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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