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  • Hi.

  • Else here.

  • And today, we're talking about the statement

  • of income, comprehensive income under IFRS.

  • I have already produced a series of videos

  • where I introduce students to all the financial statements

  • using IFRS, but at the introductory accounting level.

  • If you have not watched those videos,

  • I highly recommend you do so.

  • So back to the statement of income,

  • comprehensive income for intermediate accounting.

  • First, it's important to understand

  • that IFRS allows a lot of freedom

  • with regards to the format of financial statements.

  • Why?

  • Because the objective of financial reporting

  • is to provide financial information which

  • is useful for decision making--

  • generally decisions that investors, lenders,

  • and other creditors make about money.

  • They're called capital providers for a reason.

  • The information a mining company needs

  • to provide to stakeholders to be useful

  • may not be the same as the information a bank

  • would provide, because the industries

  • differ in significant ways.

  • That's why IFRS allows a lot of freedom with regard

  • to the format of the financial statements.

  • Different industries need to show different things

  • to be useful to their stakeholders, their decision

  • makers.

  • Having said that, IFRS does not allow total freedom.

  • To ensure a minimum level of information for all businesses,

  • IFRS has some basic presentation requirements.

  • Let's go through the listing of basic items

  • that need to be presented on the statement of income,

  • comprehensive income under IFRS.

  • There are nine required line items.

  • First is revenues.

  • Second, costs incurred for financing the business.

  • Third, profit or loss from associates or joint ventures

  • accounted for using the equity method.

  • Fourth, income taxes spent or refund

  • from continuing operations.

  • Fifth, discontinued operations, net of income taxes.

  • Six, profit or loss, also called net income or net loss.

  • Seven, earnings per share for continuing and discontinuing

  • operations.

  • Eight, other comprehensive income with details.

  • Nine, comprehensive income.

  • Now that we've listed all of the items,

  • let's look at each in detail so you

  • get a better idea of what each of these line items requires.

  • First, revenues are likely the most important number

  • on the income statement, because it

  • is the key to a business's performance, which is what

  • the income statement measures.

  • It must be grouped by type.

  • For example, income from selling products

  • must be separated from interest income and income

  • from investments.

  • Each category of revenue, if it's material,

  • must be reported separately, either on the face

  • of the statement or in the notes.

  • What does that mean?

  • On the face of the financial statement means

  • it is placed on the actual financial statement,

  • broken down line by line item and providing a total.

  • However, in some cases, it is impossible to provide

  • all the details in the statements,

  • since it's just too detailed.

  • That problem is solved by providing a condensed statement

  • and then providing supplementary schedules in the notes

  • to the financial statements.

  • These schedules in the notes support the total

  • on the face of the financial statement.

  • This can reduce the statement to just a few lines

  • on a single page.

  • Anyone wishing to know the details

  • must pay attention to the supporting schedules,

  • which are located in the notes.

  • Revenues, categorized by type.

  • The second line item is financing costs,

  • and they must be reported separately.

  • What did it cost the company to finance

  • their growth and expansion and their day-to-day operations?

  • The cost of financing may seriously

  • affect the business's performance,

  • and it will absolutely affect the assessment

  • of how risky the business is.

  • This is with regards to providing the business

  • with additional capital, such as a loan,

  • at some point in the future.

  • Because it is so important, it must

  • be included as a separate line item

  • on the face of the statement.

  • Third is the profit or loss from investments which are accounted

  • for using the equity method.

  • What are we talking about here?

  • Let's break it down for a moment.

  • Earnings are lost from what investments?

  • From either joint ventures or associates.

  • What are they?

  • For a joint venture, we're talking

  • about a joint arrangement, as defined under IFRS 11.

  • A joint arrangement is where two or more entities agree

  • to partner together for a specific reason,

  • like an activity, and they sign a contract which states

  • how the partnering will work.

  • The arrangement usually has a limited life

  • and a carefully-defined set of activities or objectives.

  • An example would be two mining companies

  • who have a joint arrangement to explore

  • a specific geographical area in Canada.

  • Once that exploration is finished,

  • so is the joint arrangement.

  • Key to a joint arrangement is that the parties

  • have joint control, meaning that any strategic decisions must

  • be agreed to by all the parties, a unanimous consent.

  • In a joint venture, the investor--

  • the entity who makes the investment--

  • has a right to the net assets of the joint venture.

  • The other type of investment is an associate.

  • This is where the investor owns over 20% of the shares

  • of an other entity.

  • The 20% is a rule of thumb, meaning

  • that if the ownership share is 20% or greater,

  • we assume there an associate.

  • But really, we would have to look at the facts

  • before we make this decision.

