F1 3.03 The Statement of Profit or Loss and Other Comprehensive Income

The Statement of Profit or Loss and Other Comprehensive Income

The Statement of Profit or Loss and Other Comprehensive Income measures an entity’s performance over a financial period. It records an entity’s income, expenses and its profits or losses. The Statement is sometimes referred to as the Statement of Income and whilst this is not as common as it used to be, it is still used by some companies.

Comparisons with the equivalent statement for sole traders and/or partnerships

There are some notable differences between the statement of profit or loss and other comprehensive income for a company and that for a sole trader or partnership

  1. The company’s statement tends to be less detailed than a statement for a sole trader or partnership (expenses are grouped together in fewer categories)
  2. The company’s statement includes the company’s corporation tax charge for the year (corporation tax is a tax that is based on the profits made by a company). Sole traders or partners however, do not include the income tax that is charged on their business profits in their statements of profit or loss
  3. The company’s statement may include a section at the end that records “Other Comprehensive Income”. [NB. If this section is not included, the statement will simply be called a Statement of Profit or Loss]
    • A company is permitted to split this statement into two separate parts; first a Statement of Profit or Loss and secondly a Statement of Comprehensive Income
    • In this course we will only look at the combined statement

Other Comprehensive Income

Other Comprehensive Income includes any gains or losses that have occurred but have not been “realized” (i.e. they are “unrealized”). A realized transaction is one that has been completed such as a sale that has been made following the supply of goods or services. An unrealized transaction however, is one which has not been completed. An example of an unrealized transaction would be an asset such as a property that is revalued upwards to its fair value (i.e. its current market value). Whilst this gain would be recorded in the period, this gain is only on paper as the property as the asset has not actually been sold.

There are a number of different types of gains or losses that would be recorded in the Other Comprehensive Income section of the statement including:

  • A gain or loss when property, plant and equipment has been revalued to its fair value
  • A company has an investment in a foreign subsidiary that has changed in value due to changes in currency exchange rates
  • A company has available-for-sale financial assets whose fair value have changed
  • Actuarial gains and losses arising on a defined benefit pension plan

In each of the above cases, the asset’s value or liability’s value has changed but until the asset is sold, or the liability is settled, that gain or loss is unrealized.

[Note that this course will only look at the example of revaluations of property, plant and equipment]

Statement of profit or loss: permitted layouts

IAS 1 Presentation of Financial Statements allows two different layouts for the Statement of Profit or Loss; one based on the nature of expense and a more common layout which is based on the function of expense. Examples of both layouts are shown below but it must be noted that the layout based on the nature of expense is not used by the vast majority of companies in the UK and will not therefore be used in the rest of this course.

Layout based on the nature of expense: example

NB. The column headed Notes refer to numbers in the Notes to the Financial Statements where additional information about the associated figures can be found

Layout based on the function of expense: example

Each type of expense or costs shown in the above Statement of Profit or Loss can consist of several types of expense incurred by the different functions of the company or entity.

Cost of sales

Cost of sales include any direct costs or expenses incurred in making, or buying-in the products sold or the services delivered plus any indirect production overheads. The types of items that are commonly included in Cost of Sales are:

  • Opening inventories
  • Purchases of raw materials or goods for resale
  • Carriage inwards
  • Production wages
  • Factory costs
  • Depreciation of machinery used in production
  • Less closing inventories
Selling and distribution expenses

Selling and distribution expenses include any expenses incurred in gaining and making sales and then delivering the goods to the customers. They will therefore include such costs as:

  • Sales department’s wages
  • Delivery drivers’ wages
  • Agent’s fees and commissions
  • Advertising and promotional costs
  • Carriage outwards
  • Depreciation of delivery and sales vehicles
  • Motor expenses
Administrative expenses

Administrative expenses include the running costs of the business including:

  • Administration staff wages
  • Depreciation of office equipment
  • Printing, postage and stationery
  • Accountancy fees
  • Legal costs
  • Office rent, rates & insurance
  • Head Office costs
Finance income

Finance income records income generated from savings and investments such as:

  • Bank interest receivable
  • Debenture interest receivable
Finance costs

Finance costs records the cost raising finance from borrowings such as:

  • Interest on bank borrowings
  • Interest payable on debentures
  • Interest payable on lease liabilities

The tax line in the statement records corporation tax (which is a tax payable by companies on the profits they make). This line will record:

  • The corporation tax charge for the financial period
  • Any adjustments required as a result of a previous period’s corporation tax charge being recorded incorrectly. This is known as an “over- or under-provision of corporation tax”

Common alternatives used in the names of the lines of the statement

When preparing the Statement of Profit or loss a company may use slightly different names for the line headings than those shown above, for example, a company might use “Sales” or “Sales Revenue” rather than “Revenue”.

A company might also use additional lines for income or expenses if it received income or incurred costs that did not fit easily into the existing categories. For example, a company might include a line for “Other Income” if it received income that wasn’t sales or finance income.

Companies should amend the names of lines in the Statement or include additional lines whenever it believes that doing so will aid the users’ understanding.

Other Comprehensive Income

Where a company had “Other Comprehensive Income” in a financial period, an additional section will be included at the bottom of the Statement of Profit or Loss and Other Comprehensive Income. This section will record the unrealized gains or losses made in the period. Gains included in this section will then be added to the profits for the period, and losses will be deducted, in order to calculate the “Total Comprehensive Income for the period”

An example of a Statement that includes the Other Comprehensive Income section is shown below:

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