BU387 Lecture Notes - Lecture 6: Weighted Arithmetic Mean, Production Function, Deep Fryer
BU387- WEEK 3, LECTURE 2
Shoppers Drug Mart → Follows IFRS
• Document called “management’s responsibility for financial statements”
o Signed by CEO and CFO acknowledge all areas of their responsibilities
• Auditor’s report
o Makes reference to management responsibility for financial statements
o Auditor’s responsibility is to make sure financial statements are free from
material error
▪ Deloitte LLP
o Now believe that the financials accurately represent the financial position
o IFRS mentioned instead of GAAP
• Can prepare single continuous statement
o Or prepare statement of earnings and second being statement of
comprehensive income (Shopper’s Drug Mart chose this route)
o EPS
▪ Calculation only done for public companies
o Statement of comprehensive income includes the “net income” plus other
comprehensive income
▪ The summing gives us the two numbers
Statement of changes in Shareholder’s Equity
• At the end of fiscal year, the temporary accounts get closed
• Net income goes into retained earnings
• Comprehensive income gets closed out to Accumulated Comprehensive Income
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Statement of Income & Other Comprehensive Income
• Objective#4- Understand different perspectives on how to measure income
o How is income measured? Net income? Comprehensive income? Operating?
▪ EPS looks calculated by net income number
o Net Income- revenues less expenses from both ongoing and discontinued
operations
o Comprehensive Income- net income plus/minus comprehensive income/loss
▪ Net income plus other comprehensive income
▪ Includes all changes in equity apart from shareholder transactions
▪ Net Assets (assets – liabilities) way of looking at it:
Net Assets (beginning of the year) vs Net Assets (end of year): look at the delta
Adjust transactions with equity owners
What we are left with then, are transactions that have impacted comprehensive income
o Operating Income- ongoing revenues less expenses
▪ Transactions that impact operating income vs those that don’t
▪ What happens when management decides that there’s a part of the
business the company shouldn’t keep on?
• Board of Directors would announce this decision
o Current operating performance approach- shows the current, regular and
recurring revenue/expenses → normalized, sustainable earnings
▪ Including one-time items like write-offs decrease predictive value
o Some argue that all operating income should be including as it sometimes
can be tough to distort between what’s one-time and what isn’t
o Other comprehensive income (OCI)- made up of specific gains/losses
including unrealized gains/losses on certain securities and FX
▪ Recognized first to OCI then transferred to net income when
investment is impaired or sold
▪ Closed out on the balance sheet as an equity account under
“Accumulated Other Comprehensive Income” that serves a bit like a
“retained earnings” purpose
Discontinued Operations
• Objective#5- Measure and report results of discontinued operations
o Discontinued operations- components of an enterprise that have been
disposed of (by sale, abandonment, or a spinoff) where:
▪ They are a subsidiary acquired for resale
▪ Represent a major line of business or geographical area
o Three key characteristics ALL in common:
▪ Generate cash flow
▪ Own set of accounting records
▪ Asset devoted to business
o Report results of discontinued operations and make them clear
▪ So that when users look at the income from operations, they KNOW
that’s the income from ongoing continuous operations from the
business
▪ Telling users to disregard the discontinued part of the business
o Separate component
▪ Component must have operations, cash flows, and financial elements
clearly distinguishable from the rest of the enterprise
▪ Must have its own assets, liabilities, and cash flows
• Hotel, apartment building, division, subsidiary, or another
country’s operations of a company
o Every hotel location would have its own cash flows
from revenues and its own expenses like heating
o Assets held for sale: if component not disposed of, before transaction
presented in income statement, assets must be shown as held for sale
▪ Assets and liabilities held for sale must be shown as current assets
and current liabilities, respectively
▪ There must be a formal plan by management to dispose of the assets,
before they’re listed as assets held for sale. Requirements:
• There is an authorized plan to sell
• Assets available for immediate sale in current state
• Active program to find a buyer
• Sale is probable within a year
• Asset reasonably priced and actively being marketed
• Change to plan unlikely
• All factors must be considered when we report discontinued
operations
o What about the assets on the balance sheet?
▪ Assets may not meet the definition discontinued operations- they’re
presented the same way as discontinued operations on the balance
sheet but any gains/losses are recorded as part of income from
continuing operations
▪ Measurement & Presentation- when an asset is held for sale, it’s re-
measured to the lower of carrying value and fair value less cost to sell.
No further depreciation is recognized.
▪ Once an asset is written down, we can always raise the value if we
think the market is turning and reverse the loss taken
▪ ASPE vs IFRS
• ASPE → Treats exactly the way those assets were treated
before they were identified for sale
• IFRS → Applies principal that any asset crystalized into cash
within next 12 months should be classified as a current asset
Document Summary
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