  • If that 20% rule applies, then the investor

  • is assumed to have significant influence.

  • This means they have the power to involve themselves

  • in the operations of the entity they are invested in.

  • This is often demonstrated by things

  • such as being able to vote in a member of the board

  • of directors or having one of your senior managers work

  • in the investee company.

  • Both of these things would indicate that the investor has

  • significant influence, and the investment is therefore

  • categorized as an associate.

  • If that is the case, then the associate

  • must use the equity method to account for their investment.

  • What does this mean?

  • Well, on the balance sheet, it means that the investor

  • will report their share--

  • say, 28%-- of the net assets of the investee's business.

  • It would be a one-line item under assets

  • that must be fully described in the notes

  • of the financial statements.

  • On the income statement, it would

  • mean that the investor's share of the investor's profit

  • or loss is reported as one line item on the income statement

  • with the full details described in the notes

  • to the financial statements.

  • To summarize, profit or loss from the investments accounted

  • for under the equity method is the income or loss

  • from a joint venture or associate which

  • is reported on one line in the income statement,

  • but detailed in the notes.

  • Why is this required?

  • Because unlike normal revenues and expenses

  • from continuing operations, these investments

  • are only partially under the control of management,

  • and therefore, an important factor

  • for shareholders to know so that they can appropriately

  • assess the profitability of the business.

  • Four is income tax, also a required line item.

  • This is either the income tax expense,

  • because the company has revenues greater than expenses,

  • or an income tax refund, because the company has expenses that

  • are greater than the revenues.

  • Income tax expense reduces the profit,

  • and it's recorded as a debit.

  • However, income tax refunds are recorded as credits,

  • meaning that they reduce expenses and technically are

  • similar to revenues, since revenues

  • are recorded as credits.

  • Let's do an example, just to clarify this concept.

  • If there is income before taxes of $10,000,

  • then there is income tax expense of $2,000

  • if the company has a 20% marginal tax rate.

  • Profit would then be $8,000.

  • But if there were losses before income tax of $6,000,

  • then the company would get a tax refund of $1,200.

  • This would reduce the amount of the loss.

  • So in this case, the $1,200 refund would reduce the $6,000

  • loss before taxes to only $4,800 loss after taxes.

  • Income taxes must be disclosed for both continuing operations

  • as well as discontinued operations.

  • Why?

  • Because it is only partially under the control

  • of management, and therefore, an important factor for

  • stakeholders to know so they can appropriately

  • assess the profitability of the business.

  • Line item 5 is discontinued operations.

  • We're not going to say much about this

  • now, because there will be a separate video

  • about discontinued operations.

  • But just so you know the basics, this

  • is when the business sells a major line, segment,

  • or geographical area.

  • And they sell it as a whole unit.

  • This line item must include both the losses from the write-down

  • of the assets and liabilities being sold--

  • net of income tax refunds--

  • and the profit or loss from operating

  • this part of the business before it

  • was discontinued-- net of income taxes that are applicable,

  • either an expense if there's a profit or a refund

  • if there's a loss.

  • Why are discontinued operations reported as a separate line

  • item?

  • Because the information has no predictive value.

  • This line of business will not continue into the future.

  • For this reason, it must be listed as a separate line

  • item on the statement.

  • Item 6 is profit or loss from the total operations,

  • which are all the lines we have already covered and expenses.

  • What?

  • You didn't catch this?

  • To see this, let's go back to our listing of line items.

  • Notice in our listing, there is no line item for expenses,

  • such as the cost of goods sold, depreciation expense,

  • utilities expense, et cetera.

  • We have financing costs and income taxes, but nothing else.

  • However, since we have to have a line item called profit or loss

  • from total operation, there must be a line item

  • for expenses on the statement.

  • It's just not a required line item officially.

  • Line item 6 is therefore a total of all the prior line

  • items and expenses, which must also be deducted.

  • Item 7 is earnings per share.

  • We'll have a separate video on how to calculate

  • earnings per share.

  • But on the face of the statements,

  • there must be the following--

  • basic earnings per share from continuing operations

  • and for discontinued operations plus a total earnings per share

  • for both operations together.

  • In addition, on the face of the statement,

  • there must be diluted earnings per share

  • from continuing operations and diluted

  • earnings per share from discontinued operations,

  • and then diluted earnings per share from both operations

  • together.

  • We'll discuss earnings per share in a future video,

  • because earnings per share is considered

  • a very important ratio with regard

  • to assessing a business's performance.

  • Next is other comprehensive income.

  • This area is so complex that I defer coverage

  • to a different video.

  • But we can say right now that other comprehensive income are

  • the gains and losses due to changes in equity that are not

  • part of the normal operations of the business.

  • These non-operating items can be used