Accounting: The Language of Business - Vol 2 (Intermediate: Part 53)

The income tax is the biggest single intrusion suffered by the American people. It forces every worker to be a bookkeeper, to open his records to the government, to explain his expenses, to fear conviction for a harmless accounting error. Compliance wastes billions of dollars. It penalizes savings and creates an enormous drag on the U.S. economy. It is incompatible with a free society, and we aren’t libertarians if we tolerate it.

Harry Browne

Statements of Net Income and Comprehensive Income (Part K)

by

Charles Lamson 

Discontinued Operations

Discontinued operations are portions of the business that a company has disposed of or is in the process of disposing of. The discontinued operations section of the statement of net income includes any income from components of an entity or a group of components of an entity that have been disposed of, abandoned during the reporting, or are classified as held for sale as of the end of the reporting period. A discontinued operation may also be composed of a business or nonprofit activity. We will identify the characteristics of discontinued operations before examining the reporting requirements.

Characteristics of a Discontinued Operation

A component of an entity has three main characteristics: it is (1) a portion of the entity (2) comprising operations and cash flows (3) that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity can be:

• a reportable segment,

• an operating segment,

• a reporting unit,

• a subsidiary, or

• an asset group.

That is, a company must be able to separate the discontinued component's operations and cash flows from the continuing operations' earnings and cash flows. It should also be able to separately report discontinued operations in its financial statements.

After a company has determined that a portion of a business is a component of an entity or a group of components of an entity, the company must also demonstrate that the disposal represents a strategic shift that has or will have a major effect on the entity's operations and financial results. For example, the disposal of a major line of business would constitute a strategic shift that would have a major impact on the entity.

Discontinued Operations Reporting Requirements

Companies report income from discontinued operations and continuing operations separately. The separate reporting provides financial statement users with a measure of income from continuing operations, which is a preferred basis for predicting future performance. Clearly, a discontinued portion of a business will no longer generate future earnings and cash flows. Companies report three main types of income, gain, or loss under discontinued operations on the income statement:

1. Income or loss from operations of discontinued segment, unit or group, net of tax.

2. Loss on initial remeasurement of net assets held for sale to fair value less disposal costs, net of tax. In subsequent measurements, a loss or gain up to previously recognized losses can be repeated.

3. Gain or loss on disposal of assets or disposal group(s) constituting the discontinued operation, net of tax.

Companies present the operating income, loss, or gain from the discontinued operation and income from continuing operations separately. If the company has sold the discontinued operation, it includes the operating income from the beginning of the reporting period to the date of disposal in the discontinued operations section of the statement of net income. If the company is holding the discontinued operation for sale as of the end of the reporting period, it presents the operating income from the entire reporting period in the discontinued operations section of the statement of net income. For example, assume a company earned $22 million of net income of which three million dollars was from a loss on discontinued operations. The company would report income from continuing operations of $25 million and a $3 million loss from discontinued operations.

When a company decides to discontinue an operation, it remeasures the assets and liabilities of that operation for their fair values less selling costs if this amount is lower than their carrying value. Because the assets and liabilities are being held for sale, their value in the market is the most relevant value to financial statement users.

In the first period that the company remeasures the assets and liabilities of the operation, only a loss is permitted. If a write-down is necessary, the loss is equal to the difference between the book value of the net assets and their fair value net of selling costs. If the company writes down the net assets to fair value net of selling costs in one period and still holds the net assets in the next period, the company will report again in the subsequent period if the fair value net of selling costs increased. However, the write-up cannot result in a carrying value greater than the carrying value of the net assets before the write-down (See FASB ASC 205-30-65-3 and FASB ASC 360-10-35-40 for the related authoritative literature. Also, we discuss this issue in more detail in a later post.)

When the company sells the discontinued operation, there could be a realized gain or loss [The realized gain/loss is the difference between the cost and the proceeds from the sale or redemption of a security. A gain occurs when the proceeds from the security sold are greater than your cost basis. A loss occurs when the proceeds are less than your cost basis (rwbaird.com).] on the sale. Companies present all amounts on the income statement related to discontinued operations net of tax. Net of tax means that the amount of income, gain, or loss, reported includes any income tax effects. As noted earlier, the income tax expense (or benefit) related to discontinued operations is not included in the tax provision related to continuing operations.

