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IAS 1 - PRESENTATION OF FINANCIAL STATEMENTS
IAS 1 - PRESENTATION OF FINANCIAL STATEMENTS STATEMENTS
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IAS 1 - PRESENTATION OF FINANCIAL STATEMENTS STATEMENTS
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Presentation of Financial Statements PREFACE These workbooks are an update of those originally written by the project team of the Europe European an Union Union funded funded projec projectt Accoun Accountin ting g Reform Reform II in the Russia Russian n Federation Federation and revised by the project team of the European Union funded project, Implementation of Accounting Reform in the Russian Federation. This version has been produced by the European Union funded project
The project team would like to express thanks to those who have contributed their time and thoughts to the content of the workbooks. In particular:
Transition to IFRS in the Banking Sector.
The Bank of Russia, Moscow
The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills.
Note: Material from the following PricewaterhouseCoopers publications has been used in this workbook:
The purpose of this version is to help bank accountants in the use of IFRS. Each workbook is a self-standing short course designed for approximately of three hours of study.
The European Union Delegation, Moscow
-Applying IFRS -IFRS News -Accounting Solutions
The members members of the project project team team were were contri contribut buted ed by PwC Moscow, Moscow, FBK Moscow, and European Savings Bank Group Brussels. Although the workbooks are part of a series, each one is independent of the others. A basic knowledge of accounting is assumed but if any additional knowledge is required this is mentioned at the beginning of the section. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. Contact: The volume volumes s within within each each series series are descri described bed in detail detail and availa available ble for download from the project web site. The copyri copyright ght of the material material contai contained ned in each each workbo workbook ok belong belongs s to the European Union and according to its policy may be used free of charge for any non-commercial purpose.
e-mail
website
[email protected]
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Tel. + 7 495 772-7091
Fax. + 7 495 772-7094
Moscow, Russia, June 2008 (Updated)
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Presentation of Financial Statements
15. INFORMATION TO BE PRESENTED ON THE FACE OF THE STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) 25
CONTENTS 1. PRESENTATION OF FINANCIAL STATEMENTS INTRODUCTION
5
2. DEFINITIONS
7
16. INFORMATION TO BE PRESENTED EITHER ON THE FACE OF THE STATEMENT OF FINANCIAL POSITION, OR IN THE NOTES 26
3.FA 3.FAIR IR PRES PRESEN ENTA TATI TION ON AND AND COMP COMPLI LIAN ANCE CE WITH WITH IFRS IFRSS S
8
17. STATEMENT OF COMPREHENSIVE INCOME
4. GOING CONCERN
9
18. INFORMATION TO BE PRESENTED EITHER ON THE FACE OF THE INCOM NCOME E STAT TATEMEN EMENT T, OR IN THE NOTES OTES 32
5. ACCRUAL BASIS OF ACCOUNTING
10
6. CONSISTENCY OF PRESENTATION
11
7. MATERIALITY AND AGGREGATION
12
8. OFFSETTING
13
9. COMPARATIVE INFORMATION
15
10. GENERAL REVIEW
16
11. 11. IDE IDENT NTIF IFIC ICAT ATIO ION N OF OF THE THE FINA FINANC NCIA IAL L STA STATE TEME MENT NTS S
27
19. STATEMENT OF CHANGES IN EQUITY
35
20. STATEMENT OF CASH FLOWS
37
21. NOTES
38
22. CAPITAL
41
23. OTHER DISCLOSURES
42
17
24. ANNEX- AMENDMENTS TO IAS 1 - IFRS NEWS NOVEMBER 2007
42
12. FREQUENCY OF REPORTING
18
25. MULTIPLE CHOICE QUESTIONS
43
13. STATEMENT OF FINANCIAL POSITION
18
26. ANSWERS TO MULTIPLE CHOICE QUESTIONS
48
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Presentation of Financial Statements
1. Presentation Introduction
of
Financial Statements
-
OVERVIEW AIM
The aim of this workbook is to assist the individual in understanding the IFRS Presentation of Financial Statements. This is the subject of IAS 1. IAS 1 was updated in 2007. The changes are listed in the Annex to this workbook. One of the changes is the retitling of the balance sheet as the statement of financial position.
The Board decided to rename a new statement a ‘statement of comprehensive income’. The term ‘comprehensive income’ is not defined in the Framework but is used in IAS 1 to describe the change in equity of an undertaking during a period from transactions, events and circumstances other than those resulting from transactions with owners in their capacity as owners. Although the term ‘comprehensive income’ is used to describe the aggregate of all components of comprehensive income, including profit or loss, the term ‘other comprehensive income’ refers to income and expenses that under IFRSs are included in comprehensive income but excluded from profit or loss. The Board decided that an undertaking should have the choice of presenting all income and expenses recognised in a period in one statement or in two statements. An undertaking is prohibited from presenting components of income and expense (ie non-owner changes in equity) in the statement of changes in equity.
OBJECTIVE The objective of IAS 1 is to prescribe the presentation of financial statements, to ensure comparability both with financial statements of previous periods, and with the financial statements of other undertakings. IAS 1 sets out requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content. (The recognition, measurement and disclosure of specific transactions and other events are dealt with in other Standards and in Interpretations).
SCOPE IAS 1 shall be applied to all general purpose financial statements presented in accordance with IFRS. IAS 1 does not apply to interim financial statements, (see IAS 34 Interim Financial Reporting). IAS 1 applies equally to all undertakings, whether they need to prepare consolidated, or separate financial statements. IFRS 7 specifies additional requirements for banks and similar financial institutions, which are consistent with the requirements of IAS 1.
