Learning Outcomes
This article explains the classification, presentation, and disclosure requirements for profit or loss and other comprehensive income (OCI) under IAS 1. You will be able to distinguish between items in profit or loss and OCI, identify those subject to reclassification (recycling), and understand the accounting implications in ACCA Strategic Business Reporting (SBR) scenarios.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand how financial performance is presented, differentiated, and disclosed under IAS 1 Presentation of Financial Statements. This includes clarity on profit or loss, items of OCI, and reclassification adjustments.
- Explain the structure and content of the statement of profit or loss and other comprehensive income under IAS 1
- Distinguish between items to be reported in profit or loss and in other comprehensive income (OCI)
- Identify which OCI items may be reclassified (“recycled”) to profit or loss and which are not
- Understand and disclose reclassification adjustments in financial statements
- Recognise and explain the impact of classification and recycling on reported performance
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.
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Which of the following OCI items will not be reclassified (“recycled”) to profit or loss in future periods?
- Exchange differences on translation of a foreign operation
- Change in fair value of a revalued property (IAS 16)
- Effective portion of cash flow hedges
- Fair value gains on debt instruments classified as FVOCI
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What is a "reclassification adjustment" under IAS 1?
- Separating current and non-current assets
- Presenting items gross instead of net
- Transferring an amount previously recognised in OCI into profit or loss
- Offsetting liabilities against assets
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True or false? All gains and losses recognised in OCI will eventually be recycled to profit or loss.
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Give one reason why IAS 1 requires the separation of items that may be reclassified from OCI to profit or loss and those that will not.
Introduction
IAS 1 Presentation of Financial Statements sets out the overall requirements for the presentation of general purpose financial statements, including guidance on how income and expenses are classified in the statement of profit or loss and other comprehensive income (OCI). The distinction between what appears in profit or loss and what is recognised in OCI is central to accurately reflecting an entity’s performance. Furthermore, some OCI items are subsequently "recycled" to profit or loss (reclassified adjustments), while others remain permanently in equity. Understanding these differences is essential for correct reporting and interpretation in the ACCA SBR exam.
Key Term: profit or loss
The total of income less expenses, excluding the items included in other comprehensive income.Key Term: other comprehensive income (OCI)
Items of income and expense not recognised in profit or loss as required or permitted by IFRS Standards, usually due to measurement or revaluation requirements.Key Term: reclassification adjustment
The amount reclassified from OCI to profit or loss in the current period, often when a gain or loss previously reported in OCI is realised.
Profit or Loss vs Other Comprehensive Income (OCI)
IAS 1 requires entities to present a statement of profit or loss and other comprehensive income, showing total comprehensive income as the total of profit or loss and OCI. While profit or loss reflects the results of ordinary trading activities and recurring operations, OCI is reserved for specific items mandated by other standards, typically relating to revaluations, certain hedges, or translation adjustments.
Profit or Loss
Most revenues and expenses—such as sales, cost of sales, wages, and depreciation—are reported in profit or loss. This section is the primary indicator of an entity's financial performance for the period.
Other Comprehensive Income (OCI)
OCI includes items of income and expense that are not recognised in profit or loss, usually due to timing, unreliability, or because they reflect changes in value rather than transactions with external parties.
Common items in OCI include:
- Changes in revaluation surplus for property, plant and equipment (IAS 16)
- Revaluation gains or losses on certain intangible assets (IAS 38)
- Certain actuarial gains and losses on defined benefit pension plans (IAS 19)
- Gains or losses on financial assets measured at fair value through OCI
- Effective portion of gains/losses on cash flow hedging instruments (IFRS 9)
- Exchange differences on translating foreign operations (IAS 21)
Sub-classification: Will or Will Not Be Reclassified
IAS 1 requires OCI to be split into:
- Items that may be reclassified to profit or loss in future periods (“recycled” or “reclassified”), such as:
- Exchange differences on translating foreign operations
- Some cash flow hedge reserves
- Gains/losses on debt instruments at FVOCI
- Items that will not be reclassified to profit or loss, such as:
- Revaluation surpluses (IAS 16, IAS 38)
- Remeasurements of defined benefit pension plans (IAS 19)
- Gains/losses on equity investments at FVOCI (if the irrevocable election has been made under IFRS 9)
Exam Warning
Do not assume all OCI items will be recycled to profit or loss. Clearly identify in your answer which OCI items may or may not be reclassified.
