presentation by nature or function

Income Statement (By Nature Vs By Function)

Is an income statement presented by nature of expense or by function of expense?

Income Statement by Nature of Expense

Expenses in an income statement are either classified by their nature or by their function.

An income statement by nature is the one in which expenses are disclosed according to categories they are spent on, such as raw materials, transport costs, staffing costs, depreciation, employee benefit etc. The expenses will not be further classified into their functions (i.e cost of goods sold, selling, administrative, etc).

This method of disclosure of expenses is used in single step income statement, usually employed by small businesses as it is simple and relatively easier to be implemented. However, the drawback of this method is that it cannot be used to calculate gross profit within the income statement.

The following example shows the format of an income statement by nature.

Statement of Comprehensive Income
For the Financial Year Ended 31 December 20XX

Sales		573,610
Expenses:
Purchases, delivery charges and other direct costs	(158,401)
Changes in inventory	69,426
Depreciation Expense	(3,250)
Rent Expense	(24,000)
Employee benefit expenses	(124,630)
Utilities Expense	(6,900)
Interest Expense	(375)
Total Expenses		(248,130)
Net Income		325,480

Income Statement by Function of Expense

An income statement by function is the one in which expenses are disclosed according to different functions they are spent on (cost of goods sold, selling, administrative, etc.)

This method allows us to calculate gross profit and operating profit within the income statement, and therefore is usually used in the multi-step format of income statement. Most large and medium sized businesses use this method.

The following shows the format of an income statement by function of expense.

Statement of Comprehensive Income
For the Financial Year Ended 31 December 20XX

Revenue		102,716
Cost of sales		(55,708)
Gross profit		47,008
Other income		1,021
Selling and distribution expenses		(17,984)
Administrative expenses		(17142)
Research and development expenses		(1,109)
Other expenses		(860)
Results from operating activities		10,934
Finance income		1,161
Finance costs		(1,707)
Net finance costs		(546)
Share of profit of equity-accounted investees, net of tax		541
Profit before tax		10,929
Tax expense		(3,371)
Profit from continuing operations		7,558

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The IFRS income statement follows certain formatting requirements and options different from US GAAP.

From the IFRS Institute - Nov 15, 2018

The IFRS presentation guidelines for annual financial statements are generally less prescriptive than SEC regulation, but may still surprise US private companies. IFRS preparers have some flexibility in selecting their income statement format and which line items, headings and subtotals are to be presented on the face of the statement. In this article we highlight key considerations affecting preparers when choosing the structure, format and contents of the income statement and other presentation matters.

Single statement vs. two statements

Under IAS 1[1], the income statement is the primary financial statement used to provide an understanding of a company’s performance and operations over a defined period of time. Because of its importance, its format is often debated and scrutinized by preparers, users, regulators, standard setters and others.

Under IFRS, the income statement is labeled ‘statement of profit or loss’. Like US GAAP, the income statement captures most, but not all, revenues, income and expenses. Other items of comprehensive income (OCI) do not flow through profit and loss. Examples include the fair value remeasurement of certain equity instruments, remeasurements of defined benefit plans, and the effective portion of cash flow hedges change in fair value.

Items of profit and loss and OCI can be presented as:

• a single statement: the ‘statement of comprehensive income’; or
• two separate statements: an income statement displaying profit or loss followed immediately by a separate statement of comprehensive income.

The selected structure is applied consistently.

Format and content of the income statement

Although the format of the income statement is not prescribed, certain items require presentation, if material, either on the face of the income statement or disclosed in the notes to the financial statements. Here we highlight certain items common for commercial or industrial companies and how they should be presented in the income statement.

Common items 'requiring'  presentation on the face of the income statement

• Revenue, presenting separately interest revenue
• Finance costs
• Impairment losses related to financial instruments
• Share of the profit or loss of associates and joint ventures
• Tax expense

Common items that may be presented on the face of the income statement 'or'  disclosed in the notes to the financial statements

• Writedowns of inventories to net realizable value or property, plant and equipment to recoverable value, as well as reversals of such writedowns
• Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
• Gains or losses on disposals of items of property, plant and equipment
• Gains or losses on disposals of investments
• Litigation settlements

Unlike IFRS, SEC regulation  prescribes the format and minimum line items to be presented for SEC registrants. For non-SEC registrants, there is limited guidance on the presentation of the income statement or statement of comprehensive income, like IFRS.

Presentation of expenses by function or nature

Another accounting policy election is the presentation of expenses by either their function or nature. This determination should be based on which approach is most relevant and reliable and often depends on the company, the industry in which it operates and its users’ needs.

When expenses are presented by function they are allocated to, for example, cost of sales, selling or administrative activities. At a minimum, under this method companies present cost of sales separately from other expenses. This election requires the use of IT systems, defined processes and internal controls to make sure the allocations are appropriate. In our experience, most US companies present their expenses by function.

The presentation of expenses by nature is less complex. For example, expenses may be disaggregated as purchases of materials, transport costs, depreciation and amortization, personnel costs and advertising costs. A mixed presentation is not permitted. This means, for instance, that it’s not possible to present impairment losses on nonfinancial assets or amortization and depreciation in separate line items in a presentation by function.

Regardless of the approach used, companies need to ensure the presentation is not misleading and is relevant to the understanding of the financial statements. Lastly, if presenting expenses by function, companies are required to include additional information on the nature of expenses (e.g. depreciation, amortization and staff costs) in the notes to the financial statements.

Unlike IFRS, US GAAP has no requirement for expenses to be classified according to their nature or function. SEC regulations prescribe expense classification requirements, unlike IFRS.

Presenting additional line items, headings and subtotals

IAS 1 allows companies to use additional line items, headings and subtotals in the income statement “if such presentation is relevant to an understanding of the company’s financial performance.” The standard allows for judgment when determining what to present and how to present it, rather than prescribing a format or specifying all the possible items.

