(m) tax expense;
(n) a single amount comprising the total of:
(i) the post-tax profit or loss of discontinued operations; and
(ii) the post-tax gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s) constituting
the discontinued operation; [IFRS 5.33(a)(ii)]
(o) profit
or
loss;
[IAS 1.81A] and
(p) the following as allocations of profit or loss for the period:
(i) profit or loss attributable to non-controlling interests; and
(ii) profit or loss attributable to owners of the parent. [IAS 1.81B].
As discussed at 3.2.3 below, an analysis of expenses is required based either on their
nature or their function. IAS 1 encourages, but does not require this to be shown on the
face of the statement of profit or loss. [IAS 1.99-100].
The implementation guidance accompanying the standard provides an illustrative
example of a statement of profit or loss (see Example 3.4 at 3.2.3.A below).
3.2.2.A Operating
profit
The current IAS 1 has omitted the requirement in the 1997 version to disclose the results
of operating activities as a line item on the face of the statement of profit or loss. The
reason given for this in the Basis for Conclusions to the standard is that ‘Operating
activities’ are not defined in the standard, and the Board decided not to require
disclosure of an undefined item. [IAS 1.BC55].
The Basis for Conclusions to IAS 1 goes on to state that
‘The Board recognises that an entity may elect to disclose the results of operating
activities, or a similar line item, even though this term is not defined. In such cases, the
Board notes that the entity should ensure the amount disclosed is representative of
activities that would normally be considered to be “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
134 Chapter
3
activities, even if that had been industry practice. For example, it would be inappropriate to
exclude items clearly related to operations (such as inventory write-downs and
restructuring and relocation expenses) because they occur irregularly or infrequently or are
unusual in amount. Similarly, it would be inappropriate to exclude items on the grounds that
they do not involve cash flows, such as depreciation and amortisation expenses.’ [IAS 1.BC56].
As noted at 3.2.2 above, IAS 1 requires the face of the statement of profit or loss to show
the share of the profit or loss of associates and joint ventures accounted for using the
equity method.
For entities presenting a measure of operating profit, in our view it is acceptable for an
entity to determine which such investments form part of its operating activities and
include their results in that measure, with the results of non-operating investments
excluded from it.
Another acceptable alternative would be to exclude the results of all associates and joint
ventures from operating profit.
3.2.3
Classification of expenses recognised in profit or loss by nature or
function
IAS 1 states that components of financial performance may differ in terms of frequency,
potential for gain or loss and predictability, and requires that expenses should be sub-
classified to highlight this. [IAS 1.101]. To achieve this, the standard requires the
presentation of an analysis of expenses (but only those recognised in profit or loss) using
a classification based on either their nature or their function within the entity,
whichever provides information that is reliable and more relevant. [IAS 1.99]. It is because
each method of presentation has merit for different types of entities, that the standard
requires management to make this selection. [IAS 1.105]. As noted at 3.2.2 above IAS 1
encourages, but does not require the chosen analysis to be shown on the face of the
statement of profit or loss. [IAS 1.100]. This means that entities are permitted to disclose
the classification on the face on a mixed basis, as long as the required classification is
provided in the notes. Indeed, the IASB itself produces an example of such a statement
of profit or loss in an illustrative example to IAS 7. [IAS 7.IE A].
The standard also notes that the choice between the function of expense method and
the nature of expense method will depend on historical and industry factors and the
nature of the entity. Both methods provide an indication of those costs that might vary,
directly or indirectly, with the level of sales or production of the entity. However,
because information on the nature of expenses is useful in predicting future cash flows,
additional disclosure is required when the function of expense classification is used
(see 3.2.3.B below). [IAS 1.105].
3.2.3.A
Analysis of expenses by nature
For some entities, ‘reliable and more relevant information’ may be achieved by
aggregating expenses for display in profit or loss according to their nature (for example,
depreciation, purchases of materials, transport costs, employee benefits and advertising
costs), and not reallocating them among various functions within the entity. IAS 1
observes that this method may be simple to apply because no allocations of expenses to
Presentation of financial statements and accounting policies 135
functional classifications are necessary. The standard illustrates a classification using the
nature of expense method as follows: [IAS 1.102]
Example 3.3:
Example of classification of expenses by nature
Revenue
×
Other income
×
Changes in inventories of finished goods and work in progress
×
Raw materials and consumables used
×
Employee benefits expense
×
Depreciation and amortisation expense
×
Other expenses
×
Total expenses
(×)
Profit before tax
×
The implementation guidance accompanying the standard provides a further example
of a statement of profit or loss analysing expenses by nature. Whilst very similar to the
above, it is expanded to show further captions as follows: [IAS 1.IG Part I]
Example 3.4:
Illustrative statement of profit or loss with expenses classified by
nature
XYZ GROUP – STATEMENT OF PROFIT OR LOSS FOR THE YEAR
ENDED 31 DECEMBER 2019
(in thousands of Euros)
2019
2018
Revenue
390,000
355,000
Other income
20,667
11,300
Changes in inventories of finished goods and work in progress
(115,100)
(107,900)
Work performed by the entity and capitalised
16,000
15,000
Raw material and consumables used
(96,000)
(92,000)
Employee benefits expense (45,000)
(43,000)
&nbs
p; Depreciation and amortisation expense
(19,000)
(17,000)
Impairment of property, plant and equipment
(4,000)
–
Other expenses
(6,000)
(5,500)
Finance costs
(15,000)
(18,000)
Share of profit of associates
35,100
30,100
Profit before tax
161,667
128,000
Income tax expense
(40,417)
(32,000)
Profit for the year from continuing operations
121,250
96,000
Loss for the year from discontinued operations
–
(30,500)
Profit for the year
121,250
65,500
Profit attributable to:
Owners of the parent 97,000
52,400
Non-controlling
interests 24,250
13,100
121,250
65,500
Earnings per share (€)
Basic and diluted
0.46
0.30
136 Chapter
3
A footnote to the illustrative examples explains that ‘share of profits of associates’ means
share of the profit attributable to the owners of the associates and hence is after tax and
non-controlling interests in the associates.
