STRUCTURE AND CONTENT OF THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

A single statement or two statements The statement of profit or loss and other comprehensive income provides information about the performance of an entity in a period. It consists of two parts: 1. a statement of profit or loss – a list of income and which result in a profit or loss for the period; and 2. a statement of other comprehensive income – a list of other gains and losses that have arisen in the period. As stated in the IAS 1 an entity is allowed to present the two sections in a single statement or in two separate statements. If two separate statements are used they should include all the information that would otherwise be included in the single statement of profit or loss and other comprehensive income. The statement of profit or loss shows the components of profit or loss, beginning with ‘’ and ending with ‘Profit (or Loss)’ for the period after tax. Definition of total comprehensive income Total comprehensive income during a period is the sum of: a. the profit or loss for the period; and b. other comprehensive income. Information to be presented on the face of the statement of profit or loss and other comprehensive income IAS 1 requires that the statement of profit or loss and other comprehensive income should include line items showing the following amounts for the financial period: (a) revenue (b) finance costs (for example, interest costs) (c) share of profit of associates (d) tax (e) an amount related to the profit or loss from discontinued operations (IFRS5) (f) profit or loss (g) each component of ‘other comprehensive income (h) total comprehensive income. Example: Statement of profit or loss and other comprehensive income of an individual entity

IAS 1 does not specify formats.

The example below is based on a suggested presentation included in the implementation guidance to IAS 1.

XYZ Entity: Statement of profit or loss and other comprehensive for the year ended 31 December 2012

₦000

Revenue 678

Cost of sales 250

Gross profit 428

Other income 44

Distribution costs (98)

Administrative expenses (61)

Other expenses (18)

Finance costs (24)

Profit before tax 271

Taxation (50)

PROFIT FOR THE YEAR 221

Other comprehensive income Gains on property revaluation 46

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 267 Information to be shown on the face of the statement of profit or loss and other comprehensive income (or the statement of profit or loss, if separate) or in the notes The following information may be shown either on the face of the statement of profit or loss or in a note to the financial statements: i. material items of income and expense ii. an analysis of expenses, providing either:  expenses analysed by their nature, or  expenses analysed by the function that has incurred them. IAS 1 encourages entities to show this analysis of expenses on the face of the statement of profit or loss, rather than in a note to the accounts. Material items that might be disclosed separately include: a. a write-down of inventories from cost to net realisable value, or a write-down of items of property, plant and equipment to recoverable amount b. the cost of a restructuring of activities c. disposals of items of property, plant and equipment d. discontinued operations  litigation settlements e. a reversal of a provision.

Analysis of expenses by their function When expenses are analysed according to their function, the functions are commonly ‘cost of sales’, ‘distribution costs’, ‘administrative expenses’ and ‘other expenses’. This method of analysis is also called the ‘cost of sales method’. In practice, most entities use this method. An example of a statement of profit or loss, showing expenses by function (cost of sales, distribution costs, administrative expenses) is as follows. Example: Analysis of expenses by function The following is an extract from the accounts of Entity Red for the year to 30 June 2015, after the year-end adjustments had been made: Debit Credit ₦000 ₦000 Cost of sales 6,214 Distribution costs 3,693 Revenue 14,823 Other expenses 248 Administrative expenses 3,901 Other income 22 Required Show the first part of Entity Red’s statement of profit or loss using the ‘cost of sales’ analysis method.

Entity Red: Statement of profit or loss for the year ended 30 June 2015 ₦000 Revenue 14,823 Cost of sales 6,214 Gross profiit 8,609 Other income 22 Distribution costs (3,693) Administrative expenses (3,901) Other expenses (248) Profit before tax 789 Note The basis for separating these costs between the functions would be given in the question.

Analysis of expenses by their nature When expenses are analysed according to their nature, the categories of expenses will vary according to the nature of the business. In a manufacturing business, expenses would probably be classified as: a. raw materials and consumables used; b. staff costs (‘employee benefits costs’); and c. . Items of expense that on their own are immaterial are presented as ‘other expenses’. There will also be an adjustment for the increase or decrease in inventories of finished goods and work-in-progress during the period. Other entities (non-manufacturing entities) may present other expenses that are material to their business. An example of a statement of profit or loss, showing expenses by their nature, is shown below, with illustrative figures included.

Example: Analysis of expenses by nature

The following is an alternative method of presenting the accounts of Entity Red.

₦000

Increase in inventories of finished goods and work-in-progress 86

Revenue 14,823

Raw materials and consumables 5,565

Depreciation 1,533

Other income 22

Staff costs 4,926

Other operating expenses 2,118

Required

Show the first part of Entity Red’s statement of profit or loss using the ‘nature of expenditure’ method, down to the operating profit level.