Given that IFRS does not define gross profit, operating results or many other common subtotals, there’s flexibility when adding and defining new line items in the income statement. Many companies disclose ‘operating profit‘ or ’results from operating activities‘ as a subtotal before profit or loss in the income statement. As a general rule, all additional line items and subtotals should be clearly labeled and presented, made up of items recognized and measured using IFRS, and calculated consistently across periods. Further, items shouldn’t be displayed with more prominence than other items required in the income statement.

Unusual or exceptional items

IFRS does not describe events or items of income or expense as ‘unusual’ or ‘exceptional’. However, the presentation, disclosure or characterization of an item as extraordinary is prohibited.

We believe it is possible to characterize items as unusual or exceptional under certain conditions. This should be infrequent and reserved for items that justify a prominence greater than that achieved by separate presentation and disclosure – e.g. a natural disaster. Those items should also be classified by nature or function, in the same way as usual or non-exceptional amounts. Lastly, companies should provide an explanation of the nature of the amount and why the item has been classified in this manner.

Given the significant judgment involved, companies should exercise caution when presenting items as unusual or exceptional. For example, although often infrequent and significant, the costs associated with a restructuring event generally wouldn’t qualify.

Unlike IFRS, transactions of an unusual nature are defined as possessing a high degree of abnormality and of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity. Unlike IFRS, significant events or transactions that are unusual and/or occur infrequently are presented separately in the income statement or disclosed in the notes. Like IFRS, extraordinary items classification is prohibited.

Items of income and expense are only offset when it is required or permitted by IFRS, or when gains, losses and related expenses arise from the same transaction or event or from similar individually immaterial transactions and events. For example, finance costs and finance expenses are generally presented gross; so are other income and expenses.

Like IFRS, items of income and expense are not offset unless it is required or permitted by another Codification topic/subtopic, or when the amounts relate to similar transactions or events that are not significant. However, offsetting is permitted in more circumstances under US GAAP than under IFRS. For example, derivatives executed with the same counterparty under a master netting arrangement may be offset, unlike IFRS.

Non-GAAP financial measures

Non-GAAP financial measures (NGFMs) – also sometimes referred to outside the United States as alternative performance measures – are not defined in IFRS. In practice, investors are increasingly looking to, and companies are increasingly presenting, NGFMs. These are generally achieved by adding subtotals, such as EBIT or EBITDA, to the income statement. Such measures can be helpful in linking a company’s financial statements to explanations of its business performance.

When NGFMs are presented, companies are expected to:

• identify and define the NGFMs presented and the components included in such measure;
• provide the basis of calculation and how such measures reconcile to the IFRS financial statements; and
• be consistently presented over time.

Read our May 2017 article,  Non-GAAP financial measures are thriving .

Unlike IFRS, the presentation of NGFMs in the financial statements by SEC registrants is generally prohibited. There are exceptions to this rule for Foreign Private Issuers applying IFRS. In practice, NGFMs are also not presented in the financial statements by non-SEC registrants, unlike IFRS. Read our  .

Income statement presentation – the takeaway

Most income statement items are consistently presented with little or no ambiguity as to their terminology or order. However, there is flexibility in terms of adding line items, using non-GAAP financial measures and formatting options. Therefore, companies need to be thoughtful when exercising their presentation choices, develop detailed accounting policies and ensure consistent application of such policies with full and transparent disclosures. Companies with the intention of going public should be prepared to respond to future challenges based on these considerations.

The IASB is conducting a standard-setting project on the primary financial statements to provide clarity on subtotals in the income statement, non-GAAP financial measures and unusual or infrequent items. This project is intended to provide guidance so that companies’ alternative performance measures will be more transparent and comparable. The FASB is also conducting a standard-setting project on the presentation of financial statements.

We believe the presentation of items in the income statement will continue to be a heightened area of focus and subject to future change.

• IAS 1, Presentation of Financial Statements
• Regulation S-X Rule 5-03, Income Statements, which applies to commercial or industrial companies

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Read // Articles on financials // What is the difference between presenting costs by their nature and by their function on the P&L?

What is the difference between presenting costs by their nature and by their function on the P&L?

There are two main types of profit & loss statement:

• Either they present costs by their nature , e.g. production of goods less purchases of goods or raw materials, changes in inventories, staff costs, taxes and depreciation;
• Or by their function , that is, based on their use in the operating and investment cycle, e.g. turnover less cost of goods sold, sales and marketing expenditure, R&D costs and overheads).

But regardless of how the P&L is presented, the operating profit is still the same!

Presentation of costs by their function This is based on an analytical approach to the company, which classifies costs by major functions within the company

Personnel costs, for example, are broken down in each of these four functions (or three when sales & marketing costs and administrative costs are merged into one item), depending on whether the employee works in production, sales, R&D or administration. Similarly, the depreciation of a tangible fixed asset will be put under production costs if it is a machine, under sales & marketing costs if it is a salesperson's car, under R&D costs if it is laboratory equipment and under administrative costs if it is the accounting department's computers.

Presentation of costs by their nature This is the traditional presentation in France and many continental European countries. Obviously, in this approach, operating income, as in the previous case, is the difference between sales and the cost of these sales. European practice calls for booking costs when they are contracted, not when they are consumed. If the P&L shows, on the one hand, all purchases made during the year and, on the other hand, all invoices sent to clients, then we're comparing apples and oranges. After all, a company can stock some of the purchases it made during the year. This is not value destruction, but, rather, the constitution of an asset that is no doubt temporary, but quite real at a given moment. Meanwhile, it is possible that some of the company's finished products will not be sold during the year and, yet, the costs pertaining to these products appear on the P&L. So to avoid comparing apples and oranges, we have to make some adjustments, i.e.

