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Full disclosure: The income statement · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office Studios.
• 0:05
  SPEAKER_04: Before we get to today's show, so that you never miss an episode, make sure you subscribe to the PWC Accounting Podcast wherever you listen to your content.
• 0:15
  SPEAKER_04: With two new episodes released each week, there's something for everyone.
• 0:22
  SPEAKER_04: Welcome to PwC's Accounting Podcast series.
• 0:26
  SPEAKER_04: I'm Heather Horn.
• 0:27
  SPEAKER_04: Thanks for tuning in to the second episode in our full disclosure summer series, a show all about presentation and disclosure from the top of the financial statements down to the last footnote.
• 0:39
  SPEAKER_04: While it may sound like accounting 101, I guarantee you'll learn something new today.
• 0:44
  SPEAKER_04: As we continue our way through the financial statements, the topic of the day, the income statement.
• 0:53
  SPEAKER_02: I think in all of financial statements and financial reporting, what you want to keep in mind is the users.
• 0:59
  SPEAKER_02: You don't want to check the box on just the minimum disclosures.
• 1:02
  SPEAKER_02: Sometimes you may need to enhance it to make it as useful as possible.
• 1:06
  SPEAKER_04: That's one of my guests, Val Wehman, a PWC National Office Partner.
• 1:10
  SPEAKER_04: She'll be joined by Ashley Pierce, a PWC National Office Director.
• 1:15
  SPEAKER_04: I work closely with Ashley and Val on all of our National Office Thought Leadership content.
• 1:20
  SPEAKER_04: It's great having them on today's show.
• 1:23
  SPEAKER_04: And with that, it's time to get started.
• 1:27
  SPEAKER_04: So, Val, Ashley, thanks so much for joining me today to talk about the income statement.
• 1:32
  SPEAKER_04: I'm especially happy to have you both on since you're both part of our National Office Thought Leadership team.
• 1:38
  SPEAKER_04: So special guest today.
• 1:40
  SPEAKER_04: And this is a follow-on to the first episode of our full disclosure podcast that we started last week with Kyle talking about the balance sheet.
• 1:48
  SPEAKER_04: This week we're logically moving on to the income statement.
• 1:51
  SPEAKER_04: And Kyle did tee things up by reminding listeners that public companies are generally required to present three years of income statements, although there's certain exceptions.
• 2:01
  SPEAKER_04: And private companies, which aren't explicitly required to present more than one year, are encouraged to present comparatives.
• 2:08
  SPEAKER_04: So we kind of have that framework.
• 2:09
  SPEAKER_04: But Val, starting with you, I know that we actually have some requirements about which line items are required to be presented in income statements.
• 2:17
  SPEAKER_04: So can you give us some highlights?
• 2:19
  SPEAKER_02: Sure, Heather.
• 2:20
  SPEAKER_02: So really to get into that, you need to look at both the gap requirements as well as the SEC requirements.
• 2:25
  SPEAKER_02: And Kyle probably touched on that last week.
• 2:27
  SPEAKER_02: So you have your general income statement presentation guidance that's codified in ASC 205.
• 2:33
  SPEAKER_02: That's going to give you the big picture presentation items and the general purpose, how to present discontinued operations.
• 2:40
  SPEAKER_02: But to really get into the line items, there's not a lot of detail in the gap guidance.
• 2:46
  SPEAKER_02: So ASC220, which technically is comprehensive income as opposed to the income statement.
• 2:52
  SPEAKER_02: I know you're going to do a separate show on comprehensive income.
• 2:55
  SPEAKER_02: So maybe I'll focus on the income statement part of that.
• 2:58
  SPEAKER_02: But that's really where you're going to get into some of the details.
• 3:03
  SPEAKER_02: It tells you that you need to have an individual line item for net income.
• 3:07
  SPEAKER_02: It tells you you need to look at the components of net income.
• 3:10
  SPEAKER_02: But other than that, the really granular level of the individual line items is going to come from the SEC guidance.
• 3:17
  SPEAKER_02: So for a public company, that's going to be found in regulation SX item 503.
• 3:22
  SPEAKER_02: And that requires, and I'm going to give them to you.
• 3:25
  SPEAKER_02: I'm not sure how this is going to come across on the podcast, but there are 12 line items, and I'm kind of going to go through them, and they're in order as you would expect to see them on the income statement.
• 3:34
  SPEAKER_02: So you would start with your revenue or sales by category.
• 3:38
  SPEAKER_02: Then you have your cost of sales, your other operating expenses, where you would state them separately, the amounts that are not in the cost of sales.
• 3:47
  SPEAKER_02: You have your SGA, you're selling general administrative costs, your provision for bad debts, your other general expenses.
• 3:55
  SPEAKER_02: Then toward the bottom, you're getting into your non-operating income, your interest in amortization, and then income or loss before tax.
• 4:04
  SPEAKER_02: And then below that, you have your income tax and your equity and earnings, and then your income or loss from continuing ops, discontinued operations, and the amounts attributable to non-controlling interests and controlling interests.
• 4:15
  SPEAKER_02: And then below that, you'll get into next week on the statement of comprehensive income, either in one continuous statement or on two different statements.
• 4:23
  SPEAKER_02: So obviously I had that bullet point in front of me that wasn't purely from memory, but it is sort of a logical flow of information on the income statement.
• 4:30
  SPEAKER_02: And then at the bottom, as most people are familiar with, you have the earnings per share requirements for public companies.
• 4:35
  SPEAKER_04: All right.
• 4:36
  SPEAKER_04: So that was a great list, Val.
• 4:38
  SPEAKER_04: Although you could have just let it go.
• 4:39
  SPEAKER_04: I'm sure people would believe you knew all those off the top of your head.
• 4:42
  SPEAKER_04: But just one clarifying point I want to make sure.