IAS 1 uses terminology that is suitable for profit-oriented undertakings, including public-sector business undertakings. Similarly, undertakings that do not have equity as defined in IAS 32: some mutual funds, and undertakings whose share capital is not equity: some co-operative undertakings may need to adapt the of members’ (or unitholders’) interests.
The Board acknowledged that the titles ‘income statement’ and ‘statement of profit or loss’ are similar in meaning and could be used interchangeably, and decided to retain the title ‘income statement’ as this is more commonly used.
This workbook is complemented by the Illustrative Corporate Financial Statements and the IFRS Disclosure Checklist which appear on the project website.
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Presentation of Financial Statements
Financial statements Financial statements are a structured representation of the financial position, and financial performance, of an undertaking. The objective of financial statements is to provide information about the financial position, financial performance, and cash flows, which is useful to a wide range of users in making decisions. Financial statements also show the results of management’s stewardship of resources. To meet this objective, financial statements provide information about an undertaking’s:
comparative period when an undertaking applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. An undertaking may use titles for the statements other than those used in IAS 1. An undertaking shall present with equal prominence all of the financial statements in a complete set of financial statements. An undertaking may present the components of profit or loss either as part of a single statement of comprehensive income or in a separate income statement.
(i)
assets;
(ii)
liabilities;
(iii)
equity;
(iv)
income and expenses, including gains and losses;
(v)
contributions by, and distributions to owners in d their capacity as owners; an
An audit report is not compulsory, but it will provide readers with independent assurance of the figures.
(vi)
cash flows.
Many undertakings present, outside the financial statements, a financial review by management, that describes the main features of the undertaking’s financial performance, and financial position, and the uncertainties it faces.
This information, with other information in the notes, assists users of financial statements in predicting the undertaking’s future cash flows and, their timing and certainty. A complete set of financial statements comprises: (i)
a statement of financial position as at the end of the period;
(ii)
a statement of comprehensive income for the period;
(iii)
a statement of changes in equity for the period;
(iv)
a statement of cash f lows for the period;
(v)
notes, comprising a summary of significant accounting policies and other explanatory information; and
(vi)
a statement of financial position as at the beginning of the earliest
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When an income statement is presented it is part of a complete set of financial statements and shall be displayed immediately before the statement of comprehensive income.
Such a report may include a review of : (i) the main factors determining financial performance, including changes in the environment, the undertaking’s response to those changes and their impact, and the policy for investment to maintain (and enhance) performance, including its dividend policy; (ii) sources of funding and targeted ratio of liabilities to equity; and (iii) resources not recorded in the statement of financial position in accordance with IFRSs. Many undertakings also present reports, such as environmental reports and value added statements, particularly in industries in which environmental factors are significant, and when staff are regarded as an important user group. 6
Presentation of Financial Statements Reports and statements presented outside financial statements are outside the scope of IFRSs.
comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs. Othe r compre hensive income
2. Definitions
The components of other comprehensive income include:
General purpose financial statements (referred to as ‘financial statements’) are
(i)
changes in revaluation surplus (see IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets);
(ii)
actuarial gains and losses on defined benefit plans recognised in accordance IAS 19 Employee Benefits;
(iii)
gains and losses arising from translating the financial statements of a foreign operation (see IAS 21);
influence the decisions of users, taken on the basis of the financial statements.
(iv)
gains and losses on remeasuring available-for-sale financial assets (see IAS 39 Financial Instruments);
Materiality depends on the size, and nature, of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.
(v)
the effective portion of gains and losses on hedging instruments in a cash flow hedge (see IAS 39).
those intended to meet the needs of users who are not in a position to require an undertaking to prepare reports tailored to their particular information needs. Impracticable Applying a requirement is impracticable when the undertaking
cannot apply it, after making every reasonable effort to do so. Material Omissions (or misstatements of items) are material if they could
Notes contain information in addition to that presented in the statement of
financial position, statement of comprehensive income, separate income statement (if presented), statement of changes in equity, and statement of cash flows. Notes provide narrative descriptions, or disaggregations of items in those statements, and information about items that do not qualify for recognition in those statements. Assessing whether an omission, or misstatement, could influence decisions of users, and so be material, requires consideration of the characteristics of those users. Users are assumed to have a reasonable knowledge of business and accounting, and a willingness to study the information with reasonable diligence. The assessment needs to take into account how users, with such attributes, are influenced in making decisions.
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Owners ar e holders of instruments classif ied as equi ty. Profit or loss is the total of inc ome less expen ses, excluding com ponents o f other co mprehensi ve inco me.
the
Reclassification adju stments are amounts r eclassified to prof it or loss in the curren t peri od that were recognis ed in other comprehensi ve income in the cur r ent o r previous p eriods.
Total compre hensive income is the change in equity dur ing a m tr ansactions and other events, other than those per iod resulting f ro changes result ing from t r ans actions w ith owners in their capacity as owners. Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive income’. Although IAS 1 uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total comprehensive income’, an undertaking may use other terms to describe the totals as long as the meaning is clear. For example, an undertaking may use the term ‘net income’ to des cribe profit o r loss.
