All the income and expenses are reported in SOPL (statement of profit and loss) which becomes part of RE (retained earnings). However, there are some items (items of exception) which are reported in OCI (other comprehensive income) and accumulated in OCE (other components of equity). The items are only reported in OCI which are permitted or required in any IFRS to target relevant information and faithful presentation. These classification and reclassification are subject to specific provisions of IFRS and are usually in the nature of impact of change in carrying value etc.
The gains and losses that cannot be reclassified to SOPL:
>change in revaluation surplus (IAS16)
>re-measurement of defined benefit plan (IAS19)
>gain and losses on measuring FVTOCI for financial assets (IFRS9)
The gains and losses that can be reclassified to SOPL:
>group FX impact (IAS21)
>gain or loss in cash flow hedge (IFRS9)
1. What is Statement of Profit and Loss (P&L) and What is Statement of Other Comprehensive Income (OCI)?
Statement of Profit and loss is the total of income less expenses, excluding components of 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 other IFRSs.
Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive income’. [IAS1]
The above statement provides information about the financial performance of an entity during the reporting period. This statement is a part of the complete set of financial statements that an entity reports for a financial period. A complete set of financial statement as prescribed in IAS1 is reproduced in below diagram:
If we try to analyse the elements of above set of financial statement then in nutshell, there will be two branches of items. One branch will be for Assets, Liabilities and Equity usually termed as Balance Sheet Items. Second branch will be for Income and Expenses usually terms as P&L items. A brief overview is reproduced below:
2. Why we have two Statements to report for our Financial Performance?
- The statement(s) related to financial performance is prepared with an objective to provide financial information about the reporting entity’s income and expenses that would be useful to the users in assessing financial health of the entity (say dividends, interest, repayments and other return on investments, future cash inflows, utilisation of entity’s economic resources etc.). The conceptual framework (Mar18 para7.17) guides us that the profit or loss is the preliminary source of information about an entity’s financial performance for the period. Hence all income and expenses, as a basic principle, shall form part of statement of profit or loss. The purpose of having a statement OCI (Other Comprehensive Income) arises where we need to report income or expenses generating from change in the current value of asset or liability (of unusual events) and doing so would result in the statement of P&L providing more relevant information or providing a more faithful representation of the entity’s financial performance for that period.
- The Conceptual Framework (Mar18 para7.15) has not specified whether the Statement of Financial Performance comprises a single statement or two statements. If we refer to Para81A of IAS1, then we can conclude that in collectively it may be termed as ‘Statement of Comprehensive Income’ and it shall include (present separately) profit or loss, other comprehensive income and total comprehensive income including both. In other words, it is shall be termed as the statement of profit or loss and other comprehensive income, which shall present (a) profit or loss (b) other comprehensive income (c) total comprehensive income being total of preceding two.
- The performance of the company is reported in the statement of profit or loss and other comprehensive income. As defined in paragraph7 of IAS1 Profit or loss (P&L) is the total of income less expenses, excluding the components of other comprehensive income. Other comprehensive income (OCI) comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss, as required or permitted by other IFRSs. Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive income’. IAS1 allows income and expenses transactions to be reported either (i) as a single statement [P&L and OCI] or (ii) separate statement.
- The reporting entity may use other terms to describe the above two statements.
- The reporting entity shall not present any items of income or expense as extraordinary items either in the statement or in notes (paragraph87 of revised IAS1).
3. What should be the reporting period (Frequency of Reporting) for P&L and OCI?
The paragraph 36 of IAS1 says about frequency of reporting. It has clearly stated that the complete set of financial statements should be presented annually. In case of change in the period (longer or shorter) the entity shall present (i) reason for using a longer or shorter period and (ii) that fact that the amounts presented in the financial statements are not entirely comparable.
4. Recommended Formats and prescribed presentations for reporting in P&L and OCI:
The minimum recommended line items for presentation in P&L include (not an exhaustive list) (para82 IAS1):
Material items of income or expenses shall be disclosed separately (e.g. write-down of inventories or PPE, reversal of write-downs, disposal of PPE or investments, discontinued operation, litigation settlement etc.).
An entity shall present an analysis of expenses in P&L using a classification based on either (i) their nature or (ii) their function within the entity (para99 of IAS1).