• Remove the change in raw materials and goods, from purchases. We then book consumptions and not purchases;
• Add the change in inventories of finished goods to sales. We then book production and not sales.

Booking costs by their function starts with revenues and then reconstitutes the costs of these goods or services sold, in order to reach the operating profit. Booking costs by their nature starts from operating purchases and then adjusts them for changes in inventories of raw materials and finished products, in order to reach the operating profit, through subtraction from revenues (1).

A new presentation? A third way of presenting the P&L has emerged, in particular in France and the US. It looks like a presentation by function, except that it does not split up depreciation between various cost items but isolates it on one separate line, as in presentation by nature. Time will tell what becomes of this innovation.

INCOME STATEMENT PRESENT BY FUNCTION

Income statement (statement of profit or loss), gross profit.

Gross Profit = Revenues – Cost of Sales

Net Profit = Revenues – All Expenses (Cost of Sales + Other expenses)

Net Profit = Gross Profit – Other Expenses (Expenses that are not Cost of Sales)

Presenting Expenses in the Income Statement

Presentation by function.

Raw material consumed	1,200,000
Production staff salaries	80,000
Machinery repair and maintenance	10,000
Administrative staff salaries	50,000
Legal charges	10,000
Insurance	20,000
Marketing staff salaries	50,000
Advertisements	15,000

120,000	80,000	50,000	250,000

60,000	12,000	8,000	80,000

	$
Revenues	2,000,000
Less: Cost of Sales	(1,470,000)
Administrative Expenses	(172,000)
Marketing Expenses	(123,000)
Tax	(35,000)

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3 main purposes of financial statements (explained), what is asset definition, explanation, types, classification, formula, and measurement, 5 main elements of financial statements: assets, liabilities, equity, revenues, expenses, income statement: definition, types, templates, examples, and more.

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IFRS vs GAAP Income Statement: Differences and Similarities

What is the difference between the IFRS vs GAAP income statements? The IFRS and US GAAP are the two common accounting standards that businesses adhere to. These accounting standards are needed to ensure that a company’s financial statements and information are accurate and can be compared to other companies’ financial statements.

However, there are some differences and similarities between the US GAAP and IFRS requirements on how companies should present their financial statements. Hence, the requirements under IFRS vs GAAP for income statement presentation would differ in several ways.

In this article, we will be comparing the differences between IFRS vs GAAP requirements for income statements as well as the similarities between these two accounting standards. But first, let us discuss what the income statement is.

See also: Is Net Income on Balance Sheet or Income Statement?

Income statement explained

An income statement is a financial statement that reports the income and expenditure of a company over a period of time. This financial statement is also known as a profit and loss statement (P&L) , or a statement of revenue and expense . The US GAAP and IFRS require the components of a complete set of financial statements which include a balance sheet (or statement of financial position ), an income statement, a statement of comprehensive income as well as a statement of cash flows and accompanying notes to the financial statements.

The income statement is one of the three important financial statements used for reporting the financial performance of a company over a specific accounting period. It can show the revenue, expenses, gains, and any loss incurred during the accounting period; it doesn’t include accounts such as assets, liabilities, and equity (these are found on the balance sheet) or unrealized gains from investments and loans (such would be reported in the cash flow statement ).

The income statement usually covers a period of time, such as one fiscal quarter or year, and can be used to assess the financial health of a company as well as determine the profitability of the business . Hence, it gives investors the necessary information to make a decision on a company. The statement can show whether a business is generating a profit or not and if a business spends more than it earns.

Read also: Statement of Retained Earnings GAAP vs IFRS: Differences and Similarities

Differences between IFRS vs GAAP Income Statement

• Under the IFRS, there is no special format for the income statement that needs to be followed whereas GAAP dictates a specific format in which an income statement should be prepared, i.e. either using a single-step or multiple-step format.
• Discounting of revenue to PV (present value) is required under IFRS whereas, under GAAP, it is only required in limited situations
• Under the GAAP guidance, vendor-specific objective evidence (VSOE) of fair value should be used to find out the estimated selling price of software whereas, under IFRS guidelines, no such rules are present.
• The presentation of NGFMs (non-GAAP financial measures) in financial statements is generally prohibited under GAAP whereas these measures can be used in income statements under IFRS.
• Under IFRS, the development cost is purely treated as an expense in the income statement whereas, under GAAP, it is treated as an expense, but is still capitalized if certain conditions are satisfied.

The US GAAP is an acronym for Generally Accepted Accounting Principles ; this set of accounting principles is set by the Financial Accounting Standards Board (FASB) which is followed by most United States companies. The IFRS, on the other hand, stands for International Financial Reporting Standards . IFRS is dictated by the International Accounting Standards Board (IASB) and followed by many countries outside the US. Nevertheless, deciding which set of standards to use when making financial reports like the income statement would depend on whether the company operates in the US or internationally.

Here are some of the differences between the IFRS vs GAAP requirements for income statement presentation:

Difference between US GAAP vs IFRS Income Statement in terms of format and content

The format and content of the income statement are factors when comparing IFRS vs GAAP income statement presentation. IFRS doesn’t prescribe the format of the income statement whereas GAAP prescribes the format and minimum line items to be presented for SEC registrants. GAAP dictates a specific format in which an income statement should be prepared, i.e. either using a single-step or multiple-step format. Under a single-step format, the classification of all expenses on the income statement is done by functions, and then those functions are deducted from the total income in order to derive income before tax.

The GAAP multi-step format, on the other hand, comprises a gross profit section where the cost of sales is deducted from sales, followed by the presentation of other income and expenses to reach an income before tax. However, this prescribed format is applicable to SEC registrants. For non-SEC registrants under GAAP, there is limited guidance on the presentation of the income statement, just as with IFRS.