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Presentation of Financial Statements Profit or loss is the total of income less expen ses, excluding the com ponents o f other co mprehensi ve inco me. Reclassification adju stments are amounts r eclassified to prof it or loss in the curren t peri od that were recognis ed in other comprehensi ve income in the cur r ent o r previous p eriods.
(i) to select and apply accounting policies in accordance with IAS 8 Accounting Policies. IAS 8 sets out a hierarchy of guidance that management considers (in the absence of a Standard) that specifically applies to an item. (ii) to present information, including policies, in a manner that provides relevant, reliable, comparable and understandable information.
Total compre hensive income is the change in equity dur ing a m tr ansactions and other events, other than those per iod resulting f ro changes resulting from transactions with owners in their capacity as owners.
(iii) to provide additional disclosures, when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, on the undertaking’s financial position, and performance.
Total comprehensive income comprises all components of ‘profit or loss’ and of ‘other comprehensive income’.
EXAMPLE-Additional disclosure to enhance fair presentation Issue
Although IAS 1 uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total comprehensive income’, an undertaking may use other terms to describe the totals as long as the meaning is clear.
A fair presentation of an undertaking’s financial position may require, in rare situations, additional disclosures to those that IFRS require.
For example, an undertaking may use the term ‘net income’ to describe profit or loss.
When it is appropriate to provide additional disclosure about the reconciliation of the opening deferred tax balance to the closing deferred tax balance?
3.Fair Presentation and Compliance with IFRSs
Background
Financial statements shall present fairly the financial position, financial performance and cash flows of an undertaking. Fair presentation requires the faithful representation of the impacts of transactions, in accordance with the definitions (and recognition criteria) for assets, liabilities, income and expenses set out in the Framework (see Framework workbook). The application of IFRSs (with additional disclosure when necessary) is presumed to result in financial statements that achieve a fair presentation. Financial statements that comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs, unless they comply with all the requirements of IFRSs. A fair presentation also requires an undertaking:
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An undertaking has material unused tax losses and its management has no expectation that future taxable profit will be available before they expire. Solution
IAS 12’s required disclosures may not in this case provide enough information to understand the current period’s financial statements. Management should present additional notes. Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used, nor by notes or explanatory material. EXAMPLE- warranties unbooked
You know that you will have to pay warranty claims for goods that you have sold. You have not included a warranty provision in your accounts. It is not sufficient to mention in the notes that this has not been done. The warranty provision should be made in the accounts themselves. 8
Presentation of Financial Statements EXAMPLE- departure from Standard –prohibition
There is a strong presumption that there will not be any need to depart from the requirements of the Standards. When an undertaking departs from a requirement of a Standard, it shall disclose: (i) that management has concluded that the financial statements present fairly the financial position, financial performance and cash flows; (ii) that it has complied with applicable Standards, except that it has departed from a particular requirement, to achieve a fair presentation; (iii) -the title of the Standard from which the undertaking has departed,
You believe that you must depart from the requirements of a Standard as your legal system insists that specific procedures that do not comply with IFRS must be applied at all times. You provide the disclosures listed above. Information would conflict with the objective of financial statements when it does not represent faithfully the transactions that it either purports to represent, or could reasonably be expected to represent and it would influence decisions made by users.
-the nature of the departure, including the treatment that the Standard would require,
When assessing whether complying with a requirement in a Standard would be so misleading that it would conflict with the objective of financial statements, management considers:
-the reason why that treatment would be so misleading that it would conflict with the objective of financial statements set out in the Framework, and
(i) why the objective of financial statements is not achieved in the particular circumstances; and
-the treatment adopted; and
(ii) how the undertaking’s circumstances differ from those of others that comply with the requirement.
(iv) for each period presented, the financial impact of the departure on each item in the financial statements, that would have been reported in complying with the requirement. EXAMPLE-departure from Standard – continuing impact
When an undertaking departed, in a prior period, from a requirement in a Standard for the measurement of assets (or liabilities) and that departure affects the measurement of changes in assets (and liabilities) recorded in the current period’s financial statements, this needs to be disclosed. When management concludes that compliance with a requirement in a Standard would be so misleading that it would conflict with the objective of financial statements, but the relevant regulatory framework prohibits departure from the requirement, the undertaking shall disclose: (i) the title of the Standard, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading that it conflicts with the objective of financial statements; and (ii) for each period presented, the adjustments to each item, that management has concluded would be necessary to achieve a fair presentation.
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If others, in similar circumstances, comply with the requirement, there is a rebuttable presumption that the undertaking’s compliance would not be so misleading that it would conflict with the objective of financial statements.
4. Going Concern When preparing financial statements, management shall make an assessment of an undertaking’s ability to continue as a going concern. Financial statements shall be prepared on a going-concern basis, unless management either intends to liquidate the undertaking or to cease trading, or has no realistic alternative but to do so. EXAMPLE-going concern
Banks provide loans under specific conditions, including the financial performance of clients. A breach of these conditions may enable the bank to liquidate the client’s business. In these circumstances, unless the client can secure an alternative source of finance, financial statements should not be prepared on a going concern basis.
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Presentation of Financial Statements When management is aware of material uncertainties that may cast significant doubt upon the undertaking’s ability to continue as a going concern, those uncertainties shall be disclosed. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared, and the reason why the undertaking is not regarded as a going concern. In assessing whether the going-concern assumption is appropriate, management takes into account all available information about the future, which is at least twelve months from the end of the reporting period. EXAMPLE-going concern
Management reviews its budgets to identify times when cash flows will be under pressure. It reviews its credit lines to ensure that sufficient funds will be available to cover any anticipated shortfalls. It arranges further lines of credit, if necessary. Having done this, it can produce accounts on a going-concern basis. When an undertaking has a history of profitable operations, and ready access to financial resources, a conclusion that the going-concern basis is appropriate may be reached without detailed analysis.
