## **Learning Outcomes**

After completing this article, you will be able to identify and describe the required subtotals in the statement of profit or loss and other comprehensive income (OCI). You will be able to explain the role and risks of alternative performance measures (APMs), understand the links to earnings per share (EPS), and apply these concepts in line with IFRS and ACCA exam standards.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the principles governing the presentation of profit or loss and OCI, including:

- The required line items and subtotals in the statement of profit or loss and OCI under IAS 1
- The definition, use, and exam treatment of alternative performance measures (APMs)
- How subtotals and APMs interact with the presentation of basic and diluted EPS under IAS 33
- The effect of APMs and subtotals on user understanding of performance for exam and real-world analysis

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which subtotal is specifically required by IAS 1 to be presented on the face of the statement of profit or loss?
2. What is an "alternative performance measure" (APM)? What is one risk associated with APMs in published accounts?
3. True or false? Companies must present an EPS figure for every subtotal or APM shown on the statement of profit or loss.
4. Explain how subtotals and the presentation of profit links to the calculation of basic EPS under IAS 33.

## **Introduction**

Subtotals in the statement of profit or loss, such as "gross profit" or "profit from operations," are widely used by companies and are commonly required or expected on exam questions. These subtotals support user understanding and enable ratio calculations, including EPS. Alternative performance measures (APMs), such as "core profit" or "adjusted EBITDA," are used by organisations to communicate performance, but they are not defined by IFRS and can influence user perceptions if not clearly explained.

Understanding the correct use and placement of subtotals, the definition and risks of APMs, and their link to EPS is essential for ACCA FR candidates. This article outlines what is required by the standards, what is permitted, and how they interact for exam presentation and analysis.

## Required and Permitted Subtotals in Profit or Loss and OCI

Companies must prepare a statement of profit or loss and other comprehensive income in accordance with IAS 1. IAS 1 specifies minimum line items, but also allows or suggests certain subtotals that help users interpret financial performance.

> **Key Term: subtotal**
> A total within the profit or loss or other comprehensive income statement aggregating selected income and expense items before arriving at a required minimum line item, shown to aid user understanding.

IAS 1 requires the following key subtotals on the face of the statement of profit or loss:

- "Profit (or loss) before tax"
- "Profit (or loss) for the period"

Other subtotals such as "gross profit," "operating profit," and "EBITDA" are commonly presented, but are not explicitly required by IAS 1. These subtotals must comply with several principles:

- They must be presented and labelled in a way that is clear and not misleading.
- They must be consistent across periods.
- Their composition must be explained, either on the face of the statement or in the notes.

> **Key Term: operating profit**
> A subtotal representing profit after deducting operating expenses from gross profit; not defined by IFRS but commonly used.

A subtotal must not obscure the required minimum line items or give undue prominence to management’s own preferred measures.

## Alternative Performance Measures (APMs)

Many companies use additional measures not specified by IFRS, such as "core profit," "adjusted profit," or similar.

> **Key Term: alternative performance measure (APM)**
> A financial measure of historical or future performance, financial position, or cash flows, other than one defined or specified in IFRS.
>
> **Key Term: core profit**
> An APM commonly used by companies to exclude certain items (such as restructuring costs or one-off gains) from IFRS profit to show "core" or "recurrent" results.

APMs must be:

- Clearly labelled and defined
- Reconciled to the most directly comparable IFRS measure
- Not given greater prominence than IFRS-required figures

### **Worked Example 1.1**

**BlueSky Co presents "Profit before exceptional items" and "Profit for the year." This year, an impairment loss on a factory asset of \$560,000 is treated as an exceptional item. The standard profit before tax is \$3,200,000 and profit after tax is \$2,400,000.**

a) What should BlueSky Co do to ensure its APM is compliant with best practice?

> **Answer:**
> BlueSky Co must define "Profit before exceptional items" either on the face of the statement or in the notes. The exceptional item (impairment loss) and how it is excluded must be disclosed or reconciled to the IFRS profit before tax. The APM must not be afforded greater prominence than "Profit for the year." The calculation and rationale should be disclosed.

## Subtotals, APMs, and Earnings per Share (EPS)

Subtotals such as "Profit for the year" and "Profit attributable to ordinary shareholders" are directly linked to the calculation of basic and diluted EPS under IAS 33.

IAS 33 requires basic and diluted EPS to be presented for:

- "Profit or loss attributable to ordinary equity holders of the parent," and
- If the entity reports amounts for discontinued operations, for those operations as well.

Presenting EPS based on APMs (such as core or adjusted profit) is not required and should be clearly labelled as "adjusted EPS" or similar. The definition of profit used must be stated and reconciled to the IFRS profit figure.

### **Worked Example 1.2**

**Windmill Ltd shows "operating profit (\$4,000,000)," "profit before tax (\$3,200,000)," and "profit for the year (\$2,560,000)." It also presents a headline "core profit" figure of \$2,800,000.**

a) For which subtotal(s) must EPS be presented under IAS 33?

> **Answer:**
> EPS must be presented for "profit for the year attributable to ordinary shareholders." EPS figures for operating profit or for core profit are not required by IAS 33 but may be shown additionally if clearly labelled and reconciled.

### **Exam Warning**

> It is incorrect to present EPS for an APM (such as "core profit") without reconciliation to IFRS profit. In exams, show EPS only for "profit for the year" unless the question requires calculation for a specific subtotal or discontinued operation.

## Risks and User Considerations—Subtotals and APMs

Subtotals improve clarity but, if inconsistently used or ill-defined, can confuse or mislead users. APMs, in particular, may cherry-pick favourable items or trends, so always interpret with care and refer to reconciliations.

### **Revision Tip**

> In FR exam questions, always use the subtotals explicitly shown in the question unless told otherwise. Show the key subtotals with correct labels, and ensure figures are reconciled to IFRS totals if APMs are required.

## **Summary**

Subtotals such as "profit before tax" and "profit for the year" are an IFRS minimum. APMs and other subtotals may be presented to provide useful additional analysis but must be clearly labelled, reconciled, and not given excessive prominence. EPS must be presented only for "profit for the year" attributable to equity holders, unless exam requirements state otherwise. When using or interpreting APMs, always check the reconciliation to IFRS profit.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define required subtotals in the statement of profit or loss and OCI, per IAS 1
- Describe the nature and risks of alternative performance measures (APMs)
- Explain when and how subtotals and APMs may be presented
- Identify which profit figures require calculation of EPS under IAS 33
- Recognise the need for reconciliation and clear labelling of APMs/EPS figures in published and exam financial statements

## **Key Terms and Concepts**

- subtotal
- operating profit
- alternative performance measure (APM)
- core profit

Statement of profit or loss and OCI - Subtotals, alternative performance measures, and EPS link