Kế toán, kiểm toán - Chapter 4: Reporting financial performance

CHAPTER 4:REPORTING FINANCIAL PERFORMANCE2Chapter 4: Reporting Financial PerformanceAfter studying this chapter, you should be able to:Understand how firms create value and manage performance.Understand how users use information about performance to make decisions.Understand the concept of and be able to assess quality of earnings/information.Understand the differing perspectives on how to measure income.Measure and report results of discontinued operations.Measure income and prepare the income statement and the statement of comprehensive income using various formats.Prepare the statement of retained earnings and the statement of changes in equity.Understand how disclosures and analysis help users of financial statements assess performance.Identify differences in accounting between IFRS and ASPE and potential changes.3Reporting Financial Performance4Business ModelsThe basic business model identifies three activities:FinancingObtaining cash fundingInvestingUse of funding to buy assets and invest in peopleOperatingUse of assets and people to generate profitsFinancial statements should capture these fundamental business activities5Overview of the Business Model6Communicating Information About PerformanceIncome Statement helps users:Evaluate past performance and profitabilityProvide a basis for predicting future performanceHelp assess the risk of not achieving future net cash inflows7Limitations of Income StatementStatement of income/comprehensive income has the following limitations:Items are excluded if they cannot be measured reliablyAmounts reported are affected by accounting methods usedUse of estimates in measuring incomeFinancial reporting biasGAAP shortcomings8Quality of EarningsQuality of earnings refers to how solid earnings numbers areTwo main aspects to consider:ContentIntegrity of informationSustainability of earningsPresentationEarnings presentation is clear and conciseEasy to use and understandable9Quality of EarningsCharacteristics of high quality earnings:Nature of ContentUnbiased and determined objectivelyRepresents economic reality Reflects earnings from on-going core activitiesCan be correlated with cash flows from operationsBased on sound business strategy/modelPresentationDoes not disguise or mislead (transparent)UnderstandableAlso, information is clear and conciseEarnings management decreases quality of earnings10Comprehensive vs. Net IncomeKey question: how do we measure income?IFRS generally supports the all-inclusive approach to measuring incomeThis results in “comprehensive income”Comprehensive income includes any non-shareholder transactions that causes a change in equity Example: unrealized gains/losses on revaluation of property, plant, and equipment under the revaluation modelComprehensive Income = Net Income +/- Other Comprehensive Income (OCI)OCI is closed to a balance sheet account called Accumulated Other Comprehensive Income (AOCI) ASPE continues to focus on net income as the measure of income11Discontinued OperationsDiscontinued operations includes components that have been disposed of or are held for saleComponents can include:Under ASPE: an operating segment, reporting unit, subsidiary, asset group, or operations without assetsUnder IFRS: separate major line of business or geographical area of operations, or a business qualifying as “held for sale” upon acquisitionIFRS is more restrictive12Discontinued OperationsA distinction made between:The component’s results of operationsDisposal of the component’s assetsThe key is that the component generates its own cash flows and has its own distinct operations13Discontinued Operations-Asset Held for SaleComponent is held for sale if the following criteria are met:Authorized plan to sell existsAsset available for immediate saleActive search for a buyerSale is probable within a yearAsset is reasonably priced and marketedChanges to the plan are unlikely14Discontinued OperationsMeasurement & PresentationDepreciation is not recognized for held for sale assetsRemeasured at lower of carrying value and fair value net of cost to sellOnce asset is written down, subsequent gains can be recognized only up to the amount of original lossPresented separately on balance sheetUnder ASPE, held for sale asset retains original classification as current or non-currentUnder IFRS, held for sale assets generally classified as current15Discontinued Operations – Statement PresentationIncome from continuing operations (net of tax) $xx,xxxDiscontinued Operations: Income (Loss) from operations (net of tax) $xx,xxx Gain (Loss) on disposal (net of tax) xx,xxx xx,xxxNet Income $xx,xxxEarnings per share from continuing operations $ xEarnings per share from discontinued operations xEarnings per share on net income $ x16Presentation of PerformanceUnder IFRS, the statement of comprehensive income can be presented either:as a single combined statement, or as two separate statementsCompanies can present income using eitherSingle-step income statement, orMultiple-step income statement17Comprehensive Income StatementExample of a combined income and