An undertaking has incurred losses during the last four years, and its current liabilities exceed its total assets. The undertaking was in breach of its loan covenants and has been negotiating with the related financial institutions in order to keep them supporting its business. These factors raise substantial doubt that the undertaking will be able to continue as a going concern. Solution
Management should disclose details of the uncertainty, preferably in the same note where the basis for preparation of the financial statements is described. The note should include an explanation of the uncertainties as well as the actions proposed to address the situation. Management should also disclose the possible effects on the financial position, or that it is impracticable to measure them. Additionally, management should state whether or not the financial statements include any adjustments that might result from the outcome of these uncertainties.
In other cases, management may need to consider a wide range of factors, relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing, before it can satisfy itself that the going-concern basis is appropriate.
In particular, if bank borrowings have been disclosed as non-current in the assumption that discussions with the bank will result in an extension of the loan facilities, details of this fact should be disclosed.
EXAMPLE-Uncertainties regarding going concern assumption
5. Accrual Basis of Accounting
Issue
Management should disclose any uncertainties that may cast significant doubt on the undertaking’s ability to continue as a going concern. How should management disclose uncertainties that affect the undertaking’s ability to continue as a going concern?
An undertaking shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. When the accrual basis of accounting is used, items are recorded as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions (and recognition criteria) for those elements in the Framework.
Background
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Presentation of Financial Statements
EXAMPLES - the accrual basis of accounting
In December, you sell some goods on credit. You receive cash from your client in February. You record the sale in December, not when you receive the cash. In November, you pay office rent relating to November, December and January. The rent cost is spread over these 3 months, not just expensed in full in the month that it was paid. This is the accrual basis of accounting.
An undertaking changes the presentation of its financial statements only if the new presentation provides information that is reliable, and is more relevant to users, and the revised structure is likely to continue, so that comparability is not impaired. EXAMPLE- Consistency of preparation - Comparatives Issue
A change in presentation and classification of items from one period to the next is permitted only when it is a result of :
6. Consistency of Presentation
a) a significant change in the nature of the undertaking’s operations; b) identification of a more appropriate presentation; or c) the requirements of a new IFRS or IFRIC.
The presentation, and classification, of items in the financial statements shall be retained from one period to the next unless:
Should an undertaking disclose information that results in a more appropriate presentation, yet detracts from the presentation of comparatives?
(i) it is apparent, following a significant change in the nature of the undertaking’s operations, or a review of its financial statements, that another presentation would be more appropriate, having regard to the criteria for the application of policies in IAS 8; or (ii) a Standard requires a change in presentation. EXAMPLE-consistent policies
Using different measurement systems of inventory (FIFO and weighted-average cost are permitted by IFRS) generates different results. Consistent use of one method is essential to allow users to compare one period with another. There should be no change of method, unless a Standard decrees it, or it would help users. If other undertakings, in the same industry, use particular accounting policies, users will benefit if yours are consistent with theirs, to enable comparison. A significant acquisition (or disposal), or a review of the presentation of the financial statements, might suggest that the financial statements need to be presented differently.
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Background
An undertaking operates in a number of different countries, undertaking a range of different activities. Management has installed a new computer information system throughout the undertaking that enables better allocation of costs, including overheads, to activities. Consequently, management is able to provide a more accurate and more detailed functional analysis of costs in its income statement for the current year. The new analysis is significantly different from the old analysis that the undertaking used. However, the new analysis is not available for the comparative information, although the current year information could be presented on the old, less informative, basis if required. Solution
No, the current year information should be presented on the old basis of presentation for consistency with the comparative information. 11
Presentation of Financial Statements This will avoid the confusion that would be caused if different bases of presentation were used for the current year results and the comparative results. Wherever possible, management should present the more useful and relevant information. Additional information concerning the new analyses available can be included in the financial statements where this provides additional information and does not contradict the information in the primary statement. The new analysis should be used in full in the following year when the new basis of presentation will be available for both years presented.
7. Materiality and Aggregation Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature (or function) shall be presented separately, unless they are immaterial. EXAMPLE-materiality
A competitor has filed a lawsuit against you for a large amount of money. Your lawyers are concerned, but you believe the lawsuit to be frivolous. You should disclose this information as a contingent liability, with expression of your views, and those of the lawyers.
material to warrant separate presentation on the face of those statements, may be sufficiently material for it to be presented separately in the notes. EXAMPLE- Information is material if its omission or misstatement could, individually or collectively, influence the users economic decisions that are based on the financial statements.
Should management disclose a change in the classification of an expense that is not material in relation to the equity and net income? Background
An undertaking reclassifies certain items of PPE, from PPE used for industrial purposes to PPE used for administrative purposes. The related depreciation expense was previously part of cost of sales and has subsequently been reclassified to administrative expenses. Management has decided not to disclose this change in classification because the asset’s carrying value and depreciation expense for the period is not material. Presented below is an extract from the income statement.
Revenue Cost of sales
Financial statements result from processing large numbers of transactions, which are aggregated into classes, according to their nature, or function.