Analysis and presentation through “nature of expenses method” involves reporting items according to their nature for example depreciation, purchases of materials, consumables cost, transport costs, employee benefits and advertising costs (no allocation based on functions within the entity).
Analysis and presentation through “function of expenses OR cost of sales method” involves reporting items according to their function for example classifying items as part of cost of sales, distribution or administrative activities. As per para 104 An entity classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation and amortisation expense and employee benefits expense.
5. Whether can we disclose any Extraordinary Item for the period?
The paragraph 87 of IAS1 has categorically prohibited any such disclosure. The entity shall not present any items of income or expense as extraordinary items.
6. Consolidated P&L and OCI in Group Accounts:
The entity shall present allocation of P&L and OCI to (i) non-controlling interest and (ii) owners of the parent.
7. Transactions to be reported in OCI (not in P&L):
The components of other comprehensive income include:
8. Reclassification of items (Recycling) Para82A of IAS1:
The paragraph 82A of IAS1 requires that the possible reclassification of items from OCI to P&L to be presented for the reporting entity and for the associates and joint venture accounted for using equity method.
(A) Items that might be reclassified to profit or loss in subsequent period are like:
1. Forex gain or loss arising on translation of a foreign operation (IAS21): The gains and losses arising from translating the financial statements of a foreign operation are recognised in OIC. But on the disposal of such foreign subsidiary, IAS21 requires that the net cumulative balance of group exchange differences be reclassified from OCI to P&L (to form part of the profit/loss on disposal) as a reclassification adjustment.
2. Effective portion (i.e. up to the value of the loss or gain on the cash flow hedged) of cash flow hedging arrangements are recognised in OCI and directly in Equity through the Statement of Changes in Equity. (IFRS 9): The ineffective portion (i.e. the excess over the value of the loss or gain on the cash flow hedged) of the loss or gain in hedging instrument are reported in Profit or Loss. [exchange differences on monetary items that qualify as hedging instruments in a cash flow hedge are recognised initially in other comprehensive income to the extent that the hedge is effective].
(B) items that will not be reclassified (or recycled) to profit or loss in subsequent accounting periods:
1. Changes in revaluation surplus (IAS 16 & IAS 38): It is recognised in OCI and are not reclassified to P&L in subsequent periods. It may be transferred to retained earnings in subsequent periods during derecognition of asset.
2. Remeasurement components of defined benefit plans (IAS 19).
3. Remeasurement of investments in equity instruments (not held for trading) that are classified as fair value through OCI (IFRS 9). This is because contractual cash flows on specified dates are not a characteristics of equity instruments.
9. A myth about OCI: ‘that it shows only unrealised gains & losses’!
It would be incorrect if we say that only unrealised gains and losses are included in OCI.
For example,
(1) the gain on revaluation of Land & Building recognised under IAS16 PPE, are reported under OCI. But if the Land & Building has been recognised under IAS40 (Investment Property) then the revaluation gain is recognised in P&L. In both the cases the gains are unrealised.
(2) under IFRS9 if financial asset is designated as FVTOCI (fair value through comprehensive income) by the management at inception, then the gain or loss are recognised in OCI. If management elects not to take (elect) this option, then the gain or loss on fair value shall be recognised in P&L.
10. The way forward on Statement of OCI & Reclassification:
· The Conceptual Statement of Financial Reporting published by IASB in Mar2018 has clarified the doubts related to future approach towards statement P&L, OCI. The revised framework has given importance to the statement of P&L and described it as the preliminary source of information about the financial performance for the reporting period. In principle, all income and expenses are classified and included in the statement of P&L.
· In exceptional circumstances the IASB may decide to exclude from the statement of P&L, income or expenses arising from a change in current value of an asset or liability and include those in OCI, when doing so would result in the statement of P&L providing more relevant information or more faithful representation.
· With an objective of providing relevant information or faithful representation the IASB has prescribed (in some IFRSs) to reclassify (recycle) an item of income or expenses included in OCI in one period are recycled to P&L in a future period. [some examples specified in point no.8 above]
SOURCES
IAS1 : http://eifrs.ifrs.org/eifrs/PdfAlone?id=19291&sidebarOption=UnaccompaniedIas
Conceptual Framework: http://eifrs.ifrs.org/eifrs/UnaccompaniedConceptual
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