Statement of Comprehensive Income / Income Statement / Other Comprehensive Income

Reporting Irregular Gains and Losses

As we understood in the beginning that definition of Income include both revenue and gains. Similarly definition of expenses also include losses in it. From the definition we can understand that gains and losses can be a regular or recurring line item or an irregular or non-recurring one.

One school of thought says that entity’s income statement shall report only regular items which in simple words mean only up to operating profit calculation reason being that only operating income and expenses are the ones that occur on regular basis. Therefore, from users’ perspective it is important that decisions are based on recurring line items while treating anomalous or irregular items separately.

Second school of thought however, oppose limiting the income statement only to recurring regular line items. They say it can substantially influence the decision of the user as some important piece of information might be missed or not considered by the user. Any gain or loss that entity earn whether regular or irregular in nature is ultimately affecting entity’s financial performance. Therefore, irregular items might take separate space or highlighted as being irregular but must be catered in the income statement.

The gains and losses that are not considered part of operations of the business or precisely said does not happen routinely as a result of operating activities are categorized as follows:

1. Other incomes and other losses of irregular nature
2. Discontinued operations
3. Extraordinary items

Other incomes and losses of irregular nature

Other incomes and losses that do not arise out of operating activities of the business but still reported in the income statement include:

1. Impairment losses of non-current assets and goodwill
2. Gain or loss on disposal of non-current assets
3. Writing down inventory to net realisable value in case NRV is lower than cost.
4. Bad debts
5. Fine or damages paid to government or customer
6. Restructuring provisions

Such gains and losses although are irregular in nature but it is left on the management to decide whether to report them as a separate line item or not. For example bad debts may be reported as administrative expenses and impairment losses may be made part of cost of sales amount. However, if the amount is significant and reporting it as a separate line item can enhance relevance and reliability of income statement then management may do so. For example restructuring provision are usually reported as a separate line item.

Moreover whether to report such items as a part of operating profit calculation is also left on management’s discretion. In that case entity must define a policy which is mostly in line with industry norms to make comparable financial statements.

Term line item basically refers to such piece of information which has its own weight and should be presented on a separate line on any document. To learn more about line item read: What is meant by ‘line item’ in accounting standards?

Discontinued Operations

A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and

1. represents a separate major line of business or geographical area of operations,
2. is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or
3.  is a subsidiary acquired exclusively with a view to resale.

A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In other words, a component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use.

IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations require entity to report any gains or losses from discontinued operations as a single post-tax (net of tax) line item in the income statement after computation of profit from continuing operations. Such presentation help users assess financial performance better.

Most of the time a separate heading is given to help identify clearly.

Extraordinary Items

Extraordinary items are such gains and losses that are irregular in nature and also material in nature. As they are irregular and result from activities that are not ongoing normal business activities they are termed as under US and other GAAPs.

To label a certain item as extraordinary it must be:

1. so unusual or abnormal considering the nature of business and environment in which it entity is operating.
2. so irregular that it is hard to expect such events happening.

These two conditions are rarely found to be true. And the possible examples include:

1. major casualty count,
2. compulsory acquisition by government
3. significantly limiting entity’s activities as a result of new regulations

Determining whether an item is extraordinary in nature it involves use of judgement which at times is quite difficult as management has to consider the whether entity was able to reasonably anticipate, materiality of event.

One important requirement however is that entity has to consider the environment as likelihood of such event is determined by considering the environment in which it operates. For example bird flu is now a usual case in chicken farming business. Therefore, strike of such virus cannot be treated as extraordinary event. But if floods have wasted crop in the area where it cannot be expected as it has never happened before then it will be considered as extraordinary event.