Gross profit
EXAMPLE-assets categorised by function
Loss for the year
You lease photocopiers and drinks machines. Identifying the results and net assets (assets and liabilities) employed by each function of the business helps users.
Depreciation reclassified from cost of sales to administrative expenses
The final stage in the process of aggregation, and classification, is the presentation of condensed and classified data, which form line items in the financial statements. If a line item is not individually material, it is aggregated with other items, either on the face of those statements, or in the notes. An item, that is not sufficiently
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Shareholders’ equity Total assets
200,000 199,000 1,000 45,000 1,200
130,000 270,000
Solution
Yes the undertaking should disclose the change in classification. The undertaking 12
Presentation of Financial Statements has reported a ‘gross profit’ as a result of the reclassification rather than a ‘gross loss’. The presentation of a gross loss rather than a gross profit might alter the users’ perception of the undertaking’s performance. A specific disclosure requirement in a Standard need not be satisfied, if the information is not material.
8. Offsetting Assets and liabilities, and income and expenses, shall not be offset unless required (or permitted) by a Standard. It is important that assets and liabilities, and income and expenses, are reported separately. Offsetting in the statements of comprehensive income or financial position or in the separate income statement (if presented),except when this reflects the substance of the transaction, detracts from the ability of users both to understand the transactions that have occurred, and to assess future cash flows. EXAMPLE- Offsetting revenue and expenses
repairs and maintenance costs; however, C has agreed to reimburse all costs in full. Solution
Sub-lease arrangements are common, and the appropriate presentation of expenses reimbursed will depend on the facts and circumstances. Where the lessee retains the primary responsibility for meeting the conditions of the lease, then in substance it will have the risks associated with the lease contract and should recognise the lease payments to the lessee and the reimbursement from the sub-lessee as separate transactions. Measuring assets, net of valuation allowances - obsolescence allowances on inventories, and doubtful debts allowances on receivables - is not offsetting. EXAMPLE- obsolescence allowances on inventories
You know that some of your inventory is obsolete. Any benefit will be limited to its scrap value. You make an obsolescence provision to reduce this inventory’s carrying value.
Issue
Items of income and expenses should be offset only when an IFRS requires or allows it, or they refer to gains or losses arising from the same or similar transactions, and events are not material.
IAS 18 defines revenue, and requires it to be measured at the fair value of the consideration received (or receivable), taking into account any trade discounts, and volume rebates, allowed by the undertaking.
When is it appropriate to offset revenue and expenses?
EXAMPLE- Offset of loss leaders with profitable transactions Issue
Background
Items of income and expense shall not be offset unless required by another Standard or an Interpretation. Offsetting in the income statement except when offsetting reflects the substance of the transaction or other event, detracts from the ability of users to understand the financial statements.
Undertaking A enters into an agreement to lease a building from undertaking B for a 10-year period. A restructures its operations shortly after entering into the lease and the leased space becomes surplus to its requirements. A is unable to cancel the lease agreement without significant penalty and, as a result, enters into a sublease arrangement with undertaking C for a 5-year period with an option to renew for a further 5 years. Undertaking A retains the primary responsibility for the lease payments and
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Can management offset the losses incurred on a "loss-leader" product with the profits earned on the connected profitable sales transaction? Background
Undertaking A sells electrical goods. The goods come with a manufacturer’s 1year warranty. Undertaking A also offers customers the option of purchasing an extended warranty to cover years 2 to 5. 13
Presentation of Financial Statements Undertaking A’s marketing plan is to sell the electrical goods at a loss, but set the sales price of the extended warranty to compensate.
How should management present gain on sale of a building in the income statement?
The compensation incorporated into the warranty price is calculated to allow for the expected take up of the extended warranty as some customers choose to buy the goods without the warranty.
Background
The normal accounting for this arrangement results in the loss on the sale of the goods being recognised in year 1 and the revenue (and profit) on sale of the extended warranty being recognised over years 2 to 5. Management proposes that part of the revenue on the sale of the extended warranties be recognised in year 1 so as to obtain an even profit margin over the sale of the goods and the warranties. Management argues that this reflects the commercial substance of the total arrangements.
Undertaking A is involved in manufacturing. During the period it sells one of its buildings and recognises a gain on the sale. Solution
Management should present the gain by netting the income on the sale with the cost of the building and other related expenses. The gain on this transaction is presented within operating profit. Management should aggregate the gain, if appropriate, with amounts of a similar nature or function, for instance other gains or losses on sale of other PPE.
Solution
No. Management cannot offset the loss on sale of the goods with the profit on sale of the warranties. The sale of the goods is not linked to the sale of the warranties because customers can, and do, purchase the goods without the warranty. There are other transactions that do not generate revenue, but are incidental to the main revenue-generating activities. The results of such transactions are presented by netting any income with related expenses arising on the same transaction. For example:
The gain or loss should be presented separately when the size, nature or incidence is such that separate disclosure is required.
(ii) expenditure related to a provision, that is recorded under IAS 37 Provisions, and reimbursed under a contractual arrangement with a third party (for example, a supplier’s warranty agreement) may be netted against the related reimbursement.
(i) gains (and losses) on the disposal of non-current assets, including investments and operating assets, are reported by deducting from the proceeds: the carrying amount of the asset, and related selling expenses; and
In addition, gains (and losses) arising from a group of similar transactions are reported on a net basis, for example, foreign exchange gains (and losses) or gains (and losses) on financial instruments held for trading. Such gains and losses are reported separately, if they are material.
