CONCEPTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (Part 2)

ACCA P2 考试：CONCEPTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (Part 2)

RECYCLING (THE RECLASSIFICATION FROM EQUITY TO P&L)

Now let us consider the issue of recycling. This is where gains or losses are reclassified from equity to P/L as a reclassification adjustment. In other words gains or losses are first recognised in the OCI and then in a later accounting period also recognised in the P/L. In this way the gain or loss is reported in the total comprehensive income of two accounting periods and in colloquial terms is said to be recycled as it is recognised twice. At present it is down to individual accounting standards to direct when gains and losses are to be reclassified from equity to P/L as a reclassification adjustment. So rather than have a clear principles based approach on recycling what we currently have is a rules based approach to this issue. This is clearly, again, an unsatisfactory approach but also as we shall see one addressed by the July 2013 IASB discussion paper on its Conceptual Framework for Financial Reporting

IAS 21, The Effects of Changes in Foreign Exchange Rates (IAS 21), is one example of a standard that requires gains and losses to be reclassified from equity to P/L as a reclassification adjustment. When a group has an overseas subsidiary a group exchange difference will arise on the re-translation of the subsidiary's goodwill and net assets. In accordance with IAS 21 such exchange differences are recognised in OCI and so accumulate in OCE. On the disposal of the subsidiary, IAS 21 requires that the net cumulative balance of group exchange differences be reclassified from equity to P&L as a reclassification adjustment - ie the balance of the group exchange differences in OCE is transferred to P/L to form part of the profit on disposal.

IAS 16 PPE is one example of a standard that prohibits gains and losses to be reclassified from equity to P/L as a reclassification adjustment. If we consider land that cost $10m which is treated in accordance with IAS 16 PPE. If the land is subsequently revalued to $12m, then the gain of $2m is recognised in OCI and will be taken to OCE. When in a later period the asset is sold for $13m, IAS 16 PPE specifically requires that the profit on disposal recognised in the P/L is $1m - ie the difference between the sale proceeds of $13m and the carrying value of $12m. The previously recognised gain of $2m is not recycled/reclassified back to P/L as part of the gain on disposal. However the $2m balance in the OCE reserve is now redundant as the asset has been sold and the profit is realised. Accordingly, there will be a transfer in the Statement of Changes in Equity, from the OCE of $2m into RE.

DOUBLE ENTRY

For those who love the double entry let me show you the purchase, the revaluation, the disposal and the transfer to RE in this way.

On purchase	$m	$m
Dr Land PPE	10
Cr Cash		10
On revaluation
Dr Land PPE	2
Cr OCE and recognised in OCI		2
On disposal
Dr Cash	13
Cr Land PPE		12
Cr P/L		1

On transfer
Dr OCE	2
Cr Retained earnings		2