• 4:45
  SPEAKER_04: I think operating expenses, we have to state separately material amounts, not in cost of sales.
• 4:50
  SPEAKER_04: So I don't want people left thinking they have to put every general ledger line item, right?
• 4:54
  SPEAKER_04: Just material categories.
• 4:56
  SPEAKER_04: Is that right?
• 4:56
  SPEAKER_04: Correct.
• 4:57
  SPEAKER_02: Material items, but although they don't define what is material, there's not a specific financial percentage that you're looking for.
• 5:03
  SPEAKER_04: Oh, so it's not like the balance sheet where they specify if it's over X percent.
• 5:07
  SPEAKER_04: Correct.
• 5:08
  SPEAKER_04: All right, that's helpful.
• 5:09
  SPEAKER_04: And then one other one I had a question, just want to make sure is non-operating income and expense.
• 5:14
  SPEAKER_04: Is that always on the face of the income statement?
• 5:17
  SPEAKER_02: It can actually be on the face or in the notes.
• 5:19
  SPEAKER_02: And that's going to include your dividends, your interest, your gains and losses.
• 5:23
  SPEAKER_02: But generally, in my experience, I've seen it on the face.
• 5:25
  SPEAKER_04: Me too.
• 5:26
  SPEAKER_04: So, Val, one more question before we move on.
• 5:28
  SPEAKER_04: You mentioned the fact that there's general guidance in the ASC, and then really companies look to these XX rules to understand the specifics.
• 5:37
  SPEAKER_04: Kyle did talk about this, but can you just remind our listeners, if I'm not a public company, how would I think about these SX rules?
• 5:45
  SPEAKER_02: I think I would look at them as recommendations.
• 5:48
  SPEAKER_02: I think a lot of companies are just used to the order that SX requires and those categories, but there is a lot more flexibility on the uh if you're a non-public.
• 5:57
  SPEAKER_02: So you can do it a little bit more logically, there'll be a little less consistency because companies have the latitude to call things differently.
• 6:03
  SPEAKER_02: But I think over time I've kind of seen that migration toward using the same categories that SX requires.
• 6:10
  SPEAKER_04: Yeah, and actually my experience is the same.
• 6:12
  SPEAKER_04: And I think in the context of our past podcast where we're seeing more companies going public and other things, you know, again, that can be helpful just to look to some of these rules in terms of how you're going to do your presentation.
• 6:24
  SPEAKER_04: So all right.
• 6:25
  SPEAKER_04: So I think Val, that's a great way to set the stage for what we're going to go through on this episode.
• 6:30
  SPEAKER_04: And we're definitely going to talk in detail later in the series on revenue.
• 6:35
  SPEAKER_04: And I think we've talked about in past podcasts too.
• 6:38
  SPEAKER_04: But I don't think we could do this podcast without at least mentioning some of the revenue requirements.
• 6:43
  SPEAKER_04: So can you, Val, take us through a little more detail on when we should be breaking out captions of revenue?
• 6:49
  SPEAKER_04: And again, I think this is coming from the SEC.
• 6:52
  SPEAKER_02: It is.
• 6:52
  SPEAKER_02: So for revenue, you're going to look at four main categories.
• 6:56
  SPEAKER_02: So you'll need to show your revenue separately, and that's net revenue, so net of discounts or returns and allowances from the sales of products, separate from the revenue for the provision of services, and separate from income from rentals and income from operating public utilities.
• 7:13
  SPEAKER_02: So those categories are required to be shown separately if they exceed 10% of the total revenue.
• 7:20
  SPEAKER_02: And maybe it's the clients I've had, but I usually see products and services as the main categories broken out.
• 7:25
  SPEAKER_02: Anything other or anything less than 10%, you can actually combine into single line items.
• 7:31
  SPEAKER_02: And you'll generally see this on 10Ks, although, again, practice, although you can have a condensed format where you don't need to break out categories on your interim financial statements, I usually see 10 Qs with the same breakout just for consistency to what's being showed on the 10K.
• 7:46
  SPEAKER_04: All right.
• 7:46
  SPEAKER_04: So, Val, I think that's a helpful background.
• 7:49
  SPEAKER_04: But Ashley, why don't I go to you?
• 7:51
  SPEAKER_04: Because I think one of the main questions I remember I used to get in this area is there often can be questions about distinguishing between revenue and gains.
• 7:59
  SPEAKER_04: And so how do we think through which goes in which category?
• 8:04
  SPEAKER_01: Yeah, that's right.
• 8:05
  SPEAKER_01: Um we we get that question a lot.
• 8:07
  SPEAKER_01: Um, and I think that distinction is also important because users of the financial statements often care more about revenue than you know other types of income.
• 8:16
  SPEAKER_01: So maybe first we'll start with revenue and then I can talk a little bit about gains.
• 8:21
  SPEAKER_01: The definition of revenue that people are probably most familiar with is the ASC 606 definition that defines revenue as inflows or other enhancements of assets of an entity or settlements of its liabilities, or it can be a combination of those things, from delivering or producing goods, rendering services, or other activities that are part of an entity's ongoing major or central operations.
• 8:50
  SPEAKER_01: So I said that last part a little slower because I wanted to highlight that ongoing major or central operations, we sort of commonly refer to that as ordinary activities.
• 8:59
  SPEAKER_01: And I think that's important in making that distinction between revenue and gain.
• 9:05
  SPEAKER_01: And one other thing that I, you know, I do want to point out that that definition that I just you know gave you from 606 very closely mirrors the current definition in concept statement six.
• 9:17
  SPEAKER_01: So you can have other things in revenue that are outside of the scope of our kind of common 606 revenue from contracts with customers, like lease revenue or interest income from financial institutions.
• 9:31
  SPEAKER_01: Um, but that same concept of determining whether those transactions are part of an entity's ordinary activities, you know, would still apply.