EXAMPLE- Offsetting - Gain on sale of a building presented net
EXAMPLE- gains on foreign currencies
Issue
You are an importer. You make currency gains (and losses) as a result of foreign trading transactions. These are shown as a separate line in your income statement. These are shown net of bank (currency) transaction charges.
The results of transactions that are incidental to the main revenue-generating activities should be presented by netting any income with related expenses arising on the same transaction.
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Presentation of Financial Statements In the following examples, I/B refers to Income Statement and Statement of financial position.
Narrative information provided in the financial statements for the previous period may be relevant in the current period.
EXAMPLE -reimbursement
In 2XX5, the local government informs you that a new road will be built in 2XX7. This will cause the destruction of your head office. Assets of $5 million will have to be written off. By the end of 2XX5, the government agreed to pay $4 million in compensation. In 2XX5, a provision and the compensation should be recorded. The income statement should reflect the provision net of the compensation I/B
I B B
DR
Issue
Undertakings should include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements. When should management include comparative narrative information in the financial statements?
($1 million). Asset sequestration (Net) Provision Accounts receivable
EXAMPLE- Comparative narrative information
CR
Background
1m 5m 4m
Recording provision in and compensation in 2XX5
9. Comparative Information An undertaking disclosing comparative information shall present, as a minimum, two statements of financial position, two of each of the other statements, and related notes.
An undertaking has an exclusive 3-year licence to operate the domestic mobile phone service; the government had granted the licence. The government sued the undertaking in 20X2, alleging that it has been providing service below the quality limits of the concession agreement. The government has indicated its intention to cancel the agreement that gives the undertaking the exclusivity to operate the service. The dispute is to be settled legally and at the balance date is yet to be resolved. Solution
The undertaking should disclosure information about the dispute that is useful to the users of the financial statements. The information should not necessarily be limited to the events of the current period. The disclosure should focus on:
When an undertaking applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements or when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two of each of the other statements, and related notes.
a) summary of the dispute; b) the actual and potential financial effect; and c) the likely outcome and the expected timing of a resolution.
An undertaking presents statements of financial position as at:
Note 10 Domestic mobile phone licence - dispute with government
(a)
In 20X1 the government granted the company a 3-year licence to operate the domestic mobile phone service. The company derives 25% of its revenue from domestic phone service.
the end of the current period,
(b) the end of the previous period (which is the same as the beginning of the current period), and (c)
The following is an example of an appropriate disclosure:
the beginning of the earliest comparative period.
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Presentation of Financial Statements The conditions of the licence included seven performance targets. The company is currently in dispute with the government over whether it has met a specific target. The dispute has not impacted on the undertaking’s financial performance in 20X1 or 20X2. Withdrawal of the licence could potentially reduce the undertaking’s revenue in 20X3. Management is confident however that it has met all performance targets, and the company’s legal advisers have confirmed this view. Details of a legal dispute, the outcome of which was uncertain at the last end of the reporting period, and is yet to be resolved, are disclosed in the current period. Users benefit from information that the uncertainty existed at the last end of the reporting period, and about the steps that have been taken during the period, to resolve the uncertainty. EXAMPLE- lawsuit
At the start of a lawsuit, the result may be difficult to estimate, and only a contingent liability can be noted. As a lawsuit nears conclusion, the result may be estimable, and a provision or asset may be recorded. Narrative should also be provided to enable users to understand the progress of the case. When the presentation of items in the financial statements is amended, comparative amounts shall be reclassified, unless the reclassification is impracticable (see IAS 8). When comparative amounts are reclassified, an undertaking shall disclose: (i) the nature of the reclassification; (ii) the amount of each item (or class of items) that is reclassified; and (iii) the reason for the reclassification. When it is impracticable to reclassify comparative amounts, an undertaking shall disclose: (i) the reason for not reclassifying the amounts; and
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(ii) the nature of the adjustments, that would have been made, if the amounts had been reclassified. The inter-period comparability of information assists users, especially for predictive purposes. It may be impracticable to reclassify comparative information for a particular period, to achieve comparability with the current period. Data may not have been collected (in the prior period) in a way that allows reclassification, and it may not be practicable to recreate the information. IAS 8 deals with the adjustments to comparative information required when an undertaking changes an accounting policy, or corrects an error.
10. General Review The business and accounting knowledge of users is assumed to be reasonable, but they are not assumed to have a comprehensive of your business. This guides the level of detail and explanation that will be provided in the financial statements. IAS 1 requires particular disclosures on the face of the statement of financial position, income statement, and statement of changes in equity, and requires disclosure of other line items either on the face of those statements, or in the notes. IAS 7 sets out requirements for the presentation of a cash flow statement. Disclosures are made either on the face of the statement of financial position, income statement, statement of changes in equity or cash flow statement (whichever is relevant), or in the notes.
Structure and Content Introduction
IAS 1 requires particular disclosures in the statement of financial position or of comprehensive income, in the separate income statement (if presented), or in the statement of changes in equity and requires disclosure of other line items either in those statements or in the notes. IAS 7 Statement of Cash Flows sets out requirements for the presentation of cash flow information. 16
Presentation of Financial Statements
11. Identification of the Financial Statements The financial statements shall be identified clearly, and distinguished from other information in the same document. Users must be able to distinguish information that is prepared using IFRSs, from other information that is not the subject of those requirements.
alternative income measures reported were similar to the trends for net profit under IFRS. Companies generally met IFRS presentation requirements for the income statement. Industry variations
Survey of income statements IFRS News
April 2007 The financial statements of 2,800 companies were surveyed, specifically looking at the additional income measures companies included in their financial statements beyond the minimum required by IFRS.
