Concept of Income

Lecture 4

Influence of future events on the recognition of

revenues and expenses

The reporting process records past events but

these past events are dependent on our estimate
of future events.

Every accrual and deferral is dependent upon

future events

Treatment of future events in asset, liability,

expense, and revenue recognition has not been
well systematized.

Some Aspects of Future Events

Perception of the Past Transaction

a transaction as a result of a single event (oneevent view) or a series of events (two-event view).

Probabilistic Nature of Future Events

probable (over 50 percent) vs. reasonable

possible or remote (less than 50%).
A modal approach vs. A weighted probability
approach

Management intent (MI) The basis of recognition

based on the MI was rejected : of subjectivity. MI
can easily change and .: might lead to a problem if
the event recognition is only based on MI.

Market values

Market values posses a rich information about future events.

However, market values may result from thinly traded

securities or assets leading to questions on representational
faithfulness or

verifiability of the resulting numbers.

Conservatism Differentiation in treatments

between contingent liabilities and
contingent assets.

Future Economic Conditions

Future Legal Requirements.

Measurement issues: Comprehensive Income, Net

Income & Core Earnings

(1) current

operating income
(2) net income, &
(3) all-inclusive concept of
income (comprehensive
income)

(1) emphasis on current & operating.

Current = only value changes & events that
are controllable by management and that
result from decisions of the current period
should be included.
Operating = only those results from the
normal operations should be included in the
measurement of income. This definition
might be problematic as non-operating
operations might also be effected by
managerial decisions. .: a more acceptable
definition is to separately disclose the
results of operating and non-operating
activities, but the focus of income would
only be on income from operating activities.

(2) Net income also includes items that are not current.

Effects of certain accounting adjustments of earlier

periods that are recognised in the current period, such as
the principle example in present practice cumulative
effects of changes in accounting principles. (SFAC No. 5,
para 42)

(3) is defined as the total change of net

wealth, except for the dividend distributions
and capital transactions. FASB refers to
concept
as
Comprehensive Income.

Comprehensive income is broader than net

income because it includes:
other changes in net assets (principally
certain holding gains and losses) that are
recognized in the period, such as some
changes in market values of investments in
marketable equity securities classified as noncurrent assets, changes in market values of
investments having specialized accounting
practices for marketable securities, and
foreign currency translation adjustments
(SFAC No. 5)

The hierarchy of earnings, net income

and comprehensive income

Earnings = Current operating income + non-recurring items

Net income = Earnings + cumulative effect on prior years of a

change in accounting principles

Comprehensive income = Net income + cumulative prior period

adjustments + remaining non-owner changes in equity

Other comprehensive income (OCI)

The components of other comprehensive income include:

(a) changes in revaluation surplus (see MFRS 116 Property, Plant and Equipment
and MFRS 138 Intangible Assets);

(b) actuarial gains and losses on defined benefit plans recognised in accordance
with paragraph 93A of MFRS 119 Employee Benefits;

(c) gains and losses arising from translating the financial statements of a foreign
operation (see MFRS 121 The Effects of Changes in Foreign Exchange Rates);

(d) gains and losses on remeasuring available-for-sale financial assets (see MFRS
139 Financial Instruments: Recognition and Measurement);

(e) the effective portion of gains and losses on hedging instruments in a cash
flow hedge (see MFRS 139);