Furthermore, even though the format for an income statement is not prescribed under IFRS, certain items require a presentation, if material, either on the face of the income statement or disclosed in the notes to the financial statements. Hence, under IFRS, there are certain items that are common for commercial or industrial companies to present in the income statement. The common items that require presentation on the face of the income statement under IFRS include:

• Revenue; presenting interest revenue separately
• Finance costs
• Impairment losses related to financial instruments
• Loss or profit of associates and joint ventures
• Discontinued operations

Common items that may be presented on the face of the income statement ‘or’ disclosed in the notes to the financial statements under IFRS include:

• Writedowns of inventories to net realizable value
• Writedowns of property, plant, and equipment to the recoverable value
• Reversals of such write-downs
• Restructuring of the activities of a company and reversals of any provisions for the costs of restructuring
• Losses or gains on the sale or disposal of fixed assets (property, plant, and equipment)
• Gains or losses on disposals of investments
• Litigation settlements

GAAP and IFRS also differs in terms of discounting of revenue

Discounting of revenue is another factor in the differences between IFRS vs GAAP income statements. Under GAAP, discounting of revenue is required in limited situations such as in the case of receivables that has more than one-year payment terms, or in situations such as license agreements for TV programs or retail land sales. However, under IFRS discounting of revenue to PV (present value) is required where the inflow of cash or cash equivalent is deferred. This may result in lower revenue because the time value part of the actual receivable is recognized as interest or finance income.

Difference in terms of software revenue recognition

There is also a difference between IFRS and GAAP when it comes to software revenue recognition. Under the GAAP guidance, vendor-specific objective evidence (VSOE) of fair value should be used to find out the estimated selling price of software whereas, under IFRS guidelines, no such rules are present.

Presentation of expenses by function or nature

The presentation of expenses by function or nature is another factor difference between IFRS vs GAAP income statements. The US GAAP has no requirement for expenses to be classified according to their function or nature, rather expense classification requirements are prescribed by SEC regulations. This is different for IFRS; under this standard, the presentation of expenses is done either by function or nature. This determination, however, should be based on which approach is most relevant and reliable and usually depends on the company; that is the industry in which the company operates and its users’ needs.

Expenses under IFRS can be presented on the income statement by function, for example, cost of sales, selling, or administrative activities . Under this method, companies present the cost of sales separately from other expenses. The presentation of expenses by nature, on the other hand, is less complex. For instance, expenses may be disaggregated as personnel costs , purchases of materials, transport costs, depreciation and amortization, and advertising costs .

Under IFRS, a mixed presentation of expenses on the income statement is not permitted. This means that it’s not possible for instance, to present amortization and depreciation in separate line items in a presentation by function. However, regardless of the approach used, companies need to make sure the presentation is not misleading and is relevant to the understanding of the financial statements. Conclusively, companies when presenting expenses by function are expected to include additional information on the nature of expenses in the notes to the financial statements.

US GAAP vs IFRS in terms of Expense Recognition- Gains and Losses

The recognition of gains and losses is also a factor when comparing IFRS vs GAAP income statement presentations. The GAAP guidelines allow companies to either record expenses related to gains and losses in a period incurred within the statement of operations (income statement) or defer those gains or losses using the corridor approach. As for IFRS, the re-measurement of gains and losses is immediately recognized in OCI (other comprehensive income) because there is no way they can be recognized in profit or loss since the corridor and spreading approach is prohibited under IFRS.

Prior-service cost in employee benefit plan

In GAAP, the prior service cost is recognized at the date when the amendment of the plan is adopted under other comprehensive income (OCI), and it is then amortized as income over the remaining years of services of participants to complete the eligibility date or life expectancy.

However, in IFRS, all prior service cost, whether it is positive or negative, is recognized in the profit and loss (P&L) account when the amendment takes place in the employee benefit plan, and it is prohibited to be spread over a future service period, as it may give rise to volatility in P&L.

Presenting additional line items, headings, and subtotals

Presenting additional line items, headings, and subtotals in the income statement differs under IFRS vs GAAP. The IAS 1 allows companies to use additional line items, headings, and subtotals in the income statement whereas GAAP does not present a requirement for that. IFRS permits the use of additional line items, headings, and subtotals if the presentation is relevant to an understanding of the company’s financial performance.

The IFRS allows for judgment when determining what to present and how to present it, rather than prescribing a format or specifying all the possible items. Even though the IFRS does not define gross profit, operating results, or many other common subtotals, there’s flexibility under this standard when adding and defining new line items in the income statement.

Hence, many companies disclose operating profit or results from operating activities as a subtotal before profit or loss in the income statement. As a general rule, all additional line items and subtotals must be clearly labeled, presented, and made up of items recognized and measured using IFRS; and also calculated consistently across periods. Furthermore, items shouldn’t be displayed with more prominence than the other items required in the income statement.

Development cost

Under IFRS, the development cost is purely treated as an expense in the income statement. Conversely, under GAAP, the development cost is treated as an expense but is still capitalized if certain conditions are satisfied.

Unusual or exceptional items

Describing events or items on the income statement as ‘unusual or exceptional’ is one difference between the IFRS vs GAAP requirements for income statement presentation. Unusual items can include discontinued operations, lawsuits, damage from natural disasters, and restructuring costs. IFRS does not describe events or items of income or expense as exceptional or unusual. It is only possible to characterize items as unusual or exceptional under specific conditions.

However, this should not be frequent and should be reserved for items (e.g natural disasters) that justify a prominence greater than that achieved by separate presentation and disclosure. Such items should also be classified by nature or function, in the same way as the usual or non-exceptional amounts. Also, companies should provide an explanation of the nature of the amount and why the item has been classified as unusual or exceptional. Therefore, under IFRS, companies are, expected to exercise caution when presenting items of income or expense as unusual or exceptional.