Industry variations in EBITDA and similar measures are consistent between 2004 reporting under national GAAP and 2005 IFRS reporting. Companies already appear to be responding to investor demands for international comparability within industry sectors. National trends are still strong
The survey also examined how companies present these non-GAAP measures in their income statements. “Investors tell us that additional income measures are useful and that they take them into account when making investment decisions,” says Leandro van Dam, PwC partner in the Netherlands and co-sponsor of the survey. “They are also looking for non-GAAP measures that management uses to run the business. They want consistency of information over time and comparability among companies.” Debate on the use of non-GAAP measures is gathering interest. Some highlights from the report are summarised below. A bridge from old to IFRS
Companies have aligned their choice and presentation of non-GAAP measures under IFRS as much as possible with what they reported under national GAAP.
Countries that have historically reported certain non-GAAP measures still do so under IFRS; those that did not report specific non-GAAP measures did not start to do so. International comparability of non-GAAP reporting in the first year of application was unlikely to arise spontaneously. Management had little opportunity to compare reporting practices with their peers and limited experience of IFRSrelated discussions with investors, regulators and other parties. Many conferences and industry sessions focused on recognition and measurement and paid little attention to format requirements and options for additional line items in the income statement. There was therefore was no real platform for development of market norms. Companies may find the research useful in deciding what to communicate to the market in next year’s IFRS financial statements.
This has allowed users to compare non-GAAP measures calculated using IFRS recognition and measurement principles with the measures calculated on the previous basis.
“This research should enable management to look at what peers are doing,” says Leandro, “and consider whether current diversity of non-GAAP measurement and presentation holds any clues for better ways of communicating with investors in future.”
No evidence of cherry-picking
Download the PDF from pwc.com/ifrs
Companies do not appear to have cherry-picked additional income measures to show their results in a more positive light; the overall trends (rise or fall) for the
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Presentation of Financial Statements Each component of the financial statements shall be identified clearly. In addition, the following information shall be displayed prominently (and repeated when it is necessary), for a proper understanding of the information presented: (i) the name of the reporting undertaking, and any change from the preceding end of the reporting period; (ii) whether the financial statements cover the individual undertaking, or a group; (iii) the date of the end of the reporting period, or the period covered by the financial statements, whichever is appropriate to that component of the financial statements;
EXAMPLE- change of end of the reporting period
Your firm has just been purchased by an investor, who wishes to change your year-end from June to December. Your first set of financial statements (under the new regime) will be for a 6 month period, and will not be comparable with prior periods. The above disclosures will need to be made. Normally, financial statements are consistently prepared covering a one-year period. Some undertakings prefer to report for a 52-week period. IAS 1 does not preclude this practice, because the financial statements are unlikely to be materially different from those that would be presented for one year.
(iv) the presentation currency,
EXAMPLE-52-week period
(v) the level of rounding used in presenting amounts in the financial statements.
You operate department stores. Your period is 52 weeks, so that you can end the period on a Sunday, and count inventory on a Monday.
These requirements are normally met by presenting page headings, and abbreviated column headings, on each page of the financial statements. Judgement is required in determining the best presentation.
13. Statement of financial position
When the financial statements are presented electronically, separate pages are not always used; the above items are then presented frequently enough to ensure a proper understanding of the information. Financial statements are often made more understandable by presenting information in thousands (or millions) of units of the presentation currency. This is acceptable if the level of rounding in presentation is disclosed, and material information is not omitted.
12. Frequency of Reporting Financial statements shall be presented at least annually. When the end of the reporting period changes, and the annual financial statements are presented for a period longer (or shorter) than one year, an undertaking shall disclose, (in addition to the period covered): (i) the reason for using a longer (or shorter) period; and (ii) the fact that comparative amounts for the financial statements are not entirely comparable.
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Current/Non-current Distinction
An undertaking shall present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its statement of financial position, except when a presentation based on liquidity provides information that is more relevant. When that exception applies, all assets and liabilities shall be presented broadly in order of liquidity. EXAMPLE-Financial Institutions
Your firm is a financial institution, and you present your statement of financial position items broadly in order of liquidity (see IFRS 7 workbook). For each asset and liability line item that combines amounts expected to be recovered (or settled) (i) no more than twelve months after the end of the reporting period, and (ii) more than twelve months after the end of the reporting period, 18
Presentation of Financial Statements an undertaking shall disclose the amount expected to be recovered (or settled) after more than twelve months.
The undertaking’s accounting policy note should describe the policy on classification of current and non-current items.
When an undertaking supplies goods (or services) within a clearly identifiable operating cycle, separate classification of current and non-current assets (and liabilities) provides useful information, by distinguishing the net assets that are continuously circulating as working capital, from those used in long-term operations.
It also highlights assets that are expected to be converted into cash within the current operating cycle, and liabilities that are due for settlement within the same period.
EXAMPLE-Current and non-current distinction based on operating cycle Issue
An asset that satisfies any of the following criteria shall be classified as a current asset: a) its realisation, sale or consumption is expected to occur in the undertaking’s normal operating cycle; b) it is held for sale; c) its realisation is expected to occur within twelve months after the date of the end of the reporting period; or d) it is unrestricted cash or a cash equivalent.
