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Application of International Financial Reporting Standards

Expenses recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function(cost of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104) The major exclusive of costs of goods sold, are classified as operating expenses. These represent the resources expended, except for inventory purchases, in generating the revenue for the period. Expenses often are divided into two broad sub classicifications selling expenses and administrative expenses.[7]

Non-operating section[edit]

  • Other revenues or gains – revenues and gains from other than primary business activities (e.g., rentincome from patents, goodwill). It also includes unusual gains that are either unusual or infrequent, but not both (e.g., gain from sale of securities or gain from disposal of fixed assets)
  • Other expenses or losses – expenses or losses not related to primary business operations, (e.g., foreign exchange loss).
  • Finance costs – costs of borrowing from various creditors (e.g., interest expensesbank charges).
  • Income tax expense – sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred taxliabilities (or assets).

Irregular items[edit]

They are reported separately because this way users can better predict future cash flows – irregular items most likely will not recur. These are reported net of taxes.

  • Discontinued operations is the most common type of irregular items. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Discontinued operations must be shown separately.

Cumulative effect of changes in accounting policies (principles) is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. For example, valuation of inventories using LIFO instead of weighted average method. The changes should be applied retrospectively and shown as adjustments to the beginning balance of affected components in Equity. All comparative financial statements should be restated. (IAS 8)

However, changes in estimates (e.g., estimated useful life of a fixed asset) only requires prospective changes. (IAS 8)

No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP. (IAS 1.87) Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. [Note: natural disaster might not qualify depending on location (e.g., frost damage would not qualify in Canada but would in the tropics).]

Additional items may be needed to fairly present the entity’s results of operations. (IAS 1.85)