IAS 1 Presentation of Financial Statements requires that when items of income or expense (a term covering both profit or loss and other comprehensive income) are material, their nature and amount are disclosed separately. The standard provides examples of circumstances that would give rise to the separate disclosure of items of income and expense, which include:
- Write-downs of inventories to net realisable value, or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
- Restructuring of the activities of an entity and reversals of any provisions for the costs of restructuring
- Disposals of items of property, plant and equipment
- Disposals of investments
- Discontinued operations
- Litigation settlements
- Other reversals of provisions
This information may be given on the face of the statement of comprehensive income or in the notes. In line with the permissive approach taken to the format of the performance statements under IFRS, the level of prominence given to such items is left to the judgement of the entity concerned. However, regarding (e) above, IFRS 5 Non-current assets held for sale and Discontinued operations sets out the information required to be presented on the face of profit or loss and in the notes.
IAS 1 does not permit an entity to present any items of income or expense as extraordinary items.
Involuntary Conversions Natural disasters – Classification of income and expense
An involuntary conversion is the exchange, or conversion, of a non-monetary asset (e.g. fixed assets) to monetary assets such as insurance proceeds. To the extent the cost of a non-monetary asset is less than the amount of monetary assets received, the transaction results in a gain. This is true even if the insurance proceeds are reinvested in replacement non-monetary assets, such as new equipment.
Insurance Proceeds Natural disasters – Classification of income and expense
Impairment losses are generally accounted for separate from any related insurance. With respect to accounting for insurance proceeds, GAAP includes the following guidance.
Business Interruption Natural disasters – Classification of income and expense
Natural disasters often cause disruptions in operations which result in losses. These losses are often covered by business interruption insurance and should be accounted for separate from other insurance proceeds. When losses incurred can be reasonably estimated and recovery is considered probable a receivable may be recorded. However, the amount recorded should not be greater than costs incurred to date. Therefore, proceeds for lost profits are treated as a contingent gain and typically recorded at the settlement date.
Cash Flow Statement Presentation Natural disasters – Classification of income and expense
Since insurance proceeds are classified based on the nature of the insurance coverage rather than the intended use of the proceeds, amounts received for business interruption, inventory losses and operating lease assets are presented as operating activities. If insurance proceeds are received for the loss of property, plant and equipment, they should be presented as investing cash flows.