Business Models and Industries
The basic business model consists of getting cash, investing it in resources, and then using these
resources to generate profits.
1. Financing (external): Obtaining cash funding.
By borrowing, issuing shares, or using retained profits.
Also involve the repayment of debt and/or repurchase shares.
2. Investing (internal): Using the funding the buy assets and invest in people.
3. Operations (internal): Using the assets to earn profits.
Risk Management: Identifying risks, deciding how to manage risks, and monitoring risks.
Low cost/high volume strategy: High volume sales at a low cost.
Cost differentiation strategy: Higher prices by selling more unique and higher end products.
Communicating Information about Performance
The information in an income statement is useful to:
1. Evaluate the enterprise's past performance and profitability.
2. Provide a basis for predicting future performance.
Determine and analyze trends.
3. Help assess the risk of not achieving future net cash inflows.
Quality of Earnings/Information
Not all information is created equal.
The statement of income/comprehensive income has the followig shortcomings:
1. Items that cannot be measured reliably are not reported in the income
2. Income numbers are affected by the accounting methods that are used.
Example: Different depreciation methods.
3. Income measurement involves the use of estimates.
Example: Different estimates of an assets life expectancy. Differences in bad
4. Financial reporting bias.
Quality of earnings: Refers to how solid the earnings numbers are.
1. Content: Integrity of the information.
Sustainability of the earnings.
Unbiased, as numbers are not manipulated, and objectively determined.
Reflect the economic reality
Reflect primarily the earnings generated from ongoing core business
Closely correlate with cash flows from operations.
Based on sound business strategy and business model.
Earnings are presented in a clear, concise manner that makes the information easy
to use and understand.
Transparent, as no attempt is made to disguise or mislead.
Sustainability of income is important.
Earnings Management: Defined as the process of targeting certain earnings levels (whether
current or future) or desired earnings trends and then working backwards to determine what
has to be done to ensure that these targets are met.
The Statement of Income and the Statement of Comprehensive
Net income represents revenues and gains less expenses and losses both from continuing
and discontinued operations.
Comprehensive income: Is net income plus/minus other comprehensive income/loss.
Operating income: Is not defined by GAAP but is generally seen to be ongoing revenues
The notion of comprehensive income is sometimes referred to as the all-inclusive
approach to measuring income.
Operating income supporters believe that including one-time items such as write-offs and
restructuring charges reduces the income measure''s basic predictive value.
Analysts argue that one-time items actually provide feedback value. They can be used to
assess the riskiness of future earnings - and therefore have predictive value.
Other comprehensive income (OCI): Is made up of certain specific gains or losses
Unrealized gains and losses on certain securities.
Certain foreign exchange gains or losses.
Other gains and losses as defined by IFRS.
Other comprehensive income is closed out to a balance sheet account that is often referred
to as Accumulated Other Comprehensive Income.
Acts as a type of retained earnings account.
Is an equity account on the balance sheet.
Discontinued Operations: Include components of an enterprise that have been disposed of (by sale, abandonment, or spinoff) or are classified as held for sale.
Component of an entity (a business component) where the operations, cash flows, and
financial elements are clearly distinguishable from the rest of the enterprise.
Considered a Component under ASPE
Operating segment: Operating segments engage in business activities, have
their performance review by management (specifically the chief operating
decision-maker), and have discrete accounting information available.
Reporting unit: Is equal to an operating segment or one level below, the
difference being that performance is review by a lower level of management.
Subsidiary: A separate level entity.
Asset group: Has cash flows that are largely independent of other cash flows
from the business.
Operations without long-lived or other assets.
Considered a Component under IFRS
A separate major line of business or geographical area of operations.
A business that meets the criteria to be accounted for as held for sale upon
ASPE is less restrictive.
Assets Held for Sale
An additional condition must be met before the transaction can be given a different
presentation on the income statement.
Assets relating to the component must be considered to be held for sale by the
Assets are considered to be held for sale when all of the following criteria are met:
There is an authorized plan to sell.
The asset is available for immediate sale in its current state.
There is an active program to find a buyer.
Sale is probable within one year.
The asset is reasonably priced and actively marketed.
Changes to the plan are unlikely.
In summary, assets may be considered as held for sale when there is a formal plan
to dispose of the component.
Note that assets that are held for sale might not (and do not need to) meet the
definition of discontinued operations.
Measurement and Presentation
When an asset is held for sale, regardless of whether it meets the definition of a
discontinued operation, the asset is remeasured to the lower of its carrying value and fair
value less its cost to sell.
Note that if the value of an asset that has been written down later increase, the gain
can be recognized up to the amount of the original loss.
Once an asset has been classified as held for sale, no further depreciation is
Assets and related liabilities that are classified in this way are presented separately as held for sale in the balance sheet (if material).
Current assets: as "current assets held for sale/related to discontinued
Noncurrent assets: as "concurrent assets held for sale/related to
Current liabilities: as "current liabilities related to assets held for
Long-term liabilities: as "long-term liabilities related to assets held for
Assets and related liabilities that are classified in this way are presented in the
The assets an liabilities would be presented as held for sale and classified as
current assets and liabilities.
Ordinary versus Peripheral Activities
The distinction between revenues and gain (and expenses and losses) depends to a great
extent on how the enterprises's ordinary or typical business activities are defined.
Basic Presentation Requirements
Companies are required to include all elements in the financial statements as long as they
are measurable and probable.
The following items are specifically required to be presented separately in the statement of
ASPE as per Section 1520
Income from investments
income tax expense (before discontinued operations)
Income or loss before discontinued operations
Results of discontinued operations
Net income or loss
IFRS as per IAS 1
Gains/losses from derecognition of financial asset measured at amortized
Gains/losses on reclassification of financial assets
Share of profit/loss for investments accounted for using the equity method
Results of discontinued operations
Profit or loss
Other comprehensive income classified by nature showing which will be
recycled and which will not
Share of other comprehensive income of investments accounted for using the
Comprehensive income Profit or loss and comprehensive income attributable to non-controlling
interest and owners
Combined Statement of Income/Comprehensive Income
Under IFRS, the statement of comprehensive income is presented either:
1. in a single combined statement including revenues, expenses, gains, losses, net
income, other comprehensive income, and comprehensive income. or;
2. in two separate statements showing the traditional income statement in one and a
second statement beginning with net income and displaying the components of other
comprehensive income, as well as comprehensive income.
Single-Step Income Statements
Only two main groupings are used: Revenues and expenses.
The single-step form of income statement is widely used in financial reporting in smaller
Presentation is simple
No one type of revenue or expense item is implied to have priory over any other
Over-simplification and less detail
Multi-Step Income Statements
Some users argue that presenting other important revenue and expense data separately
makes the income statement more informative and more useful.