Entity Red: Statement of profit or loss for the year ended 30 June 2015

₦000 ₦000

Revenue 14,823

Other income 22

14,845

Changes in inventories of finished goods and work-in progress

(reduction = expense, increase = negative expense) (86)

Raw materials and consumables used 5,565

Staff costs (employee benefits costs) 4,926

Depreciation and amortisation expense 1,533

Other operating expenses 2,118

14,056

Profit before tax 789

STATEMENT OF CHANGES IN (SOCIE) For publication purpose a set of financial statements must include a statement of changes in equity (SOCIE). A statement of changes in equity shows for each component of equity the amount at the beginning of the period (Opening balance), changes during the period, and its amount at the end of the period (closing balance). Components of equity include: 1. share capital; 2. share premium; 3. retained earnings; 4. revaluation surplus. In the case of a group of companies, the amounts attributable to owners of the parent entity and the amounts attributable to the non-controlling interest should be shown separately. (Non- controlling interest is a concept used in group accounts. For each component of equity, the SOCIE should show changes resulting from: a. profit or loss for the period; b. each item of other comprehensive income; c. transactions with owners in their capacity as owners. Transactions with owners in their capacity as owners These include: i. new issues of shares; ii. payments of dividends; iii. repurchases and cancellation of its own shares by the company. These transactions are not gains or losses so are not shown in the statement so comprehensive income but they do affect equity. The SOCIE highlights such transactions. Retrospective adjustments IAS 8 policies, changes in accounting estimates and errors requires that when an entity changes an accounting policy or restates amounts in the financial statements to correct errors, the adjustments should be made retrospectively (to the extent that this is practicable). Retrospective adjustments result in changes in the reported amount of an equity component, usually retained earnings. Retrospective adjustments and restatements are not changes in equity, but they are adjustments to the opening balance of retained earnings (or other component of equity). Where retrospective adjustments are made, the SOCIE must show for each component of equity (usually retained earnings) the effect of the retrospective adjustment. This is shown first, as an adjustment to the opening balance, before the changes in equity are reported.

Illustration: statement of changes in equity PQR Entity: Statement of changes in equity for the year ended 31 December 2009 Share Share General Accumulated capital premium reserve profits Total ₦m ₦m ₦m ₦m ₦m Balance at 31 December 2008 200 70 80 510 860 Change in accounting policy - - - (60) (60) Restated balance 200 70 80 450 800 Changes in equity for 20X9 Issue of share capital 80 100 180 Dividend payments (90) (90) Profit for the year 155 155 Other comprehensive income for the year 12 12 Balance at 31 December 2009 280 170 92 515 1,057

The statement reconciles the balance at the beginning of the period to that at the end of the period for each component of equity.

NOTES TO THE FINANCIAL STATEMENTS

Introduction Notes contain information in addition to that presented in the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of flows. Notes provide narrative descriptions of items in those statements and information about items that do not qualify for recognition in those statements. They also explain how totals in those statements are formed. 6.2 Structure The notes to the financial statements of an entity must:  present information about the basis of preparation of the financial statements and the specific accounting policies selected and applied for significant transactions and other significant events;  disclose the information required by IFRSs that is not presented elsewhere in the financial statements; and  provide additional information that is not presented on the face of the financial statements but is relevant to an understanding of them. Notes to the financial statements must be presented in a systematic manner. Each item on the face of the statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows must be cross- referenced to any related information in the notes. Notes are normally presented in the following order:  a statement of compliance with IFRS;  a summary of significant accounting policies applied;  supporting information for items presented on the face of each in the order in which each financial statement and each line item is presented; and  other disclosures, including:  contingencies;  un-contracted commitments; and  non-financial disclosures.

Disclosure of accounting policies An entity must disclose the following in the summary of significant accounting policies:  the measurement basis (or bases) used in preparing the financial statements; and  the other accounting policies used that are relevant to an understanding of the financial statements.  the judgements (apart from those involving estimations) made by management in applying the accounting policies that have the most significant effect on the amounts of items recognised in the financial statements. For example:  whether financial are held-to-maturity investments;  when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities;  whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and  whether the substance of the relationship between the entity and a special purpose entity indicates that the entity controls the special purpose entity. Which policies? Management must disclose those policies that would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. If an IFRS allows a choice of policy, disclosure of the policy selected is especially useful. Some standards specifically require disclosure of particular accounting policies. For example, IAS 16 requires disclosure of the measurement bases used for classes of property, plant and equipment. It is also appropriate to disclose an accounting policy not specifically required by IFRSs, but selected and applied in accordance with IAS 8. (See chapter 4). Key measurement assumptions An entity must disclose information regarding key assumptions about the future, and other key sources of measurement uncertainty, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes must include details of:  their nature; and  their carrying amount as at the reporting date. Examples of key assumptions disclosed are:  future interest rates;  future changes in salaries;  future changes in prices affecting other costs; and,  useful lives. Examples of the types of disclosures made are:  the nature of the assumption or other measurement uncertainty;  the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for the sensitivity;  the expected resolution of an uncertainty and the range of reasonably possible outcomes within the next financial year in respect of the carrying amounts of the assets and liabilities affected; and  an explanation of changes made to past assumptions concerning those assets and liabilities, if the uncertainty remains unresolved. 6.4 Other disclosures An entity must disclose in the notes:  the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period, and the related amount per share; and  the amount of any cumulative preference dividends not recognised.  An entity must disclose the following, if not disclosed elsewhere in information published with the financial statements:  the domicile and legal form of the entity;  a description of the nature of the entity’s operations and its principal activities; and  the name of the parent and the ultimate parent of the group.