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Net Profit or Loss for the Period All items of income and expense recognised in a period should be included in the determination of the net profit or loss for the period unless a MASB Standard requires or permits otherwise. Normally, all items of income and expense recognised in a period are included in the determination of the net profit or loss for the period. This includes extraordinary items and the effects of changes in accounting estimates. However, circumstances may exist when certain items may be excluded from net profit or loss for the current period. This Standard deals with two such circumstances: the correction of fundamental errors and the effect of changes in accounting policies. Other MASB Standards deal with items which may meet the MASB's A Proposed Framework for the Preparation and Presentation of Financial Statements, definitions of income or expense but which are usually excluded from the determination of the net profit or loss. Examples include revaluation surpluses (see MASB 15, Property, Plant and Equipment) and gains and losses arising on the translation of the financial statements of a foreign entity (see MASB 6, The Effects of Changes in Foreign Exchange Rates). The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the income statement: profit or loss from ordinary activities; and extraordinary items.
Extraordinary Items The nature and amount of each extraordinary item should be separately disclosed. Virtually all items of income and expense included in the determination of net profit or loss for the period arise in the course of the ordinary activities of the enterprise. Therefore, only on rare occasions does an event or transaction give rise to an extraordinary item. It is possible to view such items as being external to managerial control and exhibiting a high degree of abnormality. Whether an event or transaction is clearly distinct from the ordinary activities of the enterprise is determined by the nature of the event or transaction in relation to the business ordinarily carried on by the enterprise rather than by the frequency with which such events are expected to occur. Therefore, an event or transaction may be extraordinary for one enterprise but not extraordinary for another enterprise because of the differences between their respective ordinary activities. For example, losses sustained as a result of an earthquake may qualify as an extraordinary item for many enterprises. However, claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks. Examples of events or transactions that generally give rise to extraordinary items for most enterprises are: the expropriation of assets; or an earthquake or other natural disaster.
A previous practice has been to view the disposal of long-term investments and land or buildings as extraordinary items. Whilst such items are material and sometimes not expected to recur in the foreseeable future, nonetheless these items are related and incidental to the ordinary and typical activities of the enterprises. Extraordinary items arise from transactions or events that possess a high degree of abnormality that are clearly distinct from the ordinary activities of the enterprise and also are not expected to recur in the foreseeable future. That an event or transaction is clearly distinct from the ordinary activities is also determined by the nature of the event or transaction in relation to the environment of the enterprise's business operations. For example, losses sustained as a result of a typhoon would normally qualify as an extraordinary item for most enterprises in Malaysia. However, losses from a flood would not normally qualify as an extraordinary item, unless it is of a scale that can be considered as a natural disaster. Reporting enterprises are, however, required to disclose ordinary items separately if their disclosure is relevant in explaining the financial performance. The disclosure of the nature and amount of each extraordinary item may be made on the face of the income statement, or when this disclosure is made in the notes to the financial statements, the total amount of all extraordinary items is disclosed on the face of the income statement.
Profit or Loss from Ordinary Activities When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Although the items of income and expense described in paragraph 18 are not extraordinary items, the nature and amount of such items may be relevant to users of financial statements in understanding the financial position and performance of an enterprise and in making projections about financial position and performance. Disclosure of such information is usually made in the notes to the financial statements. Circumstances which may give rise to the separate disclosure of items of income and expense in accordance with paragraph 18 include: the write-down of inventories to net realisable value or property, plant and equipment to recoverable amount, as well as the reversal of such write-downs; a restructuring of the activities of an enterprise and the reversal of any provisions for the costs of restructuring; disposals of items of property, plant and equipment; disposals of long-term investments; discontinued operations; litigation settlements; and other reversals of provisions.
Discontinued Operations
While the disposal of investments or other major assets may be sufficiently important to warrant disclosure of the related items of income or expense, occasionally an enterprise sells or abandons a separate, major line of business which is distinguishable from other business activities, for example, a segment determined in accordance with MASB 22, Segment Reporting. When this constitutes a discontinued operation as defined in this Standard, the disclosures contained in paragraph 22 are relevant to users of financial statements. The following disclosures should be made for each discontinued operation: the nature of the discontinued operation; the industry and geographical segments in which it is reported in accordance with MASB 22, Segment Reporting; the effective date of discontinuance for accounting purposes; the manner of discontinuance (sale or abandonment); the gain or loss on discontinuance and the accounting policy used to measure that gain or loss; and the revenue and profit or loss from the ordinary activities of the operation for the period, together with the corresponding amounts for each prior period presented.
The results of a discontinued operation are generally included in profit or loss from ordinary activities. However, in the rare circumstances that the discontinuance is the result of events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore are not expected to recur frequently or regularly, the income or expenses that arise from the discontinuance are treated as extraordinary items. For example, if a subsidiary is expropriated by a foreign government, the income or expense that arise from the expropriation may qualify as an extraordinary item. The disclosure requirements in paragraph 22 are applied for all discontinued operations including those that give rise to extraordinary items. When it is known at the date on which the financial statements are authorised for issue that an operation was discontinued after the balance sheet date or that it will be discontinued, the disclosure requirements of paragraph 22 are applied to the extent that the information can be reliably estimated.
Changes in Accounting Estimates
As a result of the uncertainties inherent in business activities, many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgements based on the latest information available. Estimates may be required, for example, of bad debts, inventory obsolescence or the useful lives or expected pattern of consumption of economic benefits of depreciable assets. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based or as a result of new information, more experience or subsequent developments. By its nature, the revision of the estimate does not bring the adjustment within the definitions of an extraordinary item or a fundamental error. Sometimes it is difficult to distinguish between a change in accounting policy and a change in an accounting estimate. In such cases, the change is treated as a change in an accounting estimate, with appropriate disclosure. The effect of a change in an accounting estimate should be included in the determination of net profit or loss in: the period of the change, if the change affects the period only; or the period of the change and future periods, if the change affects both.
A change in an accounting estimate may affect the current period only or both the current period and future periods. For example, a change in the estimate of the amount of bad debts affects only the current period and therefore, is recognised immediately. However, a change in the estimated useful life or the expected pattern of consumption of economic benefits of a depreciable asset affects the depreciation expense in the current period and in each period during the remaining useful life of the asset. In both cases, the effect of the change relating to the current period is recognised as income or expense in the current period. The effect, if any, on future periods is recognised in future periods. The effect of a change in an accounting estimate should be included in the same income statement classification as was used previously for the estimate. To ensure the comparability of financial statements of different periods, the effect of a change in an accounting estimate for estimates which were previously included in the profit or loss from ordinary activities is included in that component of net profit or loss. The effect of a change in an accounting estimate for an estimate which was previously included as an extraordinary item is reported as an extraordinary item. The nature and amount of a change in an accounting estimate that has a material effect in the current period or which is expected to have a material effect in subsequent periods should be disclosed. If it is impracticable to quantify the amount, this fact should be disclosed.
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