Companies are also required to disclose the following other income and expense items related to discontinued operations in the footnotes to the financial statements:

1. Free text income (loss)

2. Pre-tax income (loss) attributable to the company's shareholders

3. Major line items to arrive at pre-tax income (loss) such as revenue and cost of sales, depreciation, and interest expense

4. Reconciliation of the major items making up the pre-tax profit (loss) disclosed in the notes to financial statements to the after-tax profit (loss) presented in the income statement

5. Carrying amounts of the major classes of assets and liabilities included as part of a discontinued operations and classified as held for sale

6. Gain or loss on remeasurement of net assets held for disposal

7. Reconciliation of the carrying amounts of major classes of assets and liabilities disclosed in the notes to financial statements to total assets and liabilities classified as held for sale on the balance sheet

8. Either total operating and investing cash flows related to the discontinued operation, or the depreciation, amortization, capital expenditures, and significant operating and investing non-cash items associated with the discontinued operation.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 187-189*

end

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EWTN Norge Daily TV Mass – February 28,2023

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EWTN Norge Daily TV Mass – February 27,2023

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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 52)

Capitalism is in crisis both morally, due to widening disparities of income and wealth and disclosures of abusive practices, and ecologically, due to its refusal to make business adjustments in accounting procedures that pass the consequences of emissions to the public and the future.

Richard A. Falk

Statements of Net Income and Comprehensive Income (Part J)

by

Charles Lamson

Income from Continuing Operations

In this section, we review several line items from a multi-step income statement.

Income from continuing operations is income from portions of the business that are expected to continue into the future. Therefore, income from continuing operations does not include discontinued operations, which are portions of a company that have been disposed of or that are held for sale. Firms typically calculate income from continuing operations as the sum of three income statement items:

1. Operating income (Operating income is often referred to as "earnings before interest and taxes" or EBIT.)

2. Non-operating items of non-operating revenue/gains and expenses/losses

3. Income tax provision

 We discuss each of these items in the following sections. 

Operating Income

Operating income includes revenues and expenses from the entity's principal operations. Exhibit 5.12 presents a typical operating income section of the income statement.

EXHIBIT 5.12 The Operating Section of the Statement of Net Income

*Net sales revenue equals sales net of sales discounts and estimated returns and allowances.

Gross profit, net sales revenue less cost of goods sold, represents the amount of sales revenue available to cover operating and other expenses and contributes to overall net income that can potentially be distributed to shareholders. Financial statement users analyze the firm's gross profit to assess trends and profit margins.

Operating income is gross profit less all operating expenses [(i.e., selling expenses and general and administrative expenses) (U.S. GAAP do not define operating income.)]. Operating income is a key financial performance measure because it:

1. Reflects the results of the core operations of the business.

2. Assists a financial statement user in comparing different firms' operations before considering sources of financing and their costs.

3. Provides a measure of income available to all outside stakeholders. The entity's stakeholders are the providers of capital (both debt and equity holders) and the government (through taxation).

Non-Operating Income

Non-operating income items include gains and losses along with revenues and expenses resulting from a company's peripheral activities. Non-operating income items are less useful than operating income items for predicting future earnings. Consequently, companies separate non-operating income items from the operating items on the statement of net income. For example, a gain or loss on the sale of a specialized piece of equipment is not likely to reoccur and is not part of the core operations of the business.

Specific non-operating items include interest revenue, interest expense, dividend revenue, and gains and items within unusual nature and/or infrequency and occurrence. Items with an unusual nature are transactions or events possessing a high degree of abnormality and unrelated---or only remotely related---to the company's ordinary activities. Items that are infrequent in occurrence are transactions or events not reasonably expected to reoccur in the foreseeable future. If a gain or loss results from a transaction that is either unused in nature and/or infrequent in occurrence, then companies report the event as a separate line item within income from continuing operations or disclose the item in the notes. Examples of transactions or events that are unusual or infrequent include:

• Restructuring charges.

• Losses on impairments.

• Gains and losses on disposals of assets.

• Losses due to natural disasters such as an earthquake or hurricane.

Typically, companies sum operating expense income with the non-operating items to determine income before tax.

 

Income Tax Provision

The income tax provision reports the tax expense determined by considering the income tax effects of operating in all jurisdictions. Specifically, it includes U.S. federal, state, local, and foreign income taxes.

The income tax provision does not include other types of taxes. For example, payroll tax and property taxes are included in operating expenses. Also, note that companies report discontinued operations net of tax. Consequently, companies do not report the income tax expense associated with discontinued operations in the income tax provision.

Companies deduct the income tax provision from income before taxes to report net income. For many companies, net income is the final line on the income statement. As we address in the sections that follow, if companies report any discontinued operations, they include these gains, losses, and income following net income. As a result, income after the income tax provision is then called income from continuing operations, and the line item before income tax expense is called income from continuing operations before tax.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 184-187*

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Rosary from Lourdes - 26/02/2023

EWTN Norge Daily TV Mass – February 26,2023

For perseverance, patience, and endurance.