However, in GAAP, unlike IFRS, transactions of an unusual nature are defined as possessing a high degree of abnormality. A type of item that is clearly unrelated to, or only incidentally related to, the normal and usual activities of the company can be defined as unusual. Under GAAP, unusual or infrequent transactions are presented in the income statement or disclosed in the notes.

Non-GAAP financial measures

Non-GAAP financial measures (NGFMs) are sometimes referred to outside the United States as alternative performance measures. In practice, companies under the IFRS are increasingly presenting, and investors are increasingly looking to NGFMs. NGFMs are generally achieved by adding subtotals, such as EBIT or EBITDA, to the income statement. Such financial measures can be helpful in linking a company’s financial statements to explanations of its business performance. However, when NGFMs are presented in the income statement, companies are expected to:

• Identify and define the NGFMs presented and the components included in such measures
• Present the basis of calculation and how such NGFMs reconcile to the IFRS financial statements
• Consistently present such measures over time

Unlike IFRS, the presentation of NGFMs in financial statements by SEC registrants or non-SEC registrants is generally prohibited under GAAP. However, there are exceptions to this rule for Foreign Private Issuers applying IFRS.

Table showing the differences between IFRS vs GAAP income statement

Factor for comparison	IFRS	GAAP
	Under IFRS, the income statement is also known as the statement of profit or loss	Also known as the statement of operations
	There is no special format of the income statement that needs to be followed under the IFRS	GAAP dictates a specific format in which an income statement should be prepared, i.e either using a single-step or multiple-step format
	Discounting of revenue to PV (present value) is required under IFRS	Discounting of revenue is required in limited situations under GAAP.
	Under IFRS guidelines, no rules for using vendor-specific objective evidence (VSOE) of fair value to find the estimated selling price are present	Under the GAAP guidance, vendor-specific objective evidence (VSOE) of fair value should be used to find out the estimated selling price of the software
	Under IFRS, the development cost is purely treated as an expense	Under GAAP, the development cost is treated as an expense in the income statement, though it is capitalized if certain conditions are satisfied.
	All prior service cost, whether positive or negative, is recognized in the profit and loss (P&L) account and is prohibited to be spread over a future service period	The prior service cost is recognized under other comprehensive income (OCI), and it is amortized as income over the remaining years of services of participants to complete the eligibility date
	Under IFRS, the corridor and spreading approach is prohibited, thus re-measurement of gains and losses is immediately recognized in OCI instead of the P & L statement	The GAAP guidelines allow companies to either record expenses related to gains and losses in a period incurred within the income statement or defer those gains or losses using the corridor approach.
	IFRS allows the use of additional line items, headings, and subtotals in the income statement	GAAP does not present a requirement for this
	IFRS does not describe events or items of income or expense as exceptional or unusual	GAAP describes transactions possessing a high degree of abnormality as unusual
	NGFMs can be used in income statements under IFRS	The presentation of NGFMs in financial statements is generally prohibited under GAAP

Read also: Net Income vs Net Earnings Differences and Similarities

IFRS vs GAAP Income Statement Similarities

• One of the major similarities between IFRS vs GAAP income statements is that the two accounting standards both require a presentation of the income statement in financial reports.
• In accordance with the GAAP and IFRS, the presentation of the income statement should be consistent; they both require that the presentation and classification of items in the income statement are retained from one period to the next unless the accounting standards require a change or there is a significant change in the entity’s operation or review of financial statements.
• IFRS and GAAP for revenue recognition on the income statement both focus on revenue being recognized when realized and earned; that is, revenue is not recognized on the income statement until the goods or services have been delivered to the customer or clients regardless of when payment is received.
• GAAP and IFRS both present comparative information in respect of the preceding period for all amounts reported in the income statement of the current period.
• The income statement prepared under IFRS and GAAP both captures most, but not all, revenues, income, and expenses; other items of comprehensive income (OCI) do not flow through the income statement
• One of the similarities between IFRS vs GAAP income statements is that they are reported on an accrual basis; IFRS and GAAP both formulate financial statements on an accrued basis.
• Many items that are reported as unusual or irregular used to be classified as extraordinary items on the income statement, however, both IFRS and GAAP no longer require the classification of extraordinary items; they only require classification as nonrecurring items.
• Under IFRS and GAAP, items of expenses or income of the income statement are not offset unless it is required or permitted by another codification topic or subtopic, or unless the amounts relate to similar transactions or events that are not significant. Nonetheless, offsetting is permitted in fewer circumstances under IFRS than under GAAP.
• Discontinued operations classification on the income statement for items that are held for sale or disposed of is required under GAAP and IFRS.
• Distinguishing operating and unusual items in the income statement is required under GAAP and IFRS.
• Reporting comprehensive income is required for both GAAP and IFRS.

Related: Income Statement Ratios Formulas and Examples

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Components of the Income Statement

The income statement also referred to as the “statement of earnings” or the “profit and loss” (P&L) statement, provides information on the financial performance of a company over a specified period of time. It shows the amount of revenue a company generated over the period of time under review as well as the expenses that were incurred in the process of generating the revenue.

Under both IFRS and US GAAP, the income statement may be presented as a separate statement followed by a statement of comprehensive income. The statement of comprehensive income begins with the profit or loss from the income statement, or alternatively, as a section of a single statement of comprehensive income.

Components of the Income Statement & Alternative Presentation Formats

IFRS requires certain items such as revenue, finance costs, and tax expenses, to be presented separately in the face of the income statement. IFRS also requires that line items, headings, and subtotals relevant to understanding a company’s financial performance to be presented, even if not specified.

Companies, however, enjoy flexibility in how they present the income statement. For example, some companies list the reporting years in increasing order, from left to right, with the most recent year in the right-most column. Other companies list the years in decreasing order, with the most recent year listed in the left-most column. It is, therefore, important for a user of the income statement to verify information on matters such as the order of years, how expense items are grouped and reported, and how to treat items that are presented in parentheses.