• 9:40
  SPEAKER_01: So now to get to your question about what distinguishes revenues from gains, if you have a transaction that does not arise in the course of a company's ordinary activities or you know, it's not part of their ongoing major central operations, that would not be revenue.
• 9:57
  SPEAKER_01: You know, to give an example, a gain on the disposal of a fixed asset generally would not be revenue.
• 10:05
  SPEAKER_01: But you know, obviously there's a lot of judgment here, and it it does require a company to sort of look within and evaluate what's central to their business and you know part of their normal everyday activities.
• 10:18
  SPEAKER_01: Um, and one other just kind of plug for disclosure here that I want to make.
• 10:23
  SPEAKER_01: If there are you know different types of revenue, I talked about lease revenue as an example, you would need to break that out separately, um, either you know on the face of the income statement or disclose it separately in the notes from six of six revenue.
• 10:37
  SPEAKER_01: So you need to show that breakout somewhere um in the financial statements.
• 10:41
  SPEAKER_04: All right, great reminder.
• 10:43
  SPEAKER_04: And then Ashley, because I think it's always easier to understand something if I've got a good example.
• 10:48
  SPEAKER_04: Let me ask you a fact pattern and you I'm gonna quiz you how you should be classifying these.
• 10:53
  SPEAKER_04: So let's assume I'm an equipment rental company and I'm purchasing some equipment to rent and generate rental income, but then I'm gonna sell that equipment at the end of its useful life to third party.
• 11:06
  SPEAKER_04: So would that final sale be part of revenue?
• 11:09
  SPEAKER_01: I think it's gonna depend on the facts and circumstances, obviously.
• 11:12
  SPEAKER_01: I you know, always caveat with that, but I think generally the answer would be no.
• 11:17
  SPEAKER_01: If the ongoing major and central operations of that company is renting equipment, then likely they aren't in the business of selling that rental equipment as part of their ordinary activities.
• 11:31
  SPEAKER_01: So um I would I would expect that that would probably be a gain on disposal of an asset.
• 11:36
  SPEAKER_01: And we'll get into this a little bit later, but um, it would probably also be operating if the company shows an operating measure in their income statement.
• 11:44
  SPEAKER_04: All right, very helpful.
• 11:45
  SPEAKER_04: And again, we'll talk more about revenue specifically in a future episode.
• 11:49
  SPEAKER_04: So then if I move down to Val's next line item, or I should say the SECs, I guess.
• 11:53
  SPEAKER_04: This would be costs of sales and think about operating expenses.
• 11:57
  SPEAKER_04: So, Val, what reminders would you have for our listeners on those captions?
• 12:02
  SPEAKER_02: So for cost of sales, those are the costs that are directly related to creating the revenue.
• 12:07
  SPEAKER_02: So directly related to the product sold or providing the services.
• 12:10
  SPEAKER_02: And some of those are obvious for you know direct costs.
• 12:13
  SPEAKER_02: You're gonna have your labor, you're gonna have your raw materials, and then you have your indirect costs like your utilities, um, allocated overhead or machinery depreciation.
• 12:22
  SPEAKER_02: So things that again are necessary in the creation of that revenue.
• 12:26
  SPEAKER_02: And for those allocations, that's really where judgment is required in order to do the allocation.
• 12:31
  SPEAKER_02: And there's a lot of different ways that people can come up with as long as it's sort of a reasonable approach to allocating those costs.
• 12:38
  SPEAKER_02: It's just important to remain that it's consistent so that all of your periods have sort of the comparable uh formula that you're using for that, those indirect costs.
• 12:46
  SPEAKER_02: And other than that, I mean, I I did mention the revenue breakout at the 10% level.
• 12:51
  SPEAKER_02: So if your revenue is broken out, you do want to break out your cost of sales as well into those same four categories.
• 12:57
  SPEAKER_02: But if you're combining the revenue categories because they're not uh meeting the 10% threshold, you would also combine those costs.
• 13:05
  SPEAKER_02: So other than that, I mean, considering the size of most cost of sales, there's not a lot of guidance for that.
• 13:10
  SPEAKER_02: Although I guess I should also mention the uh related party costs.
• 13:13
  SPEAKER_02: So if you have costs and expenses related to related parties, those should be reported as well.
• 13:17
  SPEAKER_02: And generally I've seen those reported parenthetically.
• 13:20
  SPEAKER_04: So, Val, one point I'd like to raise, you mentioned indirect costs, utilities, which would include electricity.
• 13:25
  SPEAKER_04: And I know you and I are both spending quite a lot of time on ESG and green accounting these days.
• 13:30
  SPEAKER_04: And a question I've been getting from many companies is whether or not the additional cost of green power compared to sort of regular power could be or should be included in cost of sales.
• 13:41
  SPEAKER_04: And I just say I think it's evolving, and we're seeing though companies starting to match up that cost with the specific cost of manufacturing.
• 13:51
  SPEAKER_04: So again, I don't want to give a specific answer here.
• 13:54
  SPEAKER_04: I think it's something we can cover in more detail, maybe in a future green podcast.
• 13:58
  SPEAKER_04: But I would like to point out to companies if you are purchasing green, it's something you should at least start thinking about and thinking about what your policy is going to be.
• 14:06
  SPEAKER_04: So just had to throw that in for our one of our latest topics we've been talking about.
• 14:11
  SPEAKER_02: So Heather, maybe I'll move then to operating expenses.
• 14:14
  SPEAKER_02: So again, under the public requirements, you have 503 requires your operating expenses to be categorized and separated if you have material buckets.
• 14:24
  SPEAKER_02: And so it's common to see selling general administrative costs, uh, which would be your direct and indirect selling expenses.
• 14:31
  SPEAKER_02: Your GNA expenses such as salaries, depreciation that's not allocated to your cost of sales, your bad debt expense, advertising expense, rent.
