Concept of Income

Concept of IncomeLecture 4Influence of future events on the recognition of revenues and expensesThe 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 EventsPerception of the Past Transaction a transaction as a result of a single event (one-event view) or a series of events (two-event view).

Probabilistic Nature of Future Eventsprobable (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 valuesMarket 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 Earningscurrent operating incomenet income, & 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 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 non-current assets, changes in market values of investments having specialized accounting practices for marketable securities, and foreign currency translation adjustments (SFAC No. 5)Comprehensive IncomeThe hierarchy of earnings, net income and comprehensive incomeEarnings = Current operating income + non-recurring itemsNet income = Earnings + cumulative effect on prior years of a change in accounting principlesComprehensive 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);