For illustration, figure 1 below presents a consolidated income statement for company ABC.

$$ \begin{array}{l|rr} {} & {\textbf{Year ended}} & {\textbf{31 December} } \\ {} & \bf {2016} & \bf {2015} \\ \hline {\textbf {Net revenue}} & {\bf{12,345}} & {\bf{9,629}} \\ {\text{Cost of goods sold}} & {(7345)} & {(5729)} \\ {\textbf{Gross profit}} & \bf {5,000} & \bf {3,900} \\ {\text {Selling, general and administrative expenses} } & {(1345)} & {(1049)} \\ { \text{Other revenue (expense)} } & {2,100} & {1,638} \\ { \textbf{Operating profit} } & \bf {5,755} & \bf {4,489} \\ { \text{Interest revenue} } & {1,178} & {919} \\ { \text{Interest expense} } & {(1,056)} & {(824)} \\ { \textbf{Earning before tax} } & \bf{5,877} & \bf {4,584} \\ { \text{Income tax} } & {(1,918)} & {(1,496)} \\ { \textbf{Income from fully consolidated companies } } & \bf {3,959} & \bf {3,088} \\ { \text{Share of profits from associated companies} } & {1,200} & {936} \\ { \textbf{Net income} } & \bf {5,159} & \bf {4,024} \\ \hline { \text{Attributable to the Group} } & {3,869} & {3,018} \\ { \text{Attributable to Minority interests} } & {1,290} & {1,006} \\ \hline \end{array} $$

As can be observed in figure 1, there are several components that are found in income statements. Each of the components is discussed below.

• Revenue – This is also referred to as sales or turnover, and is usually reported on the top line of the income statement. The term ‘net revenue’ is used whenever the revenue number is reported after adjustments such as cash or volume discounts.
• Expenses – This reflects the outflows, depletion of assets, and incurrence of liabilities in the course of business transactions. Expenses may be grouped according to their nature or function and reported in different formats, subject to specific requirements. For example, a company may choose to report a particular expense as a separate line item while another company may choose to combine that same expense with other costs and report the total in a single line item. Companies may also choose one of two ways to indicate that an amount on the income statement, an expense, results in a reduction in net income. One company may choose to show expenses, such as the cost of goods sold and selling expenses in parenthesis which will explicitly indicate that these are subtracted from revenue and will reduce net income. Another company may instead not use parenthesis but will assume that the user knows that the item is an expense that will have to be subtracted in deriving net income.
• Gross profit is the amount of revenue that is available after subtracting the costs of delivering goods or services. An income statement that shows a gross profit subtotal is said to use a multi-step format, rather than a single-step format. Other expenses that are related to running a company will be subtracted after gross profit.
• Operating profit sometimes referred to as Earnings Before Interest and Taxes (EBIT), is the result of subtracting operating expenses such as selling, general, and administrative expenses from gross profit. It reflects a company’s profits from its normal business transactions before making deductions for taxes or interest expenses (in the case of non-financial companies). Financial companies would include interest expenses in their operating expenses and would, therefore, be subtracted from the establishment of the operating profit.
• Net income  also called “net earnings” or “profit or loss”, is reported at the bottom of the income statement. For this reason, it may also be referred to as the “bottom line”. Net income is often viewed as the single most important number which describes a company’s performance over time.

Information on how much net income is attributable to a company as well as to minority interests, or non-controlling interests, is usually presented below net income.

If a company presents the income statement in a consolidated format, then it will consolidate information on all subsidiaries over which it has control. This means that it will include all the revenues and expenses of its subsidiaries even if the company owns less than 100 percent.

Net income may also include ‘gains’ and ‘losses’, which represent increments and decrements in economic benefits, respectively.

Net income is effectively equal to: (i) revenue minus expenses in the normal activities of a company, plus (ii) other income minus other expenses, plus (iii) gains minus losses.

Question Which of the following income statement components is known as the ‘bottom line?’ Net income. Net revenue. Operating profit. Solution The correct answer is A . Net income is also referred to as the ‘bottom line’. It derives its name from the fact that it is written on the bottom line of the income statement. B is incorrect. ‘Net revenue’ is reported on the top line of the income statement after making adjustments to revenue for volume and cash discounts. C is incorrect .‘Operating profit’ results from subtracting operating expenses from gross profit.

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• Financial Statements
• Income Statement
• Single-Step Income Statement
• Multi-Step Income Statement
• Income Statement by Nature
• Income Statement by Function
• Income from Discountinued Operations
• Comprehensive Income
• Earnings per Share
• Statement of Retained Earnings
• Balance Sheet
• Unusual and Infrequent Items
• Statement of Cash Flows
• Cash-Flow Statement: Direct Method
• Cash-Flow Statement: Indirect Method
• Direct vs Indirect Method Cash Flow Statement
• Cash Flows From Investing Activities
• Cash Flows From Financing Activities
• Statement of Changes in Equity
• Notes and Disclosures
• Management Discussion and Analysis
• Changes in Accounting Principles
• Changes in Accounting Estimates
• Accounting Errors

The expenses in an income statement are either classified by their nature or by their function. An income statement by nature method is the one in which expenses are disclosed according to their nature such as depreciation, transports costs, rent expense, wages and salaries etc. There is no reallocation of these expenses to different functions of the entity (i.e. cost of goods sold, selling costs, administrative costs and other expenses).

This method of disclosure of expenses is used in single step income statement and it is usually employed by small businesses due to its simplicity. However there is drawback in this method that it cannot be used to calculate gross profit within the income statement.

The following example shows the format of an income statement by nature.

Company A
Income Statement
For the Year Ended June 31, 2011
Sales		$305,610
Expenses:
Beginning Inventory	$16,800
Purchases	184,100
Ending Inventory	−21,050
Depreciation Expense	14,790
Rent Expense	21,000
Salaries and Wages Expense	38,320
Supplies Expense	3,510
Utilities Expense	6,900
Interest Expense	375
Total Expenses		−264,745
Net Income		$40,865

by Irfanullah Jan, ACCA and last modified on Apr 1, 2020

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How to classify expenses in profit or loss statement under IFRS?

How to classify expenses in profit or loss? And, what to do when you have to change this classification?

Where to present depreciation? Salaries?

Let’s see today’s question:

“Dear Silvia, I am auditing a company who owns warehouses in several locations and rents the warehouses to other companies.

Last year, the company’s owners changed and as a result, there was a change in company’s operations.

Before, employees were assigned to the specific warehouse and worked in that warehouse only.

Now, employees rotate and can serve more warehouses over some time period.

On top of it, few administrative employees were fired and warehouse employees work on admin tasks, too.

So, we have a problem with classification of expenses.

Before, all salaries of warehouse employees were classified as cost of sales because they worked in warehouse.

Now, after the change, these salaries are classified simply as personnel expenses and as a result, cost of sales dramatically decreased.

How to solve this situation? Is this OK?”  

IFRS Answer: Classification and its change

I like this question, because it deals with two issues:

• Classification of expenses in profit or loss, and
• Change in presentation of your profit or loss.

Classification of expenses in profit or loss

I often receive questions like:

• How to present depreciation expenses?
• How to present insurance of offices? And similar.

Let me say that you have a choice here.

The standard IAS 1 Presentation of financial statements does NOT prescribe how you should present your expenses.

In fact, there is NO mandatory format .

The reason is that every single entity is different in its activities and shows different profile of expenses necessary to achieve revenues.

Therefore, the standard requires the presentation of expenses in profit or loss in a way that provides more reliable and relevant information about your own activities.

• Expenses by nature and
• Expenses by function.

Expenses by nature

When you present by nature , then you simply group the expenses by their nature regardless the role that they play in your company.

You do NOT reallocate them among various functions in your company.

For example, the salary of warehouse employees and the salary of admin employees will be presented as personnel expenses .

Similarly, depreciation of warehouse and depreciation of admin building will be presented as depreciation expenses .

The big advantage of this method is that it is very simple because you don’t have to worry with allocations.  

Expenses by function

Here, you group your expenses by the functions in your company.

For example, salary of warehouse employees and depreciation of warehouse are presented as cost of sales .

Salary of admin employees and depreciation of admin building are presented as administrative expenses .

This method is more demanding because it requires certain work and judgment when reallocating your expenses among various functions, but it is probably more relevant for some types of companies.  

What classification to use?

And now, let me clarify that IAS 1 DOES NOT require analysis of expense by function or by nature on the face of profit or loss statement – it is a suggestion.

In fact, you are permitted to disclose the classification on the face of the profit or loss statement on some mixed basis .

For example, you present cost of sales as a function, then you present gross profit and then you present depreciation expenses – this is an element from by nature method. That’s the illustration of the mixed basis.  

What about the change in presentation?

Let’s get back to the first part of today’s question:

It is OK to present salaries of employees as cost of sales to the extent they relate to their warehouse work.

And, it is also OK to present these salaries as personnel expenses, if this is more relevant for the company’s activities.

But here, the question contains one more element: change in presentation .

One year, the expenses were presented as cost of sales and another year, they were presented as personnel expenses. Special For You! Have you already checked out the  IFRS Kit  ? It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out!   Well, this is not permitted .

Instead, you should bear in mind another two requirements of IAS 1:

You can change the presentation, but only when there is a change in entity’s operations and the new way of presenting would be more relevant.

If you make the change in presentation, you need to reclassify your comparative information , too.

It means that if you presented salaries of warehouse employees as cost of sales in the previous period, and now you want to present them as personnel expenses – you can do it, but you need to reclassify these salaries in the previous reporting period to personnel expenses too in order to make previous and current numbers comparable.

Here’s the video summing up the issue:

Any comments or questions? Please let me know below – thank you!

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23 Comments

Thanks so much for Sharing it is so insightful

Well guided

One of your simplest articles you still make it easy …. thank you

Hi Silvia! How to account technical maintance of leasing objects? We are lessor of ships. There is a new agreement (not a part of leasing agreement!) with third party that will maintence ships on regular bases. Is it other expense for us or no? What do you think?

Hi dzirt, well, it depends on what the lease contract says – is maintenance of the ships included in the price of lease? Will lessee refund the maintenance? I cannot really assess based on this short info.

Thank you for the post. To me expenses by nature give clear indication of “trends”. One may have by function classification for management reporting, down to the departments / responsibility accounting. e.g. Fuel prices are increasing will be visible in by nature classification while will be lost in by function classification. However by function classification will required for closing inventory valuation in manufacturing concerns. In Pakistan we have two groups on face of Income Statements; Cost of goods sold and “Selling Admin expenses” with by nature classification in two notes.

I agree with you. When you do “by function”, it is quite judgemental and yes, can hide anything, but the point is to be consistent and fair. Thank you!

Hi Silvia, Thank you for the reply. I appreciate it.

Hi Silvia, thank you so much for sharing the above info. I have a question W maybe you can help me. Why do you think the IASB is considering requiring companies to use either the Nature of expense method or the Function method of expense?

Hi Marjorie, just for the sake of some order in presentation.

Silvia, Thanks for the wonderful explanation.

Hello Silvia, I heard someone mention that you can’t present name expense/(income) non-operating expense/(income) and you can only use operating expense/(income). Is this true ? And if yes how do you disclose income or expense that are not operating ? for example write-off or insurance received ?

Hi Ronald, I think you heard that you cannot use “extra-ordinary” expense/income, because even earthquakes are a part of operations, isn’t it? You can have non-operating expense, for example interest paid can be presented as such.

Thank you very for your explanation. It is very useful!!!

thank you very much!!! it is help me a lot !!!

Hi, Dear Silvia

Many thanks for the nice clarification.

I have a question in this regard. As you said to make consistency in comparison, expenses may be reclassified. In such a situation, if the reclassification becomes material, shouldn’t we apply retrospective accounting or just give a disclosure is enough?

Hi Robiul, I would say that the classification of expenses is more-less disclosure issue, not the recognition itself. Having that said – that’s why you are presenting the comparatives under the new classification, too (it is a kind of restatement).

Dear Silvia, I am a first year business student at university in Australia.

For one of my assessable homework questions it asks us to prepare an income statement. it specifically states to NOT CLASSIFY THE EXPENSES.

i’m a bit lost on what that actually means…..could you please explain a little bit on what that actually means.

Simple but informative. Thank you for making it so

Dear Silvia, It is really helpful, i like the way in u explain the topic very easily,,,, so good. Thanks Best wishes.

Dear Silvia , It’s really helpful thanks for your explanation. Regards, Rana Atif

Hello I really like they youe explain please explain with few example accounting treatment of intangible assets,cash flow statement , partnership and leases

Silvia, Thank you very much for the input, it is very helpful. Stay blessed.

Leave a Reply Cancel reply

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Another of the Vitamin D3 and K2 benefits is in your vascular function. Vitamin D3 helps make proteins that Vitamin K2 activates to maintain the elasticity of blood vessels. You can see why we package them together, right? †

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If you’re looking for when to take Vitamin D or Vitamin K, look no further! Taking your Vitamin K2 and D3 supplements along with a regular meal is one of the best ways to help ensure you get the most of your supplement routine. Vitamin D3 and K2 are fat-soluble vitamins, meaning you should take them with water and a meal containing some fat or oil to absorb these supplements effectively. Taking all your supplements alongside water and a regular meal helps ensure that your fat-soluble and water-soluble vitamins are taken following the usage directions from the label.

Attaching your supplement routine to breakfast, lunch, or dinner also helps you remember to take them every day. While adding a new habit to your day can be difficult to remember at first, attaching your supplements to a pre-existing routine makes your new habit much easier to keep track of. If you are taking a multivitamin, like our Advanced Multivitamin , that includes Vitamin D, talk to a doctor to see if they would like to check your Vitamin D levels before adding an additional Vitamin D supplement to your routine. Always consult your primary care provider or another health professional when starting or changing your supplement routine.

Support Your Well-being with Vitamins D3 and K2

When looking for Vitamin D supplements or Vitamin K supplements , you can rest easy knowing that Nature Made ® supplements are made from carefully selected ingredients under strict manufacturing processes. Remember that Vitamin K2 and Vitamin D3 work together to support strong bones. Here at Team Nature Made ® , we recommend combining supplements with a nutritious diet as part of a comprehensive approach to health and wellness. Nature Made ® is the #1 Pharmacist Recommended Vitamin & Supplement Brand.** †

* Magnesium supports Vitamin D action in the body. †

**Based on a survey of pharmacists who recommend branded vitamins and supplements.

† These statements have not been evaluated by the Food and Drug Administration. These products are not intended to diagnose, treat, cure, or prevent any disease.

• National Institutes of Health. Vitamin D. National Institutes of Health. Published September 18, 2023. https://ods.od.nih.gov/factsheets/VitaminD-HealthProfessional/
• Liu X, Baylin A, Levy PD. Vitamin D deficiency and insufficiency among U.S. adults: prevalence, predictors and clinical implications. Br J Nutr. 2018;119(8):928-936.
• Reider CA, Chung RY, Devarshi PP, Grant RW, Hazels Mitmesser S. Inadequacy of Immune Health Nutrients: Intakes in U.S. Adults, the 2005-2016 NHANES. Nutrients. 2020;12(6):1735. Published 2020 Jun 10. doi:10.3390/nu120617354.
• National Institutes of Health. Office of Dietary Supplements - Vitamin K. Nih.gov. Published March 29, 2021. https://ods.od.nih.gov/factsheets/vitaminK-HealthProfessional/

Graham Morris

NatureMade Copywriter

Kalyn Williams, RDN

Science and Health Educator

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Graham has a degree in film with a focus on screenwriting from the University of California, Santa Cruz. He enjoys learning new things and finding the best, most engaging way to communicate them to a wide audience. Graham appreciates simplicity in life and nutrition, and wants to find the easiest, no-stress ways to stay healthy.

Kalyn is a Registered Dietitian-Nutritionist and a Science & Health Educator with the Medical and Scientific Communications team at Pharmavite. Her experience in the field of nutrition prior to joining Pharmavite has included community and public health education, media dietetics, and clinical practice in the areas of disordered eating, diabetes, women’s health, and general wellness. Kalyn received her Bachelor of Science degree in Nutrition and Dietetics from Arizona State University in Phoenix, Arizona, and completed her dietetic supervised practice in Maricopa County, AZ, with an emphasis on public health. Kalyn is certified in Integrative and Functional Nutrition through the Academy of Nutrition and Dietetics, where she is an active member in addition to memberships in Dietitians in Functional Medicine, Women’s Health Dietitians, and the International Federation of Eating Disorder Dietitians.

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Mitochondrial transplants to treat mitochondrial dysfunction

• Alessandro Bitto   ORCID: orcid.org/0000-0002-6658-1931 1  

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A new approach to treating mitochondrial disorders is based on the transplantation of healthy mitochondria, and improves symptoms and survival in a mouse model of Leigh syndrome — a paediatric mitochondrial disease that is characterized by failure to thrive, lactic acidosis, and progressive degeneration.

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