Statement of profit or loss and OCI - Classification and pre...

Learning Outcomes

After studying this article, you will be able to explain the classification and presentation principles for the statement of profit or loss and other comprehensive income (OCI) in accordance with international accounting standards. You will distinguish between profit or loss and OCI, identify typical line items and categories, and explain how classification impacts the usefulness and comparability of financial statements for the ACCA exam.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand how to prepare and present statements of profit or loss and other comprehensive income. Focus your revision on:

• The requirements of IAS 1 for the classification and presentation of income and expenses
• The standard structure and mandatory line items in the statement of profit or loss and OCI
• The difference between profit or loss and other comprehensive income, and how each is presented
• The distinction between items that are reclassifiable (recycled) and those not reclassifiable to profit or loss

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following must appear as separate lines in the statement of profit or loss under IAS 1?
   1. Revenue
   2. Revaluation surplus
   3. Cost of sales
   4. Both a) and c)
2. What is the main difference between profit or loss and other comprehensive income (OCI)?
   1. OCI includes realised gains only
   2. Profit or loss may be reclassified; OCI cannot
   3. Profit or loss reflects realised and unrealised gains; OCI is always reclassified
   4. Profit or loss is for realised, distributable income; OCI includes specific unrealised items

3. True or false? Gains from the revaluation of property, plant and equipment are always reported in profit or loss.

4. Provide two examples of income or expense that must be presented in other comprehensive income and state whether each is reclassified to profit or loss in future periods.

Introduction

The statement of profit or loss and other comprehensive income (OCI) is a core component of general purpose financial statements. It provides users with visibility into an entity's financial performance during a reporting period, capturing both realised and certain unrealised gains and losses. Proper classification and presentation are essential to ensure transparency, comparability, and compliance with accounting standards such as IAS 1.

IAS 1 specifies how income and expenses are to be classified, requiring clear presentation of items in profit or loss or OCI and prescribing a minimum set of line items and formats. Understanding the basis of this presentation is essential for both exam preparation and professional practice.

Key Term: statement of profit or loss and other comprehensive income (OCI)
A primary financial statement that reports income and expenses recognised during the period, showing profit or loss and, separately, items of other comprehensive income—as required by accounting standards.

THE STRUCTURE AND FORMAT OF THE STATEMENT

Entities must present total comprehensive income, showing clearly the allocation between profit or loss and OCI. IAS 1 permits two formats: a single combined statement or two separate statements (one for profit or loss, the other for OCI). Most entities use the single-statement approach.

Classification of Income and Expenses

Income and expenses must be classified according to their nature or function. The most common classifications by function are cost of sales, selling expenses, administrative expenses, and finance costs. By nature, items are grouped such as depreciation, employee benefits, or raw materials.

Certain items must always be disclosed separately—for example, revenue, finance costs, tax expense, profit or loss, and individual OCI items such as revaluation gains or actuarial movements.

Key Term: other comprehensive income (OCI)
Components of income and expense that are not recognised in profit or loss as required or permitted by specific accounting standards, such as revaluation gains and actuarial gains/losses.

PRESENTATION OF OTHER COMPREHENSIVE INCOME (OCI)

Items included in OCI are specified by standards and are not ordinarily recycling through the profit or loss unless permitted. IAS 1 requires OCI to be subdivided into:

• items that will be reclassified subsequently to profit or loss (recycled), and
• items that will not be reclassified to profit or loss.

Examples of OCI items that may be reclassified include:

• Fair value gains/losses on certain financial assets (subject to specific policy choices)
• Exchange differences on foreign operations (not FR syllabus)

Examples that are not reclassified include:

• Revaluation surplus for property, plant and equipment
• Actuarial gains/losses on defined benefit plans

Key Term: reclassification adjustment
Amounts previously recognised in OCI that are reclassified to profit or loss in the current period, as required by accounting standards.