• 14:40
  SPEAKER_02: So all of those would be in a separate category.
• 14:43
  SPEAKER_02: And maybe I'll highlight one item on depreciation and amortization.
• 14:47
  SPEAKER_02: So that is a required disclosure.
• 14:49
  SPEAKER_02: So that's a gap requirement.
• 14:51
  SPEAKER_02: It doesn't need to be on the face, but many companies do choose to put that as a line item on the income statement, or sometimes you'll see it in the cash flow statement.
• 14:59
  SPEAKER_02: So where you report it may depend on the type of company you are.
• 15:02
  SPEAKER_02: For example, if you're a manufacturing entity, it's possible that your depreciation is allocated to inventory as a fixed overhead cost.
• 15:09
  SPEAKER_02: Or if you're a, you know, your corporate headquarters depreciation is probably reported in GNA costs.
• 15:15
  SPEAKER_02: Um, so the geography may depend on what type of company you are.
• 15:18
  SPEAKER_02: Um and some companies actually choose to report all the depreciation in earnings as a separate line item, so as a standalone component, rather than including it in cost of sales and SGNA line items, which there is a staff accounting bulletin that says that if you choose not to include depreciation in your cost of sales, the SEC is really sensitive about calling that out.
• 15:42
  SPEAKER_02: So if it's not an all-in number and it doesn't include all of your costs, that they'd prefer if you titled it something like cost of sales exclusive of depreciation.
• 15:51
  SPEAKER_02: Um, so that's clear that any subtotal or gross profit is not really your true gross profit.
• 15:56
  SPEAKER_02: Uh, and to make sure you know that it's not um, like I said, kind of that all-in total.
• 16:00
  SPEAKER_04: Got it.
• 16:01
  SPEAKER_04: Helpful reminder.
• 16:02
  SPEAKER_04: So then let me ask a question about something that I know can get very judgmental very quickly, which is you made it sound so clear.
• 16:10
  SPEAKER_04: You have costs of sales, you have operating expenses, but even based on my green power example, I, you know, that's not always completely clear.
• 16:17
  SPEAKER_04: So, Ashley, as you think about this, what are some of the considerations that we would share?
• 16:23
  SPEAKER_01: Yeah, and you're right.
• 16:25
  SPEAKER_01: Um, I think this is an area that has a lot of complexity and judgment.
• 16:30
  SPEAKER_01: And, you know, one of the reasons that this can be tricky is there's not a whole lot of guidance for determining, you know, what cost should be in cost of sales and what cost should be in, you know, another expense line item, operating expenses, SGA.
• 16:46
  SPEAKER_01: You know, Val mentioned this before, but obviously there's some pretty obvious costs that go very naturally in cost of sales, things like raw materials or direct labor costs, but it gets a lot trickier with things like facilities cost or order processing costs, or even you know, certain administrative costs like front desk or security personnel.
• 17:09
  SPEAKER_01: So, you know, it's it's important to think through each of these when you're allocating those costs on the income statement.
• 17:17
  SPEAKER_01: You know, there's not like a silver bullet and or a kind of one size fits all, but you know, one area that that I think kind of demonstrates the complexity and the judgment, it's an area where we get a lot of of questions, just to give you an example, since I know you loved examples, um, is the the presentation of amortization of software that's used for internal use.
• 17:40
  SPEAKER_01: So generally that presentation um would be based on what the software is being used for.
• 17:46
  SPEAKER_01: So similar to other long-lived assets.
• 17:49
  SPEAKER_01: So, you know, for example, if the software is being used in the manufacturing process, typically that would be categorized within cost of sales.
• 17:59
  SPEAKER_01: Um, or if it's being used to provide a service to a customer, that would also typically be categorized in cost of sales.
• 18:07
  SPEAKER_01: However, if that software is used for more back office type activities or financial reporting or marketing, then I think typically the amortization of those software costs would be presented outside of cost of sales as an operating expense.
• 18:24
  SPEAKER_01: I would also add that you know consistency is key.
• 18:27
  SPEAKER_01: So you can't cherry pick where you want certain costs to go if other similar costs are in a separate line item.
• 18:36
  SPEAKER_01: So I think it's important to look back and make sure you're being consistent, which Val mentioned and you're classifying similarly to how you've classified similar costs in prior periods.
• 18:48
  SPEAKER_04: All right.
• 18:48
  SPEAKER_04: So then Ashley, sticking with you, I know another area where um we get questions and there's SEC comments are just thinking about operating measures and subtotals.
• 18:58
  SPEAKER_04: And so, how do we think about where it's appropriate to put these different subtotals in the income statement?
• 19:05
  SPEAKER_01: Yep.
• 19:06
  SPEAKER_01: And if you remember Val's list of 12 items, um one of those items was not operating income because it's not required to be presented on the income statement.
• 19:17
  SPEAKER_01: Um, neither the FASBI guidance that she mentioned nor the SEC Rule 503 require it.
• 19:24
  SPEAKER_01: However, you know, as you know, a lot of companies can and do choose to present an operating measure in their income statement.
• 19:32
  SPEAKER_01: So if a company does choose to present operating income or you know, some other operating measure, the distinction between operating or non-operating again typically is based on the relationship of the activity to the entity's ongoing major or central operations.
• 19:52
  SPEAKER_01: But I think it's also based on the company's past practice or policy.
• 19:57
  SPEAKER_01: Um, so to the extent that they have charges that relate to activities for which revenues and expenses have historically been included in operating income, then you know, I we would expect those to be classified as an operating expense and you know separately disclosed if material like you mentioned before.
• 20:16
  SPEAKER_01: So, you know, it's important to know if you've created a past policy for yourself on how to classify certain costs and be thinking about that.
