Accounting Business Reporting for Decision Making

CHAPTER 6 Statement of profit or loss and statement of changes in equity 241

The reality check ‘What companies strip out of “Non-GAAP” earnings: fines, exec bonuses, sever-

ance, rebranding costs.. .’ reports on customised earnings measures used by companies.

REALITY CHECK

What companies strip out of ‘Non-GAAP’ earnings: fines, exec

bonuses, severance, rebranding costs...

Companies are continuing to report non-statutory profit figures in addition to statutory profit figures.

Companies are taking their statutory profit and stripping out certain costs to report a customised profit

figure. The Wall Street Journal reported that 40 IPO companies in 2014 reported ‘customised’ profits

when their performance under statutory reporting requirements were losses. The costs often stripped

out included regulatory fines, ‘rebranding’ expenses, interest, pension expenses, costs for establishing

new manufacturing sources, fees paid to the board of directors, severance costs, executive bonuses

and management-recruitment costs. Companies argue that such practices provide investors with a

clearer picture of ongoing performance. Others suggest that such practices are trying to boost profits to

support a desired valuation.

Source: Rapoport, M 2015, ‘What companies strip out of “Non-GAAP” earnings: fines, exec bonuses, severance,

rebranding costs.. ., Wall Street Journal, 8 January.

VALUE TO BUSINESS

•   Profit (earnings) can be measured at various levels.

•   Various profit measures include:

• gross profit


• profit before and after tax


• earnings before interest


• earnings before interest, tax, depreciation and amortisation


• profit before and after material items


• profit from continuing and discontinued operations


• pro forma earnings.

6.10 The statement of comprehensive income

LEARNING OBJECTIVE 6.10 Explain the nature of the statement of comprehensive income and
statement of changes in equity.

So far in this chapter we have concentrated on the statement of profit or loss. The statement of profit or loss

reports the profit or loss for the reporting period. Entities that are required to comply with accounting standards

must also prepare a statement of comprehensive income. In addition to income and expenses recognised in the

determination of profit or loss, there are other income and expense items that are required or permitted by some

accounting standards to be taken directly to equity rather than recognised in profit or loss. For example:

• non-current asset revaluations directly taken to a revaluation surplus


• net exchange differences associated with translating foreign currency denominated accounts of a sub-

sidiary into the reporting currency of the group

• adjustments to equity allowed pursuant to the operation of a new accounting standard.

Such items are included in the determination of an entity’s ‘other comprehensive income’ for an

accounting period, but they are not taken into account when determining an entity’s profit or loss for

the period. This is a product of having accounting standards that permit some transactions to bypass

the statement of profit or loss. There is no rule or rationale explaining why this is permitted in some

circumstances. Other comprehensive income refers to all changes in equity during the reporting period