Essay on Financial Accounting

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13/10/2014

Week 11

Measurement of Profit & Reporting
Comprehensive Income
Week 11 Lecture

ACCT2011
Financial Accounting A

› Text Readings:
- Chapter 16: section 16.1 – 16.3.1 (to p.510)
- Chapter 19: section 19.5
› Handbook Readings:
- AASB 101

Dr Eagle Zhang

2

Week 11

Learning objectives
1. Understand different approaches to profit measurement and the approach adopted in Australia
(Ch 16 LO 1 - 2)
2. Understand the requirements for the preparation of a statement of comprehensive income in AASB 101 (Ch
16 LO 3)
3. Understand the requirements of AASB 108 in terms of accounting for changes in accounting policies, estimates and errors (Ch 19 LO 7, 8 & 9)
4. Understand some of the social implications of the financial reporting for comprehensive income
3

Objective 1

Understand different approaches to profit measurement and the approach adopted in Australia

4

Measurement of profit (Cont’d)

Measurement of profit

›

Traditionally, profit has been the process of:
-

›

Matching revenues for a period with expenses incurred in generating those revenues

The traditional profit measurement has changed due to: -

Changes in the categorisation and labelling of financial statement elements.

-

Reduced emphasis on matching.

- Operating-profit approach:
- Profit is measured as income from operations minus expenses from operations.

- All-inclusive approach:
- Profit is measured as the result of ordinary operations plus income and expenses relating to prior periods, the effects of some accounting policy changes and the result of extraordinary transactions and events.

- Comprehensive income approach:
- Profit includes all income and expenses as defined in the
Framework.

5

6

1

13/10/2014

Measurement of profit (cont’d)
›

› Measurement of comprehensive income:

Approach adopted in AASB 101:
-

›

Measurement of profit (cont’d)

The Statement of Comprehensive Income:

Statement of comprehensive income

identifies total comprehensive income as all changes in equity other than contributions from or distributions to equity holders (shareholders).

Income
Less: Expenses
= Profit or loss for the period

Profit or Loss is the total of income less expenses, excluding the components of other comprehensive income.
(AASB101:7)

›

+/- Items of other comprehensive income
=Total comprehensive income for the period

Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Australian Accounting Standards. (AASB101:7)
7

8

Objective 2

AASB 101
›The approach in AASB101 is similar to the ‘comprehensive income approach’.

Understand the requirements for the preparation of a statement of comprehensive income in AASB 101

AASB 101.7:
Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive income’.
Owners are holders of instruments classified as equity.

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AASB 101
Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other
Australian Accounting Standards.

AASB 101

IASB/FASB convergence project
›

Framework, released in September 2010

›

ED IAS 1 The Presentation of Items of Other
Comprehensive Income, released in May 2010.

The components (101.7) of other comprehensive income include:
(a) changes in revaluation surplus (see AASB 116 Property, Plant and
Equipment and AASB 138 Intangible Assets);
(b) actuarial gains and losses on defined benefit plans recognised in
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