• 20:26
  SPEAKER_01: I think you know, one pretty recent and prevalent example that we saw, you know, a lot of companies dealt with this related to the cost of the COVID-19 pandemic and whether or not those should be included in operating income, assuming that operating income is presented.
• 20:44
  SPEAKER_01: We saw most companies did include those costs in their operating measure.
• 20:50
  SPEAKER_01: Um, it's obviously dependent upon facts and circumstances of the company and the nature of the cost.
• 20:55
  SPEAKER_01: But I think this would especially be true if the related revenue for those costs was included in operating income.
• 21:03
  SPEAKER_01: So those are, you know, just some things to kind of keep in mind as you're as you're working through that.
• 21:09
  SPEAKER_04: All right, very helpful.
• 21:10
  SPEAKER_04: So then, you know, we've talked about some topics here that are very judgmental.
• 21:15
  SPEAKER_04: And obviously, anytime there's judgment, there's different interpretations and outcomes.
• 21:19
  SPEAKER_04: So, Val, another area our listeners love to hear from us on is on SEC comment letters.
• 21:25
  SPEAKER_04: So, have we seen any SEC comments or any trends on SEC comments on cost classification specifically?
• 21:33
  SPEAKER_02: So I think the SEC can ask for more information.
• 21:36
  SPEAKER_02: So I wouldn't say there's a huge focus, it's not a real prevalent item, but definitely because there is that judgment between cost of sales and operating income, if the amounts are really large, they will ask companies for the components.
• 21:50
  SPEAKER_02: They'll look at whether they agree with what's included in cost of sales or ask questions if certain amounts are not.
• 21:57
  SPEAKER_02: Specifically, I mentioned earlier the depreciation.
• 21:59
  SPEAKER_02: So they'll Ask if depreciation is or isn't included in the cost of sales and why or why not, and making sure that that allocation makes sense.
• 22:07
  SPEAKER_02: So that's really sort of the primary focus, making sure that anything you call gross profit, um, because of the importance of that measure, that it really represents, sort of what it's purported to represent.
• 22:17
  SPEAKER_04: All right.
• 22:18
  SPEAKER_04: And then Val, regular listeners know we don't read on this podcast, but in the case of SCC comments, I'm always open to something read.
• 22:26
  SPEAKER_04: If there's an example comment you think might be helpful to share.
• 22:29
  SPEAKER_02: See, I was trying to address it in broad strokes, but yes, I happen to have one, Heather.
• 22:33
  SPEAKER_02: Just happen to.
• 22:36
  SPEAKER_02: So we have two examples.
• 22:37
  SPEAKER_02: Uh one was please tell us and disclose in an accounting policy footnote the specific types of amounts included in cost of sales, operating expenses, and general and administrative expenses.
• 22:50
  SPEAKER_02: And then the other one uh asks you present costs of goods sold exclusive of depreciation and amortization expense along with the subtotal gross profit.
• 23:00
  SPEAKER_02: Please tell us how your presentation complies with the guidance and SAB topic 11B, as gross profit appears to present a figure for income before depreciation.
• 23:09
  SPEAKER_04: All right.
• 23:09
  SPEAKER_04: I think those are helpful because again, I think it really does show the level of detail that the SEC is focused on.
• 23:15
  SPEAKER_04: And again, the importance of making sure, as always, that companies are compliant with these different requirements.
• 23:21
  SPEAKER_04: So with that, why don't we actually move on to some specific presentation questions?
• 23:26
  SPEAKER_04: And I have sort of a popery here, but Val, let's start with cost of sales and operating expenses, which we've talked about broadly.
• 23:34
  SPEAKER_04: But I know that we're getting more questions around research and development.
• 23:38
  SPEAKER_04: And this has another green angle because we are actually seeing these questions come up in some cases when companies are developing new technologies to reduce emissions or other sort of environmentally friendly things.
• 23:50
  SPEAKER_04: And then obviously there's just regular ongoing research and development companies have been doing.
• 23:55
  SPEAKER_04: So, can you walk us through those requirements?
• 23:58
  SPEAKER_02: Sure.
• 23:58
  SPEAKER_02: And I think you know, RD gets a little bit more challenging because there are so many different forms those agreements can take.
• 24:03
  SPEAKER_02: So ASC 730 requires you to disclose the RD charge to expense for each period where an income statement is presented.
• 24:11
  SPEAKER_02: But the question that you get is what about for programs and arrangements where you're receiving reimbursement of those RD expenses from another party?
• 24:20
  SPEAKER_02: So basically a funded RD project.
• 24:22
  SPEAKER_02: Some people can look at it and say that that should be revenue.
• 24:25
  SPEAKER_02: Some people may look at it and say that's an offset to expense.
• 24:28
  SPEAKER_02: And because the guidance on this is covered in several different places, it can make it difficult to make sure that you're considering the appropriate factors.
• 24:36
  SPEAKER_02: So the need to conclude that it's not revenue, i.e., that it's not ordinary business activities to be paid for RD, can require judgment.
• 24:46
  SPEAKER_02: And the SEC has said that there's more than one conclusion that could be supportable in certain fact patterns.
• 24:51
  SPEAKER_02: So it really is facts and circumstances specific.
• 24:55
  SPEAKER_02: But once you choose an approach, um it really should be applied consistently.
• 24:59
  SPEAKER_02: And then you should also disclose your policy as to sort of what decision and conclusion you've come to.
• 25:04
  SPEAKER_04: All right.
• 25:04
  SPEAKER_04: And then Ashley, I know a lot of times we see that these RD arrangements are actually structured as collaborative arrangements.
• 25:12
  SPEAKER_04: So how would you think about the presentation and disclosure requirements in that case?
• 25:16
  SPEAKER_01: I think it's important to know that if you have transactions that are within the scope of ASC 808, which is the collaborative arrangements guidance, there's certain presentation and disclosure requirements that you know go along with that.
