Statement of Comprehensive Income

Technical Knowledge
- 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 income
- To recognize the reclassification adjustment related to other comprehensive income
- To be able to present the income statement following the functional and natural presentation

Income Statement
- 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 or 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 the revenue.
- Information about the financial performance of an entity, in particularly its profitability, is useful in predicting the
capacity of the entity to generate cash flows from existing resources.

Comprehensive Income
- 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
- Includes the following:
1. Profit or Loss
2. Other Comprehensive Income

Profit or Loss
- The total of income less expenses, excluding the components of other comprehensive income
- The bottom line in the traditional income statement
- An entity may use “net income” or “net loss” to describe profit or loss

Other Comprehensive Income (OCI)

- Comprises items of income and expenses including reclassification adjustments that are not recognized in profit or
loss as required or permitted by PRFS
- Components of OCI:
1. Unrealized gain or loss on equity investment measured at fair value through OCI
2. Unrealized gain or loss on debt investment measured at fair value through OCI
3. Gain or loss from translation of 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 value attributable to credit risk of a financial liability designated at fair value through profit or loss

PAS 1 provides that the OCI section shall present line items for amounts of OCI in the period classified by nature.

OCI are grouped as follows:

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

1. OCI that will be reclassified subsequently to profit or loss

a. Unrealized gain or loss on debt investment measured at fair value through OCI
b. Gain or loss from translation of the financial statements of a foreign operation
c. Unrealized gain or loss from derivative contracts designated as cash flow hedge

2. OCI that will be reclassified retained earnings

a. Unrealized gain or loss on equity investment measured at fair value through OCI
- The unrealized gain or loss is reclassified to retained earnings upon disposal of investment.
b. Change in revaluation surplus
- The realization of the revaluation surplus is through retained earnings.
c. 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.
d. 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 Comprehensive Income

- PAS 1 provides than an entity has two options of presenting comprehensive income:
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 plus or minus the components of OCI

2. Single Statement Approach

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

Sources of Income
1. Sales of merchandise to customers
(Sales - Sales Returns, Allowances and Discounts = Net Sales)
2. Rendering of services
(Professional Fees, Commissions, Admission Fees)
3. Use of entity resources
(Interest, Rent, Royalty and Dividend Income)
4. Disposal of resources other than products
(Gain on Sale of Investment, PPE and Intangible Assets)

Components of Expense
a. Cost of goods sold or cost of sales
b. Distribution costs or selling expenses
c. Administrative expenses
d. Other expenses
e. Income tax expense

Cost of Goods Sold for Manufacturing Entity Cost of Goods Sold for Merchandising Entity

Beginning Raw Materials xx Gross Purchases xx

Net Purchases xx Freight In xx
Raw Materials Available for Use xx Purchase Returns, Allowances and Discounts (xx)
Ending Raw Materials (xx) Net Purchases xx
Raw Materials Used xx Beginning Inventory xx
Direct Labor xx Goods Available for Sale xx
Factory Overhead xx Ending Inventory (xx)
Manufacturing Cost xx Cost of Goods Sold xx
Beginning Work in Process xx
Cost of Goods in Process xx
Ending Work in Process (xx)
Cost of Goods Manufactured xx
Beginning Finished Goods xx
Goods Available for Sale xx
Ending Finished Goods (xx)
Cost of Goods Sold xx

Distribution Costs or Selling Expenses

- Constitute costs which are directly related to selling, advertising and delivery of goods to customers
- Includes the following:
a. Salesmen’s salary
b. Sales commissions
c. Traveling 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
- All operating expenses not related to selling and cost of goods sold
- Include the following:
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 intangibles

Other Expenses
- Expenses which are not directly related to the distribution and administration function
- Expenses and losses from incidental transactions of the entity
- Include the following:
a. Loss on sale of trading investment
b. Loss on sale of PPE
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

- An entity shall not present any items of income and expenses as extraordinary items, either on the face of the income
statement or statement of comprehensive income or in the notes.
- Unusual and infrequent items of income and expenses are considered component of income from continuing
operations.
- Any casualty loss from earthquake, typhoon, hurricane, tsunami, flood, fire and other natural disaster are considered
component of income from continuing operations.
Separate Disclosure
- When items of income and expense are material, their nature and amount shall be disclosed separately