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EWTN Norge Daily TV Mass – February 25,2023

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EWTN Norge Daily TV Mass – February 23,2023

For protection, health, and strength in resolve of self-denial in Lent.

Rosary from Lourdes - 23/02/2023

For protection and health.

Accounting: The Language of Business - Vol. 2 (Intermediate: Part 51)

Another thing he told his customers was that one of the great accounting unknowns of the modern age was how to value knowledge. It was an exciting field.

Jane Smiley

Statements of Net Income and Comprehensive Income (Part I) 

by

Charles Lamson

 Statement of Net Income Presentation: International Financial Reporting Standards (IFRS)

Whereas IFRS allows the single-step or multi-step formats, IFRS requires that companies report the following line items on the income statement:

1. Revenue (Sales revenues are also called Turnover)

2. Finance costs

3. Share of incomes/loss of associates

4. Tax expense

5. After-tax profit or loss on discontinued operations

6. Net Income, also called Net Profit or Net Loss (See IASC, International Accounting Standard I, "Presentation of Financial Statements," Paragraph 82).

IFRS reporters present additional line items and subtotals that each company's management decides are relevant to financial statement users' understanding of its operating performances. so, these will vary by company. For example, Unilever Group, a local Dutch consumer products and personal care company discussed later in Exhibit 5.11, does not report cost of goods sold on its income statement.

 IFRS also requires companies to disclose the following other items if they are not presented on the income statement:

• Write-downs of inventories of property, plant, and equipment, as well as reversals

• Restructuring costs

• Disposals of property, plant, and equipment items

• Disposals of investments 

• Discontinued operations

• Litigation settlements

• Other reversals of provisions (In reformatting from U.S. GAAP to IFRS we assume the amounts of all reported items are the same. In practice, the measurements could differ, as we will explain in subsequent parts of this volume).

If a company classifies expenses by function, it will disclose additional information on the nature of expenses, including depreciation and amortization (paying off a debt over time in equal installments) expense and employee benefits expense.

 Using IFRS requirements, Exhibit 5.10 formats the financial information and presents the income statement for Puppini Products [(from Exhibit 5.6 and 5.7 in part 49) (In reformatting from U.S. GAAP to IFRS, we assume the amounts of all reported items are the same. In practice, the measurements could differ, as will be explained in subsequent parts.)] IFRS also requires the line items or footnote disclosurs for the gain on disposal of plant assets, $4,700, and the loss on asset impairment, ($1,500). Note the comments where IFRS requires certain line items and the similar key performance measures used under U.S. GAAP. 

EXHIBIT 5.10 IFRS Income Statement (Based on Condensed Income Statement and Exhibit 5.6 and Footnote in Exhibit 5.7)

Exhibit 5.11 presents the IFRS income statement of Unilever Group. Its income statement includes the required lines: turn over (revenue), finance costs, income from associates, taxation, and net profit. It reported no discontinued operations. The income statement does not report operating expenses, which is unusual. Rather, Unilever details operating expenses and gross profit in note 3 of the financial statements. The first table in note 3 provides the cost of goods sold and selling and administrative expenses not found on the income statement. The next table includes more detail on operating expense items. Observe that the final table classifies many of these expenses by their nature, such as staff costs and raw materials and goods purchased for resale.

EXHIBIT 5.11 Statement of Net Income and Notes, Unilever Group, Financial Statements, December 31, 2016

(See the Unilever Group's annual report at https://assets.unilever.com/files/92ui5egz/production/813f7bacbbeac5e39ee1ed77dc4fde161e2e0055.pdf/unilever-annual-report-and-accounts-2016.pdf.)

 Now that we have discussed the overall presentation of the statement of the net income, in the next several parts of this volume, we will turn to a more extensive discussion of each section of the multiple-step statement of net income.

 

*GORDON. RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 183-184*

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EWTN Norge Daily TV Mass – February 22,2023

For strength, health, faith, courage, protection, and aid with Lent resolution.

Rosary from Lourdes - 22/02/2023

For strength, health, faith, courage, protection, and aid with Lent resolution.

Rosary from Lourdes - 21/02/2023

EWTN Norge Daily TV Mass – February 21,2023

4. The Khmer Empire - The Temple Building Civilization

EWTN Norge Daily TV Mass – February 20,2023

For strength: hope, faith, courage, fortitude, health (mental, physical, as well as spiritual), protection, and perseverance.

Rosary from Lourdes - 20/02/2023

For strength: hope, faith, courage, fortitude, health (mental, physical, as well as spiritual), protection, and perseverance.