• 25:31
  SPEAKER_01: So the first one, you're you're required to disclose information about the nature and the purpose of the collaborative arrangement and any rights and obligations that the company has under that arrangement.
• 25:44
  SPEAKER_01: You're also required to disclose any accounting policies that have been elected with respect to those arrangements.
• 25:51
  SPEAKER_01: And you know, from a presentation perspective, you're required to disclose the income statement classification and the amount that's attributed to those collaborative arrangements for each period for which an income statement is presented.
• 26:05
  SPEAKER_04: So, Ashley, I'm assuming since you're required to discuss where in the income statement collaborative arrangements are presented, then that's because there's not prescriptive guidance on where it needs to go.
• 26:16
  SPEAKER_01: Yeah, that's that's right.
• 26:18
  SPEAKER_01: The collaborative arrangements guidance doesn't prescribe specific presentation for how they should be presented.
• 26:25
  SPEAKER_01: Um, however, it does preclude entities from presenting those transactions with collaborative partners that are outside the scope of ASC 606 with revenue that's subject to ASC 606.
• 26:38
  SPEAKER_01: And you know, as far as the presentation goes, companies have a few options.
• 26:43
  SPEAKER_01: They can present it based on analogy to other authoritative guidance, or if there isn't appropriate guidance to analogise to, they can have a reasonable, consistently applied accounting policy election and make sure that they're applying it consistently.
• 27:02
  SPEAKER_01: So, you know, that that's not to say that these arrangements can't be revenue.
• 27:06
  SPEAKER_01: I think generally there likely are instances where it would be acceptable to present collaborative arrangements as revenue.
• 27:15
  SPEAKER_01: However, again, they they just can't be combined with revenue that's in the scope of ASC 606.
• 27:21
  SPEAKER_01: Uh, one other thing I did want to highlight, not specifically related to presentation, but just because I think it's so important.
• 27:29
  SPEAKER_01: You know, but before you even get to the point of presentation when you're in, you know, this collaborative arrangements, you know, land, you need to make sure that you've evaluated the scope and make sure that, you know, just because you're in the scope of the collaborative arrangements guidance, you still might conclude that part or all of the arrangement is in the scope of 606.
• 27:51
  SPEAKER_01: So, you know, you you can't use this ASC 808 guidance to avoid complying with 606.
• 27:57
  SPEAKER_01: So that's always kind of your step one is to figure out whether, you know, what's your unit of account and whether you have pieces that need to be accounted for under 606.
• 28:06
  SPEAKER_04: So then, Val, I'm gonna turn back to you and it's just ask a general question if there's any other specific presentation reminders you would highlight.
• 28:14
  SPEAKER_02: It's such a pulpourry of areas, but I guess we touched on the related parties and the depreciation.
• 28:20
  SPEAKER_02: I guess maybe two points on long-lived asset impairments.
• 28:24
  SPEAKER_02: So those can actually be presented either in your SG ⁇ A line item or some companies just for the increased visibility of it may present it separately on the face of the income statement.
• 28:34
  SPEAKER_02: So we've seen both pretty commonly.
• 28:36
  SPEAKER_02: Also with long-lived assets, the gains or losses from the sale of a long-lived asset is generally presented as an other general expense.
• 28:44
  SPEAKER_02: So again, calling that out uh as a specific line item.
• 28:47
  SPEAKER_02: Maybe also restructuring charges and related impairment charges in that regard.
• 28:51
  SPEAKER_02: So if you're disposing of a component, it's likely that your restructuring charges are not specifically related to that component.
• 28:58
  SPEAKER_02: So it's probably not discontinued operations.
• 29:00
  SPEAKER_02: And that's covered in a specific SAB topic that says that that would generally be part of your income from continuing operations and then disclose separately if it's material.
• 29:09
  SPEAKER_04: All right.
• 29:09
  SPEAKER_04: So definitely that was appropriate.
• 29:11
  SPEAKER_04: And I maybe could summarize all of those by saying that anytime you're dealing with something that's not usual necessarily for your company, it probably makes sense to check the rules to see if there is a specific requirement.
• 29:22
  SPEAKER_04: That would be fair.
• 29:23
  SPEAKER_04: All right, so then Val, let me ask you another question.
• 29:25
  SPEAKER_04: And we talked about operating expenses and types of expenses within operating expenses, but I know we also talked about non-operating income and expense right at the beginning.
• 29:34
  SPEAKER_04: So are there any specific presentation requirements we should think about there?
• 29:38
  SPEAKER_02: So maybe I'll focus on the non-operating income and expense, which you can show as one line item net.
• 29:46
  SPEAKER_02: So you can include that as a single line item, except if there are significant items within it.
• 29:51
  SPEAKER_02: So you really want to show them gross.
• 29:53
  SPEAKER_02: So you don't want two material items that are offset to be an insignificant amount.
• 29:57
  SPEAKER_02: If it is two material items, you would want to show those separately.
• 30:01
  SPEAKER_02: But generally, for immaterial amounts, you can net off the other income and expense.
• 30:05
  SPEAKER_02: The other nuance there is that a lot of times you'll see interest expense included in those totals, which you really should not net off because from an SEC standpoint, uh, that would be required to be shown separately in its own caption for public companies.
• 30:18
  SPEAKER_02: So you wouldn't want to include that in sort of the all-other category at the bottom of the income statement.
• 30:23
  SPEAKER_04: All right, very helpful.
• 30:24
  SPEAKER_04: So then, Ashley, let me go back to you with the topic where I know you've got a lot of questions, which is around the presentation of government grants.
• 30:32
  SPEAKER_04: And I think with the CARESAC last year and then potential additional programs this year, there's been a lot more focus on government assistance.
• 30:40
  SPEAKER_04: And so, and I know there's different requirements depending on the accounting model that you use.
