Financial Reports: Statement of Income, Compre- Compre-hensive Income and Changes in Equity
Chapter 3 Learning Objectives
3.3 Financial Statements and Their Interrelationships
• The retrospective application of a change in accounting policy is impracticable. This may be the case where a company has not collected sufficient data to enable an objective assessment of the effect of a change in accounting estimates and it would be unfeasible or impractical to reconstruct the data. Where impracticability impairs a company’s ability to apply a change in accounting policy retrospectively from the earliest prior period presented, the new accounting policy must be applied prospectively from the beginning of the earliest period feasible, which may be the current period.
The following are the required disclosures in the notes to the financial statements when a change in accounting policy is implemented:
• Title of IFRS or ASPE standard
• Nature of change in accounting policy
• Reasons for change in accounting policy
• Amount of adjustments in current and prior periods presented
• Where retrospective application is impracticable, the conditions that caused the imprac-ticality (CPA Canada, 2011).
Changes Due to Accounting Errors or Omissions
The accounting treatment for an error or omission is aretrospective adjustment with restate-ment. For example, an accounting error in inventory originating in the current fiscal year is detected within the current fiscal year while the accounting records are still open. The inventory error correction is recorded as soon as possible to the applicable accounts. However, if the accounting records are already closed when the inventory error is discovered, the error is treated retrospectively. This means that the cumulative amount due to the inventory error would be calculated and recorded, net of taxes, to the current year’s opening retained earnings balance. If the financial statements are comparative and include previous year’s data, this data is also restated to include the error correction. This will be discussed and illustrated later in this chapter.
3.3. Financial Statements and Their Interrelationships 45
privately-held company is presented below (assume Wellbourn applies IFRS; for simplicity, comparative year data and reporting disclosures are not shown).
Wellbourn Services Ltd.
Statement of Income
for the year ended December 31, 2020 Revenues:
Sales $ 250,000
Services revenue 53,000
Total revenue $ 303,000
Operating expenses:
Cost of good sold 100,000
Rent expense 23,000
Salaries expense 65,000
Total operating expense 188,000
Income from continuing operations before tax 115,000
Income tax 34,500
Net income $ 80,500
Earnings per share $ 24
Wellbourn Services Ltd.
Statement of Comprehensive Income for the year ended December 31, 2020
Net income $80,500 to R/E
Other comprehensive income:
Items that may be reclassified subsequently to net income or loss:
Unrealized gains from FVOCI investments
(net of tax of $1,500) 3,500 to AOCI
Total comprehensive income $84,000
Wellbourn Services Ltd.
Statement of Changes in Equity for the year ended December 31, 2020
Accumulated Other Common Contributed Retained Comprehensive
Shares Surplus Earnings Income Total
Balance, January 1 $200,000 $25,000 $75,000 $45,000 $345,000
Total comprehensive income:
Net income 80,500 80,500
Other Comprehensive Income 3,500 3,500
Total comprehensive income 80,500 3,500 84,000
Issuance of common shares 10,000 10,000
Dividends declared (50,000) (50,000)
Balance, December 31 $210,000 $25,000 $105,500 $48,500 $389,000
Wellbourn Services Ltd.
Statement of Financial Position December 31, 2020
Assets Liabilities
Current assets Current liabilities
Cash $135,500 Accounts payable $ 77,500
Accounts receivable (net) 225,000 Accrued liabilities 225,000
Inventory 130,000 Total current liabilities 302,500
Total current assets 490,500 Bonds payable 160,000
Investments 100,000 Total liabilities 462,500
Property, plant, and equipment (net) 246,000 Equity
Intangible assets 15,000 Common shares 210,000
Total assets $851,500 Contributed surplus 25,000
Retained earnings 105,500
AOCI 48,500
Total equity 389,000
Liabilities and equity $851,500
Wellbourn Services Ltd.
Statement of Cash Flows for the year ended December 31, 2020 Cash flows from operating activities
Cash received from clients $ 50,000
Cash paid for supplies (25,000)
Cash paid to employees (51,200)
Net cash used by operating activities (26,200)
Cash flows from investing activities
Purchase of equipment (25,000)
Net cash used by investing activities (25,000)
Cash flows from financing activities
Dividends paid (50,000)
Issued bonds 160,000
Net cash received by financing activities 110,000
Net increase in cash 58,800
Cash balance, January 1 76,700
Cash balance, December 31 $ 135,500
As can be seen from the flow of the numbers above, the net income from the statement of income becomes the opening amount for the statement of comprehensive income (a statement required for all IFRS reporting companies).
Comprehensive income starts with net income/loss and includes certain gains or losses called other comprehensive income (OCI) that are not already reported in net income. The most notable examples for purposes of this course are:
• unrealized gains or losses for investments classified as fair value through OCI (FVOCI),
3.3. Financial Statements and Their Interrelationships 47
resulting from changes in their fair value while the investment is being held (Chapter8)
• gains/losses resulting from the application of the revaluation method for property, plant and equipment, and intangibles (Chapter 9)
In the next intermediate accounting course, another OCI item is the remeasurement gains and losses regarding defined benefit pension plans.
To summarize:
IFRS companies must report:
• Other comprehensive income (OCI) = certain gains or losses not already included in net income, net of tax, with tax amount disclosed
• Total comprehensive income = net income/loss +/- other comprehensive income (OCI)
Returning to the Wellbourn financial statements, looking at the statement of comprehensive income, net income closes to retained earnings, while any other comprehensive income (OCI) gain or loss closes toaccumulated other comprehensive income(AOCI) in the statement of changes in equity. The AOCI account is similar to a retained earnings account, except that AOCI only accumulates items from OCI.
To summarize:
• Retained earnings accumulate net income/loss over time. (ASPE and IFRS)
• AOCI accumulates other comprehensive income (OCI)/losses over time. (IFRS only)
It should also be noted that IFRS companies can choose to keep the statement of income separate from the statement of comprehensive income, or they can combine the two state-ments into one report called thestatement of income and comprehensive income, which will be discussed in more detail in the next section.
Looking at the Wellbourn statement of changes in equity, note that the total column balances to the equity section of the statement of financial position/balance sheet (SFP/BS). The final link between all the financial statements is regarding the statement of cash flows (SCF), where the ending cash balance must be equal to the cash balance reported in the SFP/BS. This completes the loop of interconnecting accounts and amounts.
3.3.1 Financial Statement Differences Between IFRS and ASPE
The core financial statements shown above illustrate the types of statements required for IFRS companies. They are the following:
• a statement of income
• a statement of comprehensive income
• a worksheet-style statement of changes in equity with all the equity accounts included
• a statement of financial position
• a statement of cash flows
• notes to the financial statements
IFRS requires the comparative previous year amounts be reported as well as disclosure of the earnings per share. ASPE does not require these disclosures. IFRS requires the statement of comprehensive income (or a combined statement of income and comprehensive income), whereas ASPE only requires a statement of income because comprehensive income does not exist. The statement of changes in equity required by IFRS shown in the Wellbourn example above now becomes a more simplified statement of retained earnings for ASPE, where only the details for retained earnings are reported (though any changes in shareholder equity accounts must be disclosed in the notes to the financial statements). The remaining equity accounts such as common shares and contributed surplus are reported as ending balances directly in the balance sheet for ASPE (called the statement of financial position for IFRS companies).