Worked Example 1.1
An entity revalues a building under IAS 16, resulting in a $200,000 increase in value. In the same period, the entity also holds a debt financial asset at fair value through OCI, which has increased in value by $30,000. During the year, $5,000 of this gain is realised due to a partial sale of the debt security.
Required: Classify these gains, state which (if any) are reclassified, and explain the accounting treatment.
Answer:
- The $200,000 building revaluation is recognised in OCI under "items that will not be reclassified to profit or loss." This amount remains in equity (revaluation surplus).
- The $30,000 gain on the debt asset is recognised in OCI under "items that may be reclassified." The $5,000 realised gain is reclassified from OCI to profit or loss as a reclassification adjustment. The remaining $25,000 unrealised gain stays in OCI until realised.
Reclassification Adjustments (“Recycling”)
A reclassification adjustment arises when an item previously recognised in OCI is subsequently included in profit or loss. This process, referred to as “recycling,” is intended to avoid double-counting gains or losses as an entity realises them.
Common examples:
- Disposal of a debt investment measured at FVOCI (the cumulative OCI gain/loss is reclassified to profit or loss at sale)
- Settlement of cash flow hedges (the effective portion of gain/loss is transferred from OCI to profit or loss in the period when the hedged item affects profit or loss)
- Disposal of a foreign operation (cumulative translation differences in OCI are reclassified to profit or loss)
IAS 1 requires either separate disclosure of these reclassification adjustments in the face of the statement or in the notes.
Key Term: recycling
The process of reclassifying amounts previously included in OCI into profit or loss as required by an IFRS Standard.
Worked Example 1.2
Zebra Ltd. holds a cash flow hedge reserve in OCI that accumulated $12,000 of gains over two years. In the current year, the hedged forecast transaction occurs.
Required: What is the reclassification adjustment, and how is it presented?
Answer:
The $12,000 gain is reclassified from OCI to profit or loss in the current period, reflecting that the hedged transaction now affects profit or loss. The reclassification ensures the gain is counted only once in "total comprehensive income."
Presentation and Disclosure
Entities may present a single statement of profit or loss and other comprehensive income, or two separate statements (a statement of profit or loss, and a statement showing OCI). Whichever format is chosen, the following must be clearly shown:
- Profit or loss
- Total OCI, split into items that may/will not be reclassified
- Total comprehensive income
- Amounts attributable to owners of the parent and non-controlling interests (groups only)
- Income tax relating to each component of OCI, either net or before tax
Key Term: total comprehensive income
The total of profit or loss and other comprehensive income for the period.
Reclassification: Practical Impact and Criticisms
Recycling can smooth profits over several periods and improve comparability. However, it may obscure the timing of income and possible volatility in results. Users need to understand which OCI items are recycled and which are not to properly assess financial performance.
Summary
IAS 1 requires profit or loss and OCI to be presented separately. Some OCI items are ultimately reclassified to profit or loss (recycled), while others remain permanently in equity. Entities are required to disclose the nature and amount of reclassification adjustments and to split OCI by reclassifiability. Accurate classification affects reported performance and must be approached carefully in both reporting and SBR exam questions.
Key Point Checklist
This article has covered the following key knowledge points:
- Identify the difference between profit or loss and OCI in the statement of profit or loss and other comprehensive income
- Split OCI into items that may or will not be reclassified to profit or loss
- Recognise and explain what constitutes a reclassification adjustment (recycling)
- Correctly apply and disclose reclassification adjustments in financial statements
- Be alert for common exam pitfalls around recycling and OCI presentation
Key Terms and Concepts
- profit or loss
- other comprehensive income (OCI)
- reclassification adjustment
- recycling
- total comprehensive income