• 30:45
  SPEAKER_04: So can you just give us the highlights of what companies should be thinking about if they are in receipt of a government grant?
• 30:51
  SPEAKER_01: Yep.
• 30:51
  SPEAKER_01: Yeah, we saw this a lot as you mentioned this this past year with you know various parts of the CARES Act.
• 30:58
  SPEAKER_01: Um, we also see government assistance where an organization negotiates directly with a government agency to you know build a new factory or open an operation that's going to bring you know a large number of jobs to a particular jurisdiction.
• 31:12
  SPEAKER_01: So I think it can kind of you know span um across the spectrum.
• 31:18
  SPEAKER_01: Um but the issue here is that there's no explicit US GAAP guidance for government assistance to for-profit business entities.
• 31:26
  SPEAKER_01: Um there are you know two models that commonly get analogized to.
• 31:32
  SPEAKER_01: Um the first one is within the international accounting standards, and that's IAS 20.
• 31:38
  SPEAKER_01: Um, I think that's the one that we see more commonly applied in these situations.
• 31:42
  SPEAKER_01: The second one is the not-for-profit contribution model that's um codified in ASC 958-605.
• 31:50
  SPEAKER_01: And the FASB staff has said on a few occasions that business entities are not precluded from applying that guidance by analogy.
• 31:59
  SPEAKER_01: I think which model the company uses is going to depend on the nature of the grant and their past accounting, um, which I know I sound like a broken record, but you know, you need to look at your past history and if you've received similar grants and accounted for them, you know, a certain way, then you need to make sure you're applying a consistent policy going forward.
• 32:20
  SPEAKER_01: So, you know, all of that is to say there's there's a couple of models that that you can encounter in this area, but obviously this is a podcast on presentation and disclosure.
• 32:30
  SPEAKER_01: So why does it matter from a presentation point of view?
• 32:33
  SPEAKER_01: If you're following the not-for-profit contribution model, you would recognize the government assistance as grant income on a gross basis separately from the related expense.
• 32:45
  SPEAKER_01: And if you're following the IAS 20 model, the presentation is gonna depend more on the nature of the grant, you know, whether it's related to income or whether it's related to assets.
• 32:55
  SPEAKER_01: But generally you have more leeway here as to whether you present the grant gross as other income or whether you present it net and deduct it from the related expense.
• 33:06
  SPEAKER_01: So I won't go into a lot of detail here because we do have a few really good podcasts that we've done on this in the past that kind of dives a little bit deeper.
• 33:14
  SPEAKER_01: Um, but the one thing I will say is, you know, the presentation isn't the only difference between the two models.
• 33:20
  SPEAKER_01: There is also recognition differences, you know, related to the timing and pattern of recognition.
• 33:25
  SPEAKER_01: So I would refer listeners to those podcasts for more information.
• 33:29
  SPEAKER_04: Right.
• 33:30
  SPEAKER_04: And I think Ashley, sometimes it is hard to just talk about presentation when it's like recognition is so important.
• 33:36
  SPEAKER_04: So I do think that this whole discussion is predicated on the fact you've met your recognition guidance.
• 33:42
  SPEAKER_04: And so now this is just talking about classification.
• 33:45
  SPEAKER_04: So the one other thing though, with government grants is you know, now that we're talking about it, uh there have also been some recent standard setting in this area.
• 33:53
  SPEAKER_04: So can you share the latest update on that?
• 33:56
  SPEAKER_01: Yep.
• 33:56
  SPEAKER_01: Yeah.
• 33:57
  SPEAKER_01: So some of our listeners might know, I think we might have mentioned it on a past podcast, but the FASBE has had a project on their technical agenda for more than a few years now, um, focused on disclosures for government assistance to for-profit business entities.
• 34:13
  SPEAKER_01: Um, and they actually, the FASBE board met recently on this within the last month.
• 34:18
  SPEAKER_01: And in that meeting, they proposed requiring disclosure of the nature of the government assistance, including a description of the transaction and the form of assistance, as well as the significant terms and conditions of that assistance.
• 34:35
  SPEAKER_01: So that could be the duration of the grants, any contingencies or provisions, you know, where the company might have to give the money back, any commitments that are made by both parties, those would all be required disclosures.
• 34:49
  SPEAKER_01: And then obviously, you know, depending on the type of the assistance and the type of entity that's receiving the assistance, sometimes these um arrangements can be sensitive.
• 35:00
  SPEAKER_01: And so, you know, if an entity is legally precluded from disclosing some of this information, then they they should disclose a description of the general nature of whatever the information is that they've omitted and the legal reason that they that they omitted it.
• 35:17
  SPEAKER_01: You know, I mentioned before that there's kind of a couple of different accounting policies and a couple of models that that can be applied.
• 35:24
  SPEAKER_01: So part of this ASU would require disclosure of the accounting policy that's used to account for the assistance, as well as which line item on the balance sheet and income statement are impacted.
• 35:37
  SPEAKER_01: So, you know, that that comes back to that gross versus net presentation that I that I talked about earlier.
• 35:43
  SPEAKER_01: Um, I think that the timing on this one's pretty quick.
• 35:45
  SPEAKER_01: So we're expecting a final standard um sometime in the third quarter of this year.
• 35:50
  SPEAKER_01: Um, and it'll be effective in 2022 for calendar year end business entities.
• 35:57
  SPEAKER_04: All right.
• 35:57
  SPEAKER_04: Ashley, thanks for that reminder.
• 35:59
  SPEAKER_04: And our listeners to look out in the newsletter for when that's issue, because we will definitely highlight that.
• 36:04
  SPEAKER_04: So then, Val, just getting close to wrapping up, anything else, maybe more broadly, not specific to government grants, uh, that you would highlight from a standard setting perspective?
