The Statement of Profit or Loss (a.k.a. Income Statement using Canadian ASPE) shows the company's earnings and expenses. Different countries may have their own unique presentation standards for the same information. However, all publicly traded companies are required to follow IFRS guidelines. In this post, we review the standard IFRS Statement of Profit or Loss (used by all publicly traded companies) as well as the analogous Canadian ASPE Income Statement (used by private Canadian companies that choose ASPE).
Elements of a complete Statement of Profit or Loss under IFRS include: Revenues, Other Comprehensive Income, Expenses, Income/Gross Profit, and Gains or Losses. Under ASPE, there is no concept of Other Comprehensive Income - so this is not included in the Income Statement. Explanations of each element are found below.
Revenue is an increase in assets (usually Cash or Accounts Receivable) through normal business activities.
Other Comprehensive Income (OCI) is shown in IFRS statements, but not in ASPE Income Statements. OCI is used to show unrealized gains and losses from revaluations of fixed assets, currency hedging, pension plans and other non-standard or unrealized sources of gains. Under ASPE, companies are not required to report their unrealized gains and losses, so there is no need for this section.
Within the OCI category, line items must be classified by nature and grouped into the following categories:
Those that will not be subsequently reclassified to income or loss
Those that will be subsequently reclassified to income or loss when specific conditions are met
The following is an example of why OCI is a useful category. Under IFRS reporting, companies have the option of reassessing the value of their fixed assets at regular intervals. This is called the "revaluation model" and will be discussed in later articles. For example, a company may own multiple commercial buildings. If their buildings are increasing in value, the company might choose to use the "revaluation model" in order to show the increase in value to stakeholders. The company can show this increase in value of their fixed assets in both their Statement of Financial Position and in the Statement of Profit or Loss. However, because the assets have not actually been sold, it would be overly optimistic to show their revaluations directly by increasing the "Assets"section of the Statement of Financial Position, or by increasing the "Revenue" section of the Statement of Profit or Loss. So instead, when a company uses the revaluation model for valuing its fixed assets, the increase in value is added to "Accumulated and Other Comprehensive Income" in the Statement of Financial Position and to the "Other Comprehensive Income" in the Statement of Profit or Loss. The OCI will also have a subcategory called "Revaluation Surplus", under which these revaluation increases should be accumulated. Because the assets have not actually been sold and revaluations are simply estimates of current market value, these should never be presented in the Revenue section.
Gains or Losses arise from the company’s non-primary/non-normal activities. Gains/losses are a subcategory of OCI. Examples include: gains or losses from investments in assets (if these are not primary revenue sources), winnings or losses from lawsuits, etc...
Comprehensive Income: While not always shown in the Statement of Profit or Loss, Comprehensive Income simply refers to the total of Revenues and Other Comprehensive Income. It is essentially the total comprehensive income that the company has accumulated for a given period.
Revenues + Other Comprehensive Income = Comprehensive Income
Expenses are a decrease in assets (usually Cash or Accounts Payable) from normal business activities. This includes cost of sales and administrative expenses. It is not permitted to include these in OCI, nor can we net these from Other Comprehensive Income.
IFRS requires that expenses should be analyzed either by their nature or by their function within the company.
ASPE has no specific requirements for how the expenses should be presented.
Income/Gross Profit refers to the difference between Revenues and Expenses (the net amount). Income does not include Other Comprehensive Income. As we discussed above, OCI is not yet realized, so we should not include it in the Income/Profit section.
Revenues - Expenses = Income (Gross Profit)
Sample Statement of Profit or Loss:
Under IFRS, the Expenses section of the Statement of Profit or Loss can be presented in two different ways: by Nature or by Function. An example of each can be found below.
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