Example 3.4 above is an example of presenting comprehensive income in two
statements. Example 3.6 below illustrates the presentation of comprehensive income in
a single statement. An entity using the approach above would need to give a second
statement presenting items of other comprehensive income – this would simply be the
bottom portion of Example 3.6, starting with ‘Profit for the year’ and omitting earnings
per share and the analysis of profit between owners and non-controlling interests. This
is illustrated in Example 3.8 below.
3.2.3.B
Analysis of expenses by function
For some entities, ‘reliable and more relevant information’ may be achieved by
aggregating expenses for display purposes according to their function for example, as
part of cost of sales, the costs of distribution or administrative activities. Under this
method, IAS 1 requires as a minimum, disclosure of cost of sales separately from other
expenses. The standard observes that this method can provide more relevant
information to users than the classification of expenses by nature, but that allocating
costs to functions may require arbitrary allocations and involve considerable judgement.
An example of classification using the function of expense method given by the standard
is set out below. [IAS 1.103].
Example 3.5:
Example of classification of expenses by function
Revenue ×
Cost of sales
(×)
Gross profit
×
Other income
×
Distribution costs
(×)
Administrative expenses
(×)
Other expenses
(×)
Profit before tax
×
Entities classifying expenses by function are required by IAS 1 to disclose additional
information on the nature of expenses. The standard highlights that this requirement
also applies to depreciation and amortisation expense and employee benefits expense.
[IAS 1.104], which seems a redundant considering that the disclosure of these items
(broken down into their components) is specifically required by IAS 16, IAS 19 and
IAS 38 – Intangible Assets.
The standard gives another illustration of expenses classified by function in the
profit and loss section of the single statement of comprehensive income – see
Example 3.6 below.
3.2.4
The statement of comprehensive income
3.2.4.A
The face of the statement of comprehensive income
Whether presented as a separate statement or as a section of a combined statement
(see 3.2.1 above), the face of the statement of comprehensive income should set out the
Presentation of financial statements and accounting policies 137
items below. The items in (b) and, separately, the items in (c) should be presented in two
groups, one including items which may subsequently be reclassified into profit or loss
and another including items which will not: [IAS 1.7, 1.81A, 82A, 91]
(a) profit or loss (if two statements are presented this will be a single line item);
(b) each item of comprehensive income, classified by nature, which include:
(i) changes in revaluation surplus relating to property, plant and equipment and
intangible assets;
(ii) remeasurements on defined benefit plans in accordance with IAS 19;
(iii) gains and losses arising from translating the financial statements of a foreign
operation;
(iv) gains and losses from investments in equity instruments designated at fair
value through other comprehensive income;
(v) gains and losses on financial assets measured at fair value through other
comprehensive income;
(vi) 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;
(vii) for particular liabilities designated as at fair value through profit and loss, fair
value changes attributable to changes in the liability’s credit risk;
(viii) 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;
(ix) changes in the value of the forward elements 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;
(x) insurance finance income and expenses related to insurance or reinsurance
contracts which is excluded from profit or loss in certain circumstances in
accordance with IFRS 17 – Insurance Contracts;
(xi) the aggregate amount of tax relating to components of comprehensive
income, unless the components are shown individually net of tax (see 3.2.4.C
below). Tax should be allocated between the two groups mentioned above.
(c) share of the items of other comprehensive income of associates and joint ventures
accounted for using the equity method;
(d) reclassification adjustments, unless the components of comprehensive income are
shown after any related reclassification adjustments (see B below); [IAS 1.94] and
(e) total
comprehensive
income.
In a separate statement of other comprehensive income IAS 1 also requires an analysis
of total comprehensive income for the period between that attributable to:
(a) non-controlling interests, and
(b) owners of the parent. [IAS 1.81B].
138 Chapt
er
3
In a combined statement of total comprehensive income, the equivalent analysis of
profit and loss would also be required as would earnings per share disclosures (discussed
in Chapter 33 at 7). When two separate statements are presented, these would appear
on the statement of profit or loss. [IAS 33.67A].
IAS 1 provides an illustration of both the ‘one statement’ and ‘two statement’ approach
in its implementation guidance. An illustration of a single statement of comprehensive
income is given in Example 3.6 below. [IAS 1 IG Part I]. An illustration of a separate
statement of profit or loss is given in Example 3.4 above and an illustrative separate
statement of other comprehensive income is given in Example 3.8 below.
Example 3.6:
Presentation of comprehensive income in one statement and the
classification of expenses by function
XYZ Group – Statement of profit or loss and other comprehensive income for the year
ended 31 December 2019
(in thousands of currency units)
2019
2018
Revenue
390,000
355,000
Cost of sales
(245,000)
(230,000)
Gross profit
145,000
125,000
Other income
20,667
11,300
Distribution costs
(9,000)
(8,700)
Administrative expenses (20,000)
(21,000)
Other expenses
(2,100)
(1,200)
Finance costs
(8,000)
(7,500)
Share of profit of associates(1) 35,100
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 28