• 36:14
  SPEAKER_02: Broadly, there have been a couple of projects that the FASBI has played with relative to the income statement presentation, and they they date back actually a number of years.
• 36:22
  SPEAKER_02: Um, one in particular uh split into two separate projects.
• 36:25
  SPEAKER_02: So back in, I think it was 2014, they started researching a project looking at the disaggregation and the structure of the performance statement, as they called it, or the income statement.
• 36:35
  SPEAKER_02: And then in 2016, they did an agenda consultation, and there was actually really strong support for moving ahead with the project.
• 36:41
  SPEAKER_02: And in 2017, they did add a project to their active agenda in order to discuss various approaches for disaggregating performance and defining operating income.
• 36:50
  SPEAKER_02: But I think the sort of the more they got into disaggregation and whether it was the company model and what perspective is, it started to sound a little bit like segment reporting.
• 36:59
  SPEAKER_02: So in 2019, they actually paused the project and they are waiting to consider the developments on the segment reporting project, and then also any learnings from the ISB's primary financial statements project.
• 37:13
  SPEAKER_02: The other half of that project, actually, if I sort of put my nerd hat on, was really kind of interesting.
• 37:17
  SPEAKER_02: They were focused originally on turning the income statement into something more of a performance statement modeled after, if I understood it correctly, kind of like the cash flow statement.
• 37:26
  SPEAKER_02: So it was separate earnings between sort of what was financing, what was investing and operating, which sounded interesting, but that project actually hasn't been touched.
• 37:34
  SPEAKER_02: It's still on the research agenda, but they really haven't done anything with that since um I think it was 16 or 17.
• 37:39
  SPEAKER_04: Well, and the other interesting point on that, Val, is you know, the FASBE is getting ready to do a new agenda consultation.
• 37:45
  SPEAKER_04: So they've been talking about it in various forums.
• 37:48
  SPEAKER_04: And at the FACSAC meeting in March, so the FACSAC is an advisory committee to the FASBE.
• 37:54
  SPEAKER_04: There was a lot of discussion by the participants in terms of the need for greater disaggregation, performance metrics, and other.
• 38:00
  SPEAKER_04: So it'll be interesting to see when that agenda consultation comes out, which we're expecting at the end of June for the request, if they mention it in their end or when the responses come back and the FASB starts looking at them if this comes back up.
• 38:14
  SPEAKER_04: So potentially more to come on that.
• 38:16
  SPEAKER_04: All right.
• 38:16
  SPEAKER_04: So wrapping things up, I have a separate wrap-up question for both of you.
• 38:20
  SPEAKER_04: But Val, I'm going to start with you first.
• 38:22
  SPEAKER_04: So if you are an elevator with someone, what would be your elevator speech for a preparer of what they should focus on when they're preparing the income statement?
• 38:32
  SPEAKER_02: I think in all of financial statement and financial reporting, what you want to keep in mind is the users.
• 38:39
  SPEAKER_02: So I think as long as you maintain a focus on what are people using this for and what is it communicating.
• 38:45
  SPEAKER_02: So I think you can get into what are the technical requirements, but I think the real focus is to make it a usable performance statement and that it sort of presents that decision useful information for your targeted audience.
• 38:57
  SPEAKER_04: All right.
• 38:57
  SPEAKER_04: So basically saying start with the rules, but then make sure that you are also disclosing the information that your users need.
• 39:06
  SPEAKER_02: Correct.
• 39:06
  SPEAKER_02: You don't want to check the box on just the minimum disclosures.
• 39:09
  SPEAKER_02: Sometimes you may need to enhance it to make it as useful as possible.
• 39:12
  SPEAKER_04: All right, very helpful.
• 39:13
  SPEAKER_04: And then Ashley, you are one of our podcast producers.
• 39:16
  SPEAKER_04: If someone was asking you about the podcast, if you were to think about some of our recent episodes, which one would you most recommend they listen to and why?
• 39:25
  SPEAKER_01: I would probably have to say, um, and I'm not just saying this to plug our new series, but I really enjoyed the episode that Kyle Moffat did last week on the balance sheet because I did learn some new things.
• 39:39
  SPEAKER_01: And I think it's a good refresher.
• 39:42
  SPEAKER_01: And I also think it's just refreshing to kind of step back and make sure, you know, that we're remembering some of the basics and why we're doing what we're doing and why we're, you know, preparing financial statements the way that we are.
• 39:57
  SPEAKER_01: Because I, again, to Belle's point, so easy to get caught up in the rules and the percentages and the numbers.
• 40:03
  SPEAKER_01: And, you know, I think, you know, Kyle really highlighted that it's important to sort of step back and and you know look at things through that lens.
• 40:11
  SPEAKER_04: So all right.
• 40:12
  SPEAKER_04: Well, I'm very happy to hear that because I did promise listeners in the intro that they would definitely learn something new.
• 40:19
  SPEAKER_04: And I consider you highly knowledgeable, Ashley.
• 40:21
  SPEAKER_04: So the fact you learned something new, I think, is vindication that any of our listeners would.
• 40:26
  SPEAKER_04: So I'm with you on the recommendation and look forward to having our listeners join us again next week for the cash flow statement.
• 40:34
  SPEAKER_03: That does it for today.
• 40:36
  SPEAKER_03: Join me back here every Tuesday and Thursday for new podcast episodes.
• 40:40
  SPEAKER_03: Next Tuesday, we're moving on to look at the income statement.
• 40:44
  SPEAKER_03: And if you're looking for more insights, check out the full podcast series at viewpoint.pwc.com, where you can also register for our upcoming CPE Eligible second quarter webcast featuring special guest Paul Munter.
• 41:00
  SPEAKER_03: For PWC's National Office Studios, I'm Heather Horn.
• 41:04
  SPEAKER_03: Thanks for tuning in.
• 41:13
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• 41:17
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