CHAPTER 6 Statement of profit or loss and statement of changes in equity 227REALITY CHECKJB Hi-Fi Ltd Notes to the financial statements for the financial year
ended 30 June 2015
(t) Plant and equipment
Depreciation is provided on plant and equipment and leasehold improvements. Depreciation is calculated
on a straight-line basis so as to write off the net cost of each asset over its expected useful life to its esti-
mated residual value. The estimated useful lives, residual values and depreciation method are reviewed at
the end of each annual reporting period, with the effect of any changes recognised on a prospective basis.
The following estimated useful lives are used in the calculation of depreciation:
— Leasehold improvements 1 to 15 years
— Plant and equipment 1.5 to 15 years
An item of plant and equipment is derecognised upon disposal or when no future economic benefits are
expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retire-
ment of an item of plant and equipment is determined as the difference between the sales proceeds and
the carrying amount of the asset, and is recognised in the profit or loss.
Source: JB Hi-Fi Ltd 2015, preliminary final report, p. 68.Quality of earnings
Given that preparers of financial statements have discretion with respect to accounting policies and estimations,
it is necessary to consider the quality of the profit or loss figure, often referred to as the quality of earnings. Are
the earnings persistent? Earnings derived from the entity’s repetitive operations are regarded as persistent or
sustainable, or core earnings. Are the earnings being managed? Earnings management refers to managers’
use of accounting discretion via accounting policy choices and/or estimations to portray a desired level of profit
in a particular reporting period. Reported profits are used in entities’ contractual arrangements and to value
entities and are therefore an important financial number. Managers’ choices may be determined by their desire
to portray the economic reality of the entity in the statement of profit or loss; however, the choices may also be
driven by self-interest. A particular profit range may be desirable for a number of reasons including to avoid
breaching loan covenants, to maintain the share price or to maximise salary bonuses. The independent audit of
financial statements provides assurance that, based on the audit evidence, the financial statements give a true
and fair view of the entity’s financial position and performance and comply with required accounting standards.
In a demonstration of good corporate governance, the Chief Executive Officer and Chief Financial Officer may
be required to sign a declaration certifying the accuracy of the financial statements.
Earnings management often occurs via the accruals process. In chapter 7, you will examine the state-
ment of cash flows. This financial statement details the net cash inflows and outflows for an entity during
the reporting period. It is useful to compare an entity’s profit or loss with its cash flows from operations.
This is synonymous with comparing profit or loss under accrual accounting with profit or loss calculated
under cash accounting. Remembering that timing differences associated with accrual accounting even
out over the life of the entity, such a comparison enables the user to determine any unusual trends in
accruals that may suggest the profit figure reported is being managed.
VALUE TO BUSINESS• Many entities are required to prepare their statements of profit or loss using accrual accounting.
This means that income and expenses are included in the statement of profit or loss when they
occur. This differs from cash accounting, where income is recognised when the cash is received and
expenses are recognised when the cash is paid.
• Generally accepted accounting principles permit and require preparer choices as to when
transactions are recorded and measured.
• The profit or loss figure is a function of the entity’s portfolio of accounting choices, estimations and
judgements.