Format
The profit and loss statement, or income statement, shows financial performance for a period. Schedule III of the Companies Act 2013 prescribes the format; Ind AS 1 requires other comprehensive income to be included, so OCI items appear below net profit. Banking, insurance and utility companies follow their regulators' formats instead. Statements look different across industries because the nature of income and expenses varies; the syllabus uses Bharti Airtel's consolidated FY2019 statement.
Income lines
Expense lines
Common line items across industries are employee cost, depreciation and finance charges. Manufacturers report three more: cost of raw materials, purchase of stock-in-trade and change in inventory of finished goods. Expenses not separately disclosed go into other expenses.
Expense reporting in India differs significantly from the rest of the world. Raw materials carry higher disclosure requirements, while other direct expenses carry lower ones. Because other components of direct cost are not disclosed, gross profit cannot be calculated for Indian companies.
Tax
Tax expense has three components: current tax, MAT and deferred tax. Current tax is the tax payable for the year other than MAT. MAT paid can be used as credit in future, so in theory it should be shown as an asset; a company that doubts it can claim the credit within the allowed duration expenses it in the P&L instead. Deferred tax income or expense has no cash impact; it arises from accounting treatment that recognises future tax benefits or obligations created by past events, because tax authorities and accounting standards recognise certain incomes and expenses at different times.
Below the profit line
EPS = Net profit attributable to equity shareholders / Weighted average shares outstanding
- Shares are weighted by the time they were outstanding during the period.
- Diluted EPS assumes every instrument convertible into equity without payment of full consideration is converted: in-the-money warrants, ESOPs and convertibles. The P&L impact of conversion is also factored in, and adjusted profit is divided by the diluted share count.
- For loss-making companies diluted EPS and basic EPS are the same.
OCI is income or expense required or permitted to bypass the P&L, mostly changes in the value of assets and liabilities from non-operating factors: changes in revaluation surplus; remeasurement gains or losses on defined benefit plans; gains or losses on translating financial statements of foreign operations; changes in fair value of financial assets or liabilities accounted through OCI; gains or losses on derivative contracts that effectively hedge risk. The part of a subsidiary's OCI belonging to external shareholders is allocated to non-controlling interest.
The syllabus's sample question offers change in accounts receivable, change in long-term debt, and change in inventory of finished goods and WIP. Only the last is an income statement line; the first two are balance sheet movements that appear in the cash flow statement.
- Schedule III prescribes the P&L format and Ind AS 1 requires other comprehensive income to be included, shown below net profit; banks, insurers and utilities follow their regulators' formats. Revenue is income from core and incidental operations (some companies split other operating income); other income is non-operating, such as investment income or profit on asset sales.
- Expense lines common to all industries: employee cost, depreciation, finance charges. Manufacturers add cost of raw materials (purchases plus opening stock minus closing stock under periodic inventory accounting), purchase of stock-in-trade (goods resold without processing, most retail purchases), and changes in inventory of WIP and finished goods. Everything else is other expenses, detailed in the notes.
- Depreciation allocates the one-time cost of a tangible asset over its useful life, and Ind AS 16 requires the method to reflect how the asset is used (a cab operator may depreciate by distance); amortisation writes off intangibles. Finance cost covers interest, processing fees and amortised issuance expenses. Income from equity-accounted entities, exceptional or non-recurring items, and profit allocated to non-controlling interest follow.
- Tax has three components: current tax, MAT (a credit for the future, expensed only if the company doubts it can use the credit in time) and deferred tax (no cash impact; timing differences between tax and accounting rules). EPS uses profit attributable to equity shareholders over time-weighted average shares; diluted EPS assumes in-the-money warrants, ESOPs and convertibles convert, and equals basic EPS for loss makers. OCI comprises revaluation surplus changes, remeasurement of defined benefit plans, foreign operation translation differences, fair value changes through OCI, and effective hedge gains or losses, with the subsidiary share allocated to minority interest.