Document ID: chunk:federal_register_of_legislation:F2023C00436:body:0:p31
Version: federal_register_of_legislation:F2023C00436
Segment Type: other
Provision Reference: 
Character Range: 81525–84912

income.
101 Expenses are subclassified to highlight components of financial performance that may differ in terms of frequency, potential for gain or loss and predictability. This analysis is provided in one of two forms.
102 The first form of analysis is the 'nature of expense' method. An entity aggregates expenses within profit or loss according to their nature (for example, depreciation, purchases of materials, transport costs, employee benefits and advertising costs), and does not reallocate them among functions within the entity. This method may be simple to apply because no allocations of expenses to functional classifications are necessary. An example of a classification using the nature of expense method is as follows:

   Revenue                                                           X
   Other income                                                      X
   Changes in inventories of finished goods and work in progress  X
   Raw materials and consumables used                             X
   Employee benefits expense                                      X
   Depreciation and amortisation expense                          X
   Other expenses                                                 X
   Total expenses                                                    (X)
   Profit before tax                                                 X

103 The second form of analysis is the 'function of expense' or 'cost of sales' method and classifies expenses according to their function as part of cost of sales or, for example, the costs of distribution or administrative activities. At a minimum, an entity discloses its cost of sales under this method separately from other expenses. This method can provide more relevant information to users than the classification of expenses by nature, but allocating costs to functions may require arbitrary allocations and involve considerable judgement. An example of a classification using the function of expense method is as follows:

   Revenue                     X
   Cost of sales               (X)
   Gross profit                X
   Other income                X
   Distribution costs          (X)
   Administrative expenses     (X)
   Other expenses              (X)
   Profit before tax           X

104 An entity classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation and amortisation expense and employee benefits expense.
105 The choice between the function of expense method and the nature of expense method depends on historical and industry factors and the nature of the entity. Both methods provide an indication of those costs that might vary, directly or indirectly, with the level of sales or production of the entity. Because each method of presentation has merit for different types of entities, this Standard requires management to select the presentation that is reliable and more relevant. However, because information on the nature of expenses is useful in predicting future cash flows, additional disclosure is required when the function of expense classification is used. In paragraph 104, 'employee benefits' has the same meaning as in AASB 119.

Statement of changes in equity

Information to be presented in the statement of changes in equity
106 An entity shall present a statement of changes in equity as required by paragraph