Items of Income and Expense Requiring Disclosure

a. Writedown of inventory to net realizable value and reversal of such writedown
b. Writedown of PPE to recoverable amount and reversal of such writedown
c. Restructuring of the activities of an entity and reversal of any provision for the cost of restructuring
d. Disposal of an item of PPE
e. Disposal of investment
f. Discontinued operation
g. Litigation settlement
h. Other reversal of provision

Line Items in the Statement of Comprehensive Income

a. Revenue
b. Gains and losses from the derecognition of financial asset measured at amortized cost
c. Finance cost
d. Share in income or loss of associate and joint venture accounted for using the equity method
e. Income tax expense
f. Gain or loss on reclassification of a financial asset from amortized cost to fair value through profit or loss
g. Gain or loss on reclassification of a financial asset from fair value through OCI to fair value through profit or loss
The cumulative amount in OCI is reclassified to profit or loss.
h. A single amount comprising of discontinued operations
i. Profit or loss for the period
j. Other comprehensive income
k. Comprehensive income for the period

The following items shall be disclosed on the face of the income statement and statement of comprehensive income:
1. Profit or loss for the period attributable to noncontrolling interest and owners of the parent
2. Total comprehensive income for the period attributable to noncontrolling interest and owners of the parent

An 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

- An entity shall present on the face of the income statement an analysis of expenses using a classification based on
either the function of expenses or their nature within the entity, whichever provides information that is reliable and
more relevant.
- The income statement may be presented in two ways, namely functional and natural.

Functional Presentation
- The traditional and common form of income statement
- Known as the cost of sales method
- Classifies expenses to their function as part of cost of sales, distribution costs, administrative activities and other
activities
- Entities classifying expenses by function shall disclose additional information on the nature of expenses, including
depreciation, amortization and employee benefit costs

Natural Presentation
- Referred as the nature of expense method
- Expenses are aggregated according to their nature and not allocated among the various functions within the entity
- The natural expenses are no longer classified as cost of goods sold, distribution costs, administrative and other
activities.
- The expenses which are of the same nature are grouped or aggregated and presented as one item.

Examples of “Natural” Expense

1. Purchase
2. Employee benefit costs which include sales salaries, office salaries, SSS contribution, medicare contribution,
bonuses and other employee benefits
3. Advertising costs
4. Transport costs including freight out and other delivery
5. Supplies which include store supplies and office supplies
6. Depreciation
7. Other expenses

Functional Income Statement

Sample Company
Income Statement
Year Ended December 31, 2020

Net sales xx
Cost of sales (xx)
Gross income xx
Other income xx
Investment income xx
Total income xx
Expenses:
Distribution costs xx
Administrative expenses xx
Other expenses xx
Finance costs xx (xx)
Income before tax xx
Income tax expense (xx)
Net income xx

Natural Income Statement

Net sales xx
Other income xx
Investment income xx
Total income xx
Expenses:
Increase in inventory (xx)
Net purchases xx
Employee benefit costs xx
Sales commission xx
Advertising xx
Supplies expense xx
Delivery expense xx
Depreciation xx
Taxes and licenses xx
Doubtful accounts xx
Other expenses xx
Finance cost xx (xx)
Income before tax xx
Income tax expense (xx)
Net income xx

Which form of income statement?

- There is no prescribed format
- 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 sales” method usually would provide more relevant information to the users and is simple and easy to
understand

Two-Statement Comprehensive Income

Sample Company
Statement of Comprehensive Income
Year Ended December 31, 2020

Net income xx
OCI to be classified to profit or loss:
Foreign currency translation gain xx
Unrealized loss on derivative contract designated as cash flow hedge (xx) xx
Comprehensive income xx

Single Statement of Comprehensive Income

Sample Company
Statement of Comprehensive Income
Year Ended December 31, 2020

Net sales xx
Cost of sales (xx)
Gross income xx
Other income xx
Investment income xx
Total income xx
Expenses:
Distribution costs xx
Administrative expenses xx
Other expenses xx
Finance costs xx (xx)
Income before tax xx
Income tax expense (xx)
Net income xx
OCI to be classified to profit or loss:
Foreign currency translation gain xx
Unrealized loss on derivative contract
designated as cash flow hedge (xx) xx
Comprehensive income xx