Return the Relevancy to the P&L - Lurie
Returning the Relevancy of the P&L: Proposed Model
Ehud Lurie, CPA (Isr.) Shlomi Shuv, CPA (Isr.) 1* 1. Introduction
Profit or Loss, or more commonly known as Profit and Loss (P&L), has always been a significant statement for most reporting entities. The primary reason lies in the fact that the P&L is the basis for evaluating the ability of reporting entities to generate profits in the future. This issue is reflected, among others, by the various earning multipliers which are used often in appraising companies and in determining acquisition transaction prices. Executive pay is often based on performance as measured by the P&L. Performance under financial covenants as well as financial ratings rely on current profitability ratios. In addition, the P&L statement is the most reviewed and examined report by investors, credit providers, analysts, the financial press and others. Although during the past few years, there have been many changes in performance measurement, such as Comprehensive Income reporting, Earnings Per Share continues to calculated on the basis of net profit (loss) and will continue in this manner in the future. There can be no dispute, therefore, that the relevancy of the P&L is important for the public trust in financial reporting. Any harm to the relevancy of the P&L, on the other hand, will lead the search for alternative solutions by various economic reports and non-GAAP adjustments. Over the last decades the accounting standardization began to use Other Comprehensive Income (OCI) as a tool for deferring the recognition of certain profits and losses. Although many years have passed since the first use of this tool, no one until now has dealt with the theoretical infrastructure that differentiates the cases in which items are to be recognized in the P$L or deferred to OCI. Recently, new items are added to OCI sporadically and without structured methodology. We have witnessed last year a new phenomenon in the IFRS - income and expenses are
Ehud Lurie, CPA (Isr.) Shlomi Shuv, CPA (Isr.) 1* 1. Introduction
Profit or Loss, or more commonly known as Profit and Loss (P&L), has always been a significant statement for most reporting entities. The primary reason lies in the fact that the P&L is the basis for evaluating the ability of reporting entities to generate profits in the future. This issue is reflected, among others, by the various earning multipliers which are used often in appraising companies and in determining acquisition transaction prices. Executive pay is often based on performance as measured by the P&L. Performance under financial covenants as well as financial ratings rely on current profitability ratios. In addition, the P&L statement is the most reviewed and examined report by investors, credit providers, analysts, the financial press and others. Although during the past few years, there have been many changes in performance measurement, such as Comprehensive Income reporting, Earnings Per Share continues to calculated on the basis of net profit (loss) and will continue in this manner in the future. There can be no dispute, therefore, that the relevancy of the P&L is important for the public trust in financial reporting. Any harm to the relevancy of the P&L, on the other hand, will lead the search for alternative solutions by various economic reports and non-GAAP adjustments. Over the last decades the accounting standardization began to use Other Comprehensive Income (OCI) as a tool for deferring the recognition of certain profits and losses. Although many years have passed since the first use of this tool, no one until now has dealt with the theoretical infrastructure that differentiates the cases in which items are to be recognized in the P$L or deferred to OCI. Recently, new items are added to OCI sporadically and without structured methodology. We have witnessed last year a new phenomenon in the IFRS - income and expenses are