Statement of Changes in Equity and Non-Recurring Items

So far in the financial statements arc we’ve leaned hard on the B/S and I/S, and at the end we’ll do a quick pass on the C/F. Which means the Statement of Changes in Equity has barely gotten a mention.

But honestly? The previous post was basically the Statement of Changes in Equity already.

So I’ll just toss a sample in here, say a few words, and keep moving heh heh heh

The OCIs that flow into AOCI — only very specific income/expense items get to ride that bus (the ones from that little mnemonic of mine). For CFA purposes, you really just need to know about 5 of them as general background, which is why the numbers are written in the way they are.

Hey — wait. Doesn’t this picture look suspiciously familiar??

Yeah. It’s literally the picture from the previous post. That’s why I said back then that we were already basically looking at the Statement of Changes in Equity heh heh heh heh

OK so now, on to… how do I put it… the not-so-important stuff?

Let’s lightly skim through the small fish and move on.

(Not saying it won’t show up on the exam — it just doesn’t carry much weight on the exam heh heh heh heh)

Bad Debt Expense & Warranty Expense

Bad debt got a quick cameo back when we did Accounts Receivable.

We booked it as accounts receivable — money that’s supposed to roll in later from selling inventory on credit. And if the company that owes you suddenly starts looking shaky, you have to recognize an ‘impairment’ on that receivable.

By accounting convention, impairment on accounts receivable gets its own special name — ‘bad debt.’ We covered that already.

What we didn’t cover was that this thing creates a DTA (Deferred Tax Asset) ^^

OK so what is Warranty Expense??

Throwback Samsung Electronics phones… before the Galaxy there was the Anycall. And back in those days, when you bought a phone, they’d tack on a 1-year free A/S (after-service) clause.

Anyway, in cases like that — free A/S, or inventory sold with various services bundled in — even when you book revenue of 1,000, the matching principle says expenses have to match the revenue. So you have to estimate the costs that’ll show up later and book them upfront, right?!?!?!

So you “estimate the future costs” and stuff them into the I/S in advance. And then — by the same logic as above — this becomes a thing that creates a DTA on the B/S.

When the costs actually show up later as estimated, there’s no impact on the I/S at that future moment. And if the actual cost differs from the estimate, the accounting treatment is to fix it using the prospective method :-)

For CFA purposes you don’t need any of this in detail. Just knowing the concept exists is fine heh heh heh heh

(Wanna get a tiny taste of how this part is studied for CPA?? Above I just gave the conceptual overview, but the actual accounting treatment process is absurdly, ridiculously complicated heh heh heh heh heh I’d actually recommend you not read this part heh heh heh heh

First — a “warranty” is a promise, and the accounting standard splits this promise into 2 types: assurance-type warranty / service-type warranty.

Assurance-type warranties follow the accounting treatment for “provisions.” Service-type warranties get identified as a performance obligation at the time of revenue recognition, and a portion of the transaction price gets allocated to them.

How do you tell them apart?

Can the customer choose whether or not to buy the warranty?

NO → Does it provide additional services on top of the assurance that the product meets the agreed-upon specs?

Also NO → Then you’re an assurance-type warranty (i.e., the case where only the assurance that the product meets the agreed-upon specs is given). For CPA purposes, assurance-type warranties only show up via the sales warranty provision :-))

What about service-type? A portion of the transaction price has to be allocated as a performance obligation.

The terms “performance obligation” / “transaction price” are actually terms straight out of our country’s accounting standard. So to actually define these properly, I’d need to walk through the whole “Revenue from Contracts with Customers” standard from the beginning, and if I do that this whole thing becomes another full post…. heh heh heh heh So I’ll have to leave it… sigh.. heh.heh heh)

Non-recurring Item

This part feels like a chapter about items that step outside the going-concern flow — stuff the financial statements display separately.

1. Discontinued Operation:

Just take Samsu— Samsung Electronics. It’s made of multiple business divisions: semiconductors, phones, home appliances, you name it. And it’s totally possible they decide to wind down one of those divisions, right?!

(In reality, it’s less “we went bust, that’s a wrap!!” and more often the business division is doing so well that they spin it out and set it up as its own legal entity. Like how Kakao Games popped out.

This is called a spin-off — “a form of splitting one big company into smaller companies to operate them.”)

Profit and loss tied to the division that’s about to spin off won’t show up next fiscal year, so they’re saying — hey, let’s display this stuff separately for the info users heh heh

Tax related to this discontinued operation obviously doesn’t get lumped into the Tax line above. So you also need to know — the discontinued operation itself is written net of tax!!!

One more thing,

2. Unusual or Infrequent Items (in Korean this seems to be called special items)

This refers to the Non-operating profit sitting below operating profit (영업이익).

(This is exactly where the gap between operating profit and EBIT comes from!!!!!!!!!!!! For CFA purposes I told you to just treat operating profit and EBIT as the same number — and the reason was a study-purpose assumption that there’s no non-operating income. But in reality, apparently there’s a company where the chairman of some ㅇㅇ pharma was a guy who founded a first-generation securities firm in Korea… so that kind of person is the company chairman, and the chairman is so good at stock investing…. that operating profit is meh, but non-operating income is enormous, so the gap between operating profit and EBIT (earnings before interest expense and corporate tax) is supposedly huge heh heh)

Anyway, the point is — Non-operating Profit includes things like gain/loss on disposition of PPE.

And naturally, since it’s before taxes, it’s Before Tax.

That much is fine to know heh heh

And the stuff after this is…

…nothing particularly special…. heh.heh.heh.heh.heh heh heh heh

I’ll just slap a photo on it and gloss over it! heh heh heh heh

Wow — we’re really almost done with FRA now!!!!

After this, only EPS and the cash flow statement are left.

Just these two!!!!!!!!!!!!

Once those are done it’s really, really the end!!!!!!!!!!!

Wooooooooooooooah — let’s fight all the way to the finish line!!!!

Originally written in Korean on my Naver blog (2021-10). Translated to English for gdpark.blog.