Key Term: recycling
The process of moving amounts from OCI to profit or loss, typically when a gain or loss is realised.

Worked Example 1.1

Scenario: Lyra Ltd reported a $40,000 gain on revaluation of land and a $15,000 fair value loss on equity investments designated as fair value through OCI for the year ended 31 December 20X8.

How should these items be presented in the statement of profit or loss and OCI, and are they reclassified in future periods?

Answer:

• The revaluation surplus ($40,000) is recorded in OCI and will not be reclassified to profit or loss.
• The fair value loss on equity investments designated as FVOCI ($15,000) is recorded in OCI and remains there; it will not be reclassified, but may be transferred within equity upon disposal.

CLASSIFICATION OF PROFIT OR LOSS VS OTHER COMPREHENSIVE INCOME

Distinguishing between profit or loss and OCI is based on the standard requiring or permitting OCI treatment for specific items. Typically, profit or loss captures ordinary revenue and expenses, gains/losses realised during the period, and items that reflect ongoing operations.

OCI, on the other hand, includes only those items mandated by standards, usually reflecting specific categories of unrealised gains or losses where immediate recognition in profit or loss is not appropriate. This classification is not a matter of policy choice; classification is set by relevant standards (e.g., IAS 16 for revaluations, IAS 19 for pension actuarial movements, IFRS 9 for certain fair value changes).

Worked Example 1.2

Scenario: Messier Co reported profit before tax of $180,000. During the year, a revaluation gain on equipment of $25,000 (IAS 16) and a $12,000 loss on disposal of investments in debt securities, previously held at FVOCI, were recognised.

Indicate in which section (profit or loss or OCI) each item should be presented and which, if any, are reclassified (recycled) to profit or loss.

Answer:

• Revaluation gain of $25,000: presented in OCI, not recycled to profit or loss.
• $12,000 loss on disposal of debt investments previously held at FVOCI: amount accumulated in OCI should be reclassified to profit or loss on disposal, as required by IFRS 9.

Minimum Required Content

IAS 1 sets out specific items that must be presented as line items in the statement. These include:

• Revenue
• Finance costs
• Share of profit/loss from associates and joint ventures (if applicable)
• Tax expense
• Profit or loss
• Each component of OCI, classified as to whether it may be reclassified subsequently

Comparative figures for preceding periods must always be presented.

Exam Warning

Confusing items that must appear in profit or loss versus those to be shown in OCI is a common exam pitfall. Remember, only items specified by standards belong in OCI—never by management choice. Failing to classify or present correctly will lead to loss of marks.

PRESENTATION OF TAX

The tax effects of OCI items must each be shown either individually for each item or in total for all OCI items, in accordance with IAS 1. This enhances transparency about the after-tax effects of income and expense.

RECLASSIFICATION AND RECYCLING

When a standard requires recycling, the amount is transferred from accumulated OCI to profit or loss in the relevant (usually disposal) period. Standards such as IFRS 9 and IAS 21 specify recycling for certain items. For others, such as revaluation surpluses and actuarial movements, no recycling occurs.

Summary

The classification and presentation of income and expenses in the statement of profit or loss and OCI are governed strictly by international standards. Income and expenses are shown either in profit or loss or, where required by a specific standard, in OCI. Items in OCI are sub-classified according to whether or not they are reclassifiable. Presentation must follow the minimum line items required by IAS 1 and show tax effects clearly. Standards specify which items are reclassified, and when.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the required structure and mandatory line items in the statement of profit or loss and OCI per IAS 1
• Clarify the distinction between profit or loss and other comprehensive income
• Describe how items in OCI are classified according to whether or not they will be reclassified to profit or loss
• State the rules for reclassification (recycling) and when this occurs
• Identify how tax effects are reported for OCI items

Key Terms and Concepts

• statement of profit or loss and other comprehensive income (OCI)
• other comprehensive income (OCI)
• reclassification adjustment
• recycling