IAS 1 Presentation of Financial Statements defines profit or loss and other comprehensive
income. The purpose of the statement of profit or loss and other comprehensive income is to show an entity’s financial performance in a way which is useful to a wide range of users so that they may attempt to assess the future net cash inflows of an entity. The statement should be classified and aggregated in a manner which makes it understandable and comparable. However, the International Integrated Reporting Council (IIRC) is calling for a shift in thinking more to the long term, to think beyond what can be measured in quantitative terms and to think about how the entity creates value for its owners. Historical financial statements are essential in corporate reporting, particularly for compliance purposes, but it can be argued that they do not provide meaningful information. Preparers of financial statements seem to be unclear about the interaction between profit or loss and other comprehensive income (OCI) especially regarding the notion of reclassification, but are equally uncertain about whether the IIRC’s Framework constitutes suitable criteria for report preparation. A Discussion Paper on the Conceptual Framework published by the International Accounting Standards Board (IASB) has tried to clarify what distinguishes recognised items of income and expense which are presented in profit or loss from items of income and expense presented in OCI.
Required:
(a) (i) Describe the current presentation requirements relating to the statement of profit or loss and other comprehensive income. (4 marks)
(ii) Discuss, with examples, the nature of a reclassification adjustment and the arguments for and against allowing reclassification of items to profit or loss. Note: A brief reference should be made in your answer to the IASB’s Discussion Paper on the Conceptual Framework. (5 marks)
(iii) Discuss the principles and key components of the IIRC’s Framework, and any concerns which could question the Framework’s suitability for assessing the prospects of an entity. (8 marks)
(b) Cloud, a public limited company, regularly purchases steel from a foreign supplier and designates a future purchase of steel as a hedged item in a cash flow hedge. The steel was purchased on 1 May 2014 and at that date, a cumulative gain on the hedging instrument of $3 million had been credited to other comprehensive income. At the year end of 30 April 2015, the carrying amount of the steel was $8 million and its net realisable value was $6 million. The steel was finally sold on 3 June 2015 for $6·2 million.
On a separate issue, Cloud purchased an item of property, plant and equipment for $10 million on 1 May 2013. The asset is depreciated over five years on the straight line basis with no residual value. At 30 April 2014, the asset was revalued to $12 million. At 30 April 2015, the asset’s value has fallen to $4 million. The entity makes a transfer from revaluation surplus to retained earnings for excess depreciation, as the asset is used.
Required:
Show how the above transactions would be dealt with in the financial statements of Cloud from the date of the purchase of the assets.
Note: Candidates should ignore any deferred taxation effects. (6 marks)
Professional marks will be awarded in question 4 for clarity and quality of presentation. (2 marks)
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