comprehensive income statement:Sales 800,000Cost of goods sold 600,000Gross profit 200,000Operating expenses 90,000Net income 110,000Other comprehensive incomeUnrealized holding gain, net of tax 30,000Comprehensive income 140,00018Single-Step Income StatementPresents only two groupings before Income before Discontinued Operations:Revenues (includes gains)Expenses (includes losses)Income tax expense often reported separate from expenses as the last line item in determining net incomeAdvantages:SimplicityEliminates classification problems for revenues and expensesDisadvantage:Oversimplification Less detail (e.g. operating and non-operating activities reported together and cannot be distinguished) 19Single-Step Income Statement20–=RevenuesRevenues Net Sales Other Revenues (e.g. Dividend, Rental)ExpensesExpenses Cost of Goods Sold Selling Expenses Administrative Expenses Interest Expense Income Tax ExpenseNet IncomeAny Gains/Losses fromDiscontinued Operations must bedisclosed separately fromContinuing OperationsEarnings perShare2021Single-Step Income StatementMultiple-Step Income StatementOperating and non-operating activities are separated Advantages:Highlighting regular and irregular activities allows for greater predictive value (assess future earnings) and feedback value (assess past earnings)Provides better detail to compare companiesAllows for ratio analysis used to assess performance22Multiple-Step Income StatementContinuing OperationsOperating sectionNon-operating sectionIncome taxDiscontinued OperationsIncome/Loss from operationsGain/Loss from dispositionBoth reported net of taxesOther Comprehensive IncomeIncludes other gains/losses not included in net income2324Multiple-Step Income Statement25Multiple-Step Income StatementContinuing Operations–DetailOperating SectionNet SalesCost of Goods SoldSelling ExpensesAdministrative or General ExpensesNonoperating SectionOther Revenues and GainsOther Expenses and LossesIncome TaxSeparate income tax section on Income from Continuing Operations only26Condensed Income StatementExpenses are reported on the income statement in group totalsDetails of the expense groups are included on supplementary schedulesProvides the advantage of a concise, understandable income statementAn example of trade-off between understandability and full disclosureReduces “information overload”2728Condensed Income StatementPresenting Expenses: Nature versus FunctionUnder IFRS, analysis of expenses must be presented based on either:Nature of expenses (e.g. purchase of materials, transportation costs, employee benefits, depreciation, etc.)Function of expenses (e.g. cost of sales, administrative costs, etc.)Choice should result in information that is more reliable and relevantNo similar guidance under ASPE29Intraperiod Tax AllocationRefers to the allocation of income taxes within a fiscal periodCertain irregular items on the income statement are reported net of taxSpecifically, income tax expense (or benefit) is calculated and presented separately for the following:Income from continuing operationsDiscontinued operationsOther comprehensive income30Earnings per ShareEarnings per share (EPS) is considered one of the most significant business indicatorsIndicates dollars earned per common share; it does not report the dollars paid (or to be paid) per common shareEPS based on earnings before discontinued operations and EPS based on net income must be shown on the face of the income statementEPS based on discontinued operations may be disclosed in the notes to the financial statements31Earnings Per ShareCalculated as:Net Income less Preferred DividendsWeighted Average of Common Shares OutstandingEarnings per share is subject to dilution (reduction) if issue of additional shares is possible in the future due to items such convertible bonds or stock optionsFor such situations, both Basic EPS and Diluted EPS are presented32Retained Earnings StatementRetained earnings increases by net income and decreases by net loss and declared dividends (both cash and share dividends) for the yearCorrection of errors in prior periods and effects to prior periods from accounting policy changes are treated as prior period adjustments They adjust (net of tax) beginning retained earnings; also prior years’ financial statements are restated Under IFRS, a Statement of Changes in Equity is presented in lieu of a retained earnings statement. 33Statement of Changes in EquityThis statement is required under IFRS and presents the following:Total comprehensive incomeFor each component of equity, the effects of retrospective application/restatementReconciliation between the carrying amount of each component of equity at the beginning and end of the period.3434Looking AheadIASB and FASB are preparing a converged standard on “Financial Statement Presentation”At the time of printing, the project was on hold. IASB was in discussion on financial performance reporting and was in the research project stage.An exposure draft has been prepared on the Conceptual Framework which proposes to relabel the statement of comprehensive income as the statement of financial performance. 35