Performance is measured with
Income statement –> ASPE and Statement of comprehensive income –> IFRS
overall objective of I/S
Provide relevant information (feedback value and predictive value) with
- past performance/profitability (over period of time)
- Assist in assessing cash flows
- Assess risk (want profit mostly from operations)
high earnings quality when
- content: unbiased, faithfully represented, earnings are sustainable (from main ops)
- Presentation: clear, concise, understandable, no attempt to disguise information
- other: over a long-term, a company’s earnings must be highly correlated to its cash flow from operations
Shortcomings of income statement
- A lot of estimates are used (tradeoff of increase relevance and less reliable)
- Choice of accounting policies can affect the numbers –> lead to bias and managing earnings
- some items don’t show at all if they cannot be measured or estimated reasonably
Statement of comprehensive income format
- Net Income/Loss: A) Continuing operations (pre tax + line for tax expense) B)Discontinued operations (net of tax) C) income taxes D) Earning per share
- Other comprehensive income
- Comprehensive income (1+2)
Two formats for income statement
- single step
2. multi step
Single step
combines all revenues and combines all expenses but does not show relationships between expenses and revenues
Multi-step
detailed and elaborate, better because it shows more
Expenses by nature or function
both allowed under both ASPE and IFRS; both will show the same net income. Under IFRS, when one is used the other is disclosed.
Expenses by nature
input costs: what money was spent on. relates to type of expense: depreciation, purchase of materials (not concerned with function)
Expense by function
output costs: relates to activities the expenditure was used for. I.e. activity production, expense COGS
Infrequent or unusual items
in continuing operations as non-operating, shown before taxes, under ASPE will be under management’s control
under IFRS may or may not be under management control
Discontinued operations
component of a business that has been disposed of or classified as held for sale (net of tax)
What constitutes disc ops ASPE
- Single asset generating cash flows
- Multiple assets generating cash flows (CGU), but not major line of business
- Major line of business or geographical area
- Business bought with a view to sell
What constitutes disc ops IFRS
- Major line of business or geographical area
2. Business bought with a view to sell
Once criteria for discontinued operations are met
operations sold by the end of operating period or classified as Asset held for sale.
Showing discontinued operations shows
representational faithfulness, because the user knows not to expect income from this stream in the future
Asset held for sale
may or may not be discontinued operations: selling non-current assets or a group of them sold together as CGU
To be considered held must
- authorize plan to sell
- available for immediate sale
- actively looking for a buyer
- probable sale within a year
- assets priced to sell
- no planned changes
assets held for sale are carried at
lower of FV less costs to sell or cost (write down may be required if value is below cost
once classified as held for sale, depreciation
stops being counted because they are no longer being used
high requirements for assets held for sale because
discourage temporarily categorizing concurrent assets as current to bump up the current ratio
Declassification of assets held for sale
should be recategorized at lower of: FV less costs to sell and carrying value if depreciation had continued normally
Constructive obligation
implicit obligation of uncertain timing or amount due to a company’s past practice or actions that may have created expectations on part of the public –> future costs that are uncertain
