Statement of profit or loss explained

The term statement of profit or loss is used to present financial information about a company's performance for a period. Investors require this report to understand how the business operates in a period. Accounting concepts, conventions, and standards are required in preparing it.

What's statement of profit or loss

A statement of profit or loss is financial information that presents the financial performance of an entity. It helps access management performance in money terms. The statement of profit or loss explains what income is earned and how they are spent. A profit indicates that management is performing well while a loss is not necessarily bad management.

Dividend investors are more interested in companies that are making profit. While growth types focus on how the funds are used to manage the business and if there is possibility of growth in the future even when profit isn't earned.

The preparation of the statement of profit or loss involved the use of materiality convention. This helps the preparer not to include so many items in the face of the statement but showing more details in the notes to the account. According to IAS 1, the statement of profit or loss can also be called other names. These may include an income statement or a statement of performance.

Two type format for preparing profit or loss

The International Accounting Standard (IAS) 1 states two formats for the income statement. Format based on function and the other, nature. When the report is prepared based on the function of the organization, it means that the expenses are classified based on the function of the entity. Therefore items like cost of sales, administrative and distribution expenses will be used in manufacturing and trading entities. While service firms will simply use direct costs and administrative expenses.

However, if the preparer decides to prepare the statement of profit or loss based on the nature of expenses, then items like operating expenses, depreciation, staff costs, finance cost, among others will be presented in the statement.

IFRS accounting standards required in preparing income statement

Aside from IAS 1 that is required when preparing a statement of profit or loss, other IFRS accounting standards are also paramount. These include and is not limited to IAS 8, IFRS 9, and IFRS 15. The IAS 8 focuses on accounting policies used in preparing the statements. This will include other IFRS as well as the various accounting concepts such as the matching and accrual concept.

IFRS 9 discusses the treatment of financial assets. The application to the income statement is on impairment of those assets and the recognition of changes in impairment or credit loss overtime. And IFRS 15 explains how revenue is measured and recognized in the report. Preparers comply with these standards to ensure that financial information is world class.

New IFRS accounting standard that will change the presentation of statement of profit or loss

It should interest you to know that there is a new standard that will take effect from 2027 referred to as IFRS 18 (Presentation and Disclosure in Financial Statements). The standard will change the way accountants prepare the income statements for entities in Nigeria and all countries that use IFRS standards.

From a snippet of the standard, statement of profit or loss will not be prepared based on the nature or function of expenses. But will be presented based on each category of income and expenses. The following categories should be reported in the statement of financial performance.

Operating category
Investing category
Financing category
Income taxes category; and
Discontinued operations category

The presentation of the statement of profit or loss in this categories will help meet various users needs. From management, investors, tax authorities, and other users.