ACCA P2 考試：CONCEPTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (Part 1)

This article explains the current rules and the conceptual debate as to where in the statement of comprehensive income, profits and losses should be recognised - ie when should they be recognised in profit or loss and when in the other comprehensive income. Further, it explores the debate as to whether it is appropriate to recognise profits or losses twice!

The performance of a company is reported in the statement of profit or loss and other comprehensive income. IAS 1, Presentation of Financial Statements, defines profit or loss as 'the total of income less expenses, excluding the components of other comprehensive income'. Other comprehensive income (OCI) is defined as comprising 'items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs'. Total comprehensive income is defined as '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'.

It is a myth, and simply incorrect, to state that only realised gains are included in profit or loss (P/L) and that only unrealised gains and losses are included in the OCI. For example, gains on the revaluation of land and buildings accounted for in accordance with IAS 16, Property Plant and Equipment (IAS 16 PPE), are recognised in OCI and accumulate in equity in Other Components of Equity (OCE). On the other hand, gains on the revaluation of land and buildings accounted for in accordance with IAS 40,Investment Properties, are recognised in P/L and are part of the Retained Earnings (RE). Both such gains are unrealised. The same point could be made with regard to the gains and losses on the financial asset of equity investments. If such financial assets are designated in accordance with IFRS 9, Financial Instruments (IFRS 9), at inception as Fair Value Through Other Comprehensive Income (FVTOCI) then the gains and losses are recognised in OCI and accumulated in equity in OCE. Whereas if management decides not to make this election, then the investment will by default be designated and accounted for as Fair Value Through Profit or Loss (FVTP&L) and the gains and losses are recognised in P/L and become part of RE.

There is at present no overarching accounting theory that justifies or explains in which part of the statement gains and losses should be reported. The IASB's Conceptual Framework for Financial Reporting is silent on the matter. So rather than have a clear principles based approach what we currently have is a rules based approach to this issue. It is down to individual accounting standards to direct when gains and losses are to be reported in OCI. This is clearly an unsatisfactory approach. It is confusing for users.

In July 2013 the International Accounting Standards Board (IASB) published a discussion paper on its Conceptual Framework for Financial Reporting. This addressed the issue of where to recognise gains and losses. It suggests that the P/L should provide the primary source of information about the return an entity has made on its economic resources in a period. Accordingly the P/L should recognise the results of transactions, consumption and impairments of assets and fulfilment of liabilities in the period in which they occur. In addition the P/L would also recognise changes in the cost of assets and liabilities as well as any gains or losses resulting from their initial recognition. The role of the OCI would then be to support the P/L. Gains and losses would only be recognised in OCI if it made the P&L more relevant. In my view whilst this may be an improvement on the current absence of any guidance it does not provide the clarity and certainty users crave.