An undertaking is permitted to present some of its assets and liabilities using a current/non-current classification, and others in order of liquidity, when this provides information that is more relevant. The need for a mixed basis of presentation might arise when an undertaking has diverse operations. Information about expected dates of conversion into cash of assets and liabilities is useful in assessing the liquidity, and solvency, of an undertaking. IFRS 7 requires disclosure of the maturity dates of financial assets, and financial liabilities. Financial assets include trade and other receivables, and financial liabilities include trade and other payables.
Can an undertaking classify a receivable that it does not expect to realise within twelve months as a current asset in its statement of financial position?
Information on the expected date of recovery and settlement of non-monetary assets and liabilities, such as inventories and provisions, is also useful, whether or not assets and liabilities are classified as current or non-current.
Background
An undertaking discloses the amount of inventories that are expected to be sold more than twelve months after the end of the reporting period.
Undertaking A builds airplanes for national airlines. The average operating cycle is 15 months, based on the length of time it takes to build a plane. A’s management presents a classified balance sheet to distinguish its current and non-current assets and liabilities. The undertaking carries accounts receivable that it expects to realise in 15 months. Solution
Yes, A should classify the receivable as a current asset, as it expects to realise the receivable in the normal course of its 15-month operating cycle.
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Current Assets
An asset shall be classified as current, when it satisfies any of the following criteria: (i) it is expected to be converted to cash (or is intended for sale, or consumption) in the normal operating cycle; (ii) it is held primarily for the purpose of being traded; (iii) it is expected to be converted to cash within twelve months, after the end of the reporting period; or 19
Presentation of Financial Statements (iv) it is cash (or a cash equivalent, as defined in IAS 7), unless it is restricted from being exchanged (or used to settle a liability), for at least twelve months after the end of the reporting period.
The operating cycle is the time between the acquisition of assets for processing, and their conversion in cash. When the normal operating cycle is not clearly identifiable, it is assumed to be twelve months.
EXAMPLE - Presentation of cash subject to restrictions over use
Current Liabilities
Issue
A liability shall be classified as current, when it satisfies any of the following criteria:
Should an undertaking include in its consolidated financial statements cash and cash equivalents, held by a subsidiary that is not available for use by other group undertakings? Background
A subsidiary holds cash and cash equivalent balances with domestic banks. It operates in a country where there are exchange controls and the subsidiary is restricted from sending cash abroad to fellow subsidiaries and to the parent. The amount of cash held is neither excessive nor short of the subsidiary’s operating needs. Solution
The existence of currency restrictions in a foreign jurisdiction would not preclude the classification of the subsidiary’s cash and cash equivalent balance as a current asset in the consolidated financial statements.
(i) it is expected to be settled in normal operating cycle; (ii) it is held primarily for the purpose of being traded; (iii) it is due to be settled within twelve months after the end of the reporting period; or (iv) the undertaking does not have an unconditional right to defer settlement of the liability, for at least twelve months after the end of the reporting period. All other liabilities shall be classified as non-current. Some current liabilities, such as trade payables and some accruals for staff and other operating costs, are part of the working capital used in the normal operating cycle. TRADE AND OTHER PAYABLES summary
The subsidiary needs the cash to meet its operating requirements, and will therefore use it freely. The undertaking should, however, disclose the amount of cash and cash equivalents that is not available for use by the group [IAS7]. The disclosure should include a commentary that will help users understand the impact of these restrictions in the undertaking’s financial position and liquidity. All other assets shall be classified as non-current. IAS 1 uses the term ‘non-current’ to include tangible, intangible and financial assets of a long-term nature. It does not prohibit the use of alternative descriptions, if the meaning is clear.
What are trade and other payables?
Trade and other payables are current liabilities for which the amount to be settled is usually known rather than uncertain (as for provisions). Undertakings, almost without exception, carry some type of trade and other payables on their statement of financial position. Items generally included in trade and other payables are: trade payables; amounts payable under statutory obligations such as social security obligations and payroll taxes. These items are presented within the "Trade and other payables" line item on the face of the statement of financial position. Current liabilities are those expected to be settled in the normal course of the
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Presentation of Financial Statements undertaking’s operating cycle; due to be settled within twelve months of the date of the end of the reporting period; held primarily for the purpose of being traded; or those for which the undertaking does not have an unconditional right to defer settlement for at least twelve months after the date of the end of the reporting period.
Accrued expenses are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier.
Most trade and other payables fall within the definition of financial liabilities and are subject to the recognition and measurement rules that apply to those liabilities.
The recognition of accrued expenses results directly from the recognition of expenses for items of goods and services consumed during the period. Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
Initial recognition
Initial measurement
An undertaking should recognise trade and other payables when it becomes a party to the contractual provisions of the instrument.
Initial measurement of trade and other payables is usually at fair value. The initial measurement of financial liabilities not at fair value through profit or loss includes transaction costs directly attributable to the acquisition or issue of the financial liability.
An undertaking’s obligations concerning trade and other payables are usually easily identified and the point of recognition is clear. Most obligations are legally enforceable and arise under contractual arrangements. These include amounts owed for assets purchased or services obtained (trade creditors), and obligations to provide goods and services where an external party has paid in advance. Obligations are often imposed by statute. An undertaking should recognise these obligations on the basis of notices and requests for payment from the relevant authority. Constructive obligations should be recognised on the basis of amounts promised to third parties. An undertaking often incurs obligations in the form of financial and performance guarantