss of associate and joint venture accounted for using the
equity method.

e. Income tax expense

f. A single amount comprising discontinued operations

g. Profit or loss for the period

h. Other comprehensive income

i. Comprehensive income for the period

The following items shall be disclosed on the face of the income statement and
statement of comprehensive income.

a. Profit or loss attributable noncontrolling interest and owners of the parent

b. Total comprehensive income attributable to noncontrolling interest and owners

of the parent.

The entity shall present additional line items, headings, and subtotals in the
statement of comprehensive income or separate income statement when such
presentation is relevant to an understanding of the financial performance of
the entity.

Forms of income statement

PAS 1, paragraph 9, provides that an entity shall present on the face of income
statement an analysis of expense using a classification based on either the function
expenses or their nature within the entity, whichever provides information that is
reliable and more relevant.

Accordingly, the income statement may be presented into two ways, namely
functional and natural.

Functional Presentation

The functional presentation is the traditional and common form of income

statement.

The functional presentation is also known as the cost of goods sold method

This form classifies expenses according to their function as part of cost of goods
sold, distribution costs, administrative activities and other activities.

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Entities classifying expenses by function shall disclose additional information on

the nature of expenses, including depreciation, amortization and employee
benefit costs.

Natural Presentation

This presentation is referred to as the nature of expense method.

Under this form, expenses are aggregated according to their nature and not
allocated among the various functions within the entity.

In other words, the natural expenses are no longer classified as cost of goods sold,
distribution costs, administrative and other activities.

The expenses which are the same nature and are grouped or aggregated and
presented as one item.

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Functional Income Statement

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Natural Income Statement

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Which form of income statement?

There is no prescribed format.

PAS 1, paragraph 105, simply states that because each method of presentation
has merit for different types of entities, management is required to select the
presentation that is reliable and more relevant.

The cost of goods sold method usually would provide more relevant information
to users.

Besides, the income statement is simple and easy to understand.

Statement of comprehensive income

As stated earlier, in addition to the income statement, a statement of

comprehensive income is also prepared in order to show the total comprehensive
income.

The statement of comprehensive income starts with the net income or loss shown
in the income statement plus or minus the components of other comprehensive
income.

The purpose of this statement is to provide a more comprehensive information of

financial performance measured more broadly than the income as traditionally
computed.

Illustration

Using the net income in the preceding illustration, the separate statement of
comprehensive income may appear as follows:

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

However, the comprehensive income of 1,600,000 is not carried to retained

earnings.

Only the net income of 1,550,000 is included in the determination of retained

earnings unappropriated.

The net other comprehensive income of 50,000 is carried to “reserves” or shown

separately in the statement of changes in equity.

Single statement of comprehensive income

Another option in presenting the components of profit or loss and components of

other comprehensive income is to prepare a single statement of comprehensive
income.

This single statement is the combined income statement and statement of

comprehensive income.

The single statement of comprehensive income following the functional

presentation may appear as follows:

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III. Assessment:

Theory: Write your answer in yellow paper.

1. Define an income statement.

2. Define comprehensive income.
3. What are the components of comprehensive income?
4. Explain the term profit or loss.
5. Explain other comprehensive income.
6. What are the components of other comprehensive income?
7. Explain the presentation of other comprehensive income
8. Explain the two options of presenting comprehensive income
9. Explain the transaction approach of income determination
10. What are the sources of income?
11. What are the components of expense?
12. What are the classifications of expense?
13. Identify items of income and expenses that require separate disclosure.
14. Explain the two forms of income statement.
15. Which form of income statement is required?

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Problems: Write your answer and solutions to yellow paper.

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Deadline: October 26, 2020, Monday at 12nn. Send your activity to the representative
of the class.
References: Financial Accounting 3 by: Valix 2019 edition

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