Chapter 4 Reporting Financial Performance

September 25/27, 2013

Quality of Earnings
Some attributes of high quality earnings: 1. Confirm past performance and profitability (Feedback Value) 2. Indicative of future performance (Predictive Value) strong core earnings. 3. Reflect potential risk or uncertainty in achieving future net cash inflows (Predictive Value) accrued earnings should turn into future cash flows.

Quality of Earnings
How can Statement of Income/Comprehensive Income help assess quality of earnings?
Recognition:
Representation of economic reality

Measurement:
Unbiased and determined objectively

Presentation:
Presented in a clear, concise manner that makes the information easy to use and understandable.

Income which to report?

ASPE: Net Income closed to retained earnings at the end of the fiscal year. IFRS: Comprehensive Income:
Net Income +/- Other comprehensive Income: Unrealized Gains/Losses arising mostly from changes in value of assets (financial or non-financial) and liabilities.
Example: unrealized gains/losses on revaluation of property, plant, and equipment under the revaluation model Closed to Accumulated Other Comprehensive Income at the end of the fiscal year.

IFRS: Required line items

Certain items are required to be reported separately: Basic:
Revenue (ASPE) Expenses Finance costs Tax expense (ASPE) Profit or loss (ASPE) Other Comprehensive Income Comprehensive Income Earnings per Share

Other required line items

When the entity disposes of a component: Results of discontinued operations (ASPE) When the entity holds financial assets: Gains/losses from derecognition of financial asset (amortized cost) Gains/losses on reclassification of financial asset When the entity uses equity method for its investment: Share of profit/loss for such investments Share of other comprehensive income of such investments For ASPE (all income from investments) When the subsidiaries are not wholly owned by the parent: Profit or loss and comprehensive income attributable to noncontrolling interest and owners AND, items of income or expense that are material and may influence users decisions.

Common Presentation
There is no prescribed form of presentation under IFRS, but following are common presentations: Single Step or Multi-Step Statements Expanded or Condensed Statements Operating vs. Non-operating sections Expenses by Nature or by Function Ultimately, the form of presentation should help users understand the true performance of the entity.

Lets take a look at Rogers Statements of Income and Statements of Comprehensive Income

Separate line items: Discontinued Operations

Discontinued operations includes components that have been disposed of or are held for sale Components can include:
Under ASPE: an operating segment, reporting unit, subsidiary, asset group, or operations without assets Under IFRS (more restrictive): separate major line of business or geographical area of operations, or a business qualifying as held for sale upon acquisition

The key is that the component generates its own cash flows and has its own distinct operations

Presentation: Discontinued Operations

A distinction made between:
- The components results of operations - Disposal of the components assets

Discontinued Operations: Assets held for sale

Component is held for sale if the following criteria are met:
Authorized plan to sell exists Asset available for immediate sale Active search for a buyer Sale is probable within a year Asset is reasonably priced and marketed Unlikely that plan to sell will change

Discontinued Operations: Assets held for sale

Depreciation is not recognized for held for sale assets Remeasured at lower of carrying value and fair value net of cost to sell Once asset is written down, subsequent gains can be recognized only up to the amount of original loss Presented separately on balance sheet
Under ASPE, held for sale asset retains original classification as current or non-current Under IFRS, held for sale assets generally classified as current

E4-4
Diamond in the Rough net income: $91,000 Blue Division income from operation net of tax: $4,200 Blue Divisions only asset:
Carrying value: $25,000 Fair Value: $8,000 Estimated net proceeds from sale: $5,000

Tax rate: 30%

Separate line items: Earnings per share

Earnings per share (EPS) is considered one of the most significant business indicators
Basic EPS: Net Income less Preferred Dividends Weighted Average of Common Shares Outstanding

Must present separately: EPS based on earnings before discontinued operations and EPS based on net income Basic EPS and Diluted EPS (e.g. stock options that may become common shares in the future will be included in the denominator)

E4-18
At December 31, 2014 Preferred shares outstanding: 107,500 shares Common shares outstanding: 4,000,000 shares Income from continuing operations before tax: $23,650,000 Discontinued operations (loss before tax): ($3,225,000) Preferred dividends declared: $1,075,000 Common dividends declared: $2,200,000 Tax rate: 30% 400,000 common shares were issued on April 1, 2014.

Calculate EPS information as it should appear in the financial statements.

Statement of Retained Earnings (ASPE) Statement of Changes in Equity (IFRS)

Beginning balance, adjusted for retrospective restatements:
Changes in accounting policy Correction of errors

+/- Net income/net loss +/- Other comprehensive income (IFRS only) +/- Transactions with owners (contributions and distributions)

Essential Ratios
Profitability Ratios: Profit margin
Net income/net sales

Rate of return on assets (ROA)

Net income/average total assets

Rate of return on common share equity (ROE)

Net income/average common shareholders equity

Price earnings ratio

Market price of shares/earnings per share