ACCOUNTING POLICIES FOR REPORTING INCOME
Definition of Accounting Policies in Literature
Accounting policy refers to the general rules and procedures, principles, actions or conduct which are accepted and applied by all the accountants in recording transactions of accounting. The policies can only be adopted if they meet certain norms such as providing valuable information to the user normally termed as being objective; there is no room for personal biasness where one can easily use his/her own rules to present financial statements; and that they should be easy to use by any one who wish to make or report or interpret a financial statement.
Authoritative Literature and Comprehensive Income
Comprehensive income is the variation in business entity net assets during atransaction period and other occurrence and conditions from sources of non- owners. Includes all costs in equity which occur during a period other than those emanating from owners’ investments and the distribution to the holders.220-10-45-1 (FASB 2011)any entity must report the comprehensive income in two consecutive financial statements that are separate from each other or in one continuous statement. 220-10-45-1A the business entity which chose to report comprehensive income in one continuous statement of finance must bring out all the constituents in two parts; net income and comprehensive income. While anybody reporting the comprehensive income in two components separate but following each other must bring out the constituents of and the sum for the net income in the net income statement. The constituents of and the sum of other comprehensive income as well as the sum of comprehensive income after the income statement
Classification within Net income
220-10-45-7 Net income comprises of different constituents which include; continuing operations income, discontinued operations income and income from exceptional. The income from continuing operations is that income that results from the daily business transaction occurrence. The income is arrived at after deducting all the current expenses and depreciation from the total of gross profit and other revenues. The items are recurrent in nature; for example administration expenses, interest income, cost of sales, depreciation expense and depreciation income, gross profit and many other transactions that impact on the income in the financial statements.
On the other hand income from discontinued operations is reported after deducting the tax and it’s as a result of operations that may be temporary or due to changes in technology temporarily. These items may not reoccur at any near future or they may be seasonal. The items must be disclosed at the end of the reporting period in the footnotes. Examples of seasonal items are income from increases in flow of tourists into the country during seasons when there is winter in European countries. Moreover, any loss as a result of change in environmental conditions especially when dealing with agricultural products.
Similarly, income from exceptional items is reported after a rare occurrence that may affect the profit level of the firm. For example, earthquakes occurring in an area which has never experienced such a phenomenon or floods being experienced in the arid areas. The exceptional items are also referred to as extraordinary items. Another example of an exceptional items may be an event resulting into abnormal profits e.g. during a short term political chaos in a long term peaceful country a firm may make abnormal profits through the sell of highly demanded but scarce items as a result of the turmoil. This will be reported as an exceptional item in the financial statements of the firm. These items must be disclosed in the financial statements as to the nature of occurrence.
Classification within Other Comprehensive Income
220-10-45-10A other comprehensive income consists of: Adjustments in the conversion of foreign currency due to foreign exchange risks or political risks. These may affect the translation rates of the currency hence reporting a loss or an income depending on the event during the business year. A gain in foreign currency exchange or a loss in the same foreign currency conversion due to misalignment in the foreign currency market will be reported in the financial statements as other comprehensive income.
Another classification is the gain or losses in transacting foreign business. These are selected and effective through economic diversification in the foreign investments. These items occur on the beginning of the foreign investment transactions. The losses or the gains may arise out of the diversification hence reported in the comprehensive income as per the date of occurrence. The third classification is the Gain or loss transactions which are within the entity but in foreign terms. These transactions are long term in nature and that the settlement is not foreseeable in the near future. These transactions are normally combined and accounted for using the equity method when reporting in the statements of finance of the entity.
Financial accounting standards board (2011)Accounting standards Codification