Preparing Financial Statements: New Zealand Equivalents to International Financial Reporting Standards

1. Preparing Financial Statements: New Zealand Equivalents to International Financial Reporting Standards Income Statement Dr Grant Samkin

2. Income Statement Revenue – Expense = Profit

3. Income statement prepared for internal reporting purposes • Income statement for internal reporting purposes bears little resemblance to one prepared for external reporting purposes • For internal decision making purposes • Differs from users decision making purposes

4. Income statement prepared for external reporting purposes • Line items to be disclosed on the face of the income statement (NZ IAS 1, par. 81) • Revenue • Finance costs • Share of profit of losses from associates • Tax expense • Discontined operations • Profit or loss for period • Additional requirements • Write down of assets • Restructuring costs • Disposals • Litigation settlements • Reversals of provisions

5. Classification of expenses by nature • Income from the ordinary activities of the reporting entity. For example: • Sales • Fees • Royalties • Dividends • Interest

6. Classification of expenses by nature • Material income items anciliary to main activities and which have not been included in ‘Revenue’. For example: • Dividends • Rent • Interest • Royalties • Canteen revenue

7. Classification of expenses by nature No guidance provided by NZ IAS 1. Suggestion that this classification not exceed 10 per cent of total expenses

8. Classification of expenses by nature • Costs that arise from an entity’s financing of its operations. Includes: • Interest on long-term borrowings; • Interest on short-term borrowings • Bank overdraft interest

9. Classification of expenses by function • Expenditure incurred in the manufacture or purchase of goods sold during the year: • Direct material, salaries and production overhead expenses. • Includes: • Product staff employment exps. • Utility exps • Depr exp of manufact. PPE • Change opening and closing inventory

10. Classification of expenses by function • Expenses associated with the administration of the entity as a whole: • Salaries and associated expenses of admin & mngt staff; • Depr. of admin. PPE; • Professional fees; • Write off of current assets (e.g.accounts receivable)

11. Classification of expenses by function • Expenses incurred in transferring ownership of the finished goods to the consumer: • Warehouse rent, insurance & maint.; • Promotion, advertising & trade shows; • Salaries, commissions etc. of sales staff; • Cash discounts on sales.

12. Classification of expenses by function • Other management expenses not seperately disclosed elsewhere. For example: • Salaries & associated payroll costs for R&D staff • Materials used in R&D process • Depr. Of PPE used in R&D

13. Income statements by nature and function evaluated

14. Additional disclosure requirements • Additional income statement disclosure requirements numerous • Found in individual accounting standards • e.g. Impairment of financial assets (bad debts) NZ IAS 32, par 126(a) • ‘Grey letter’ paragraphs are important source of additional disclosures • e.g Auditors remuneration NZ IAS 1, par NZ 94.1 • Companies Act 1993 provides certain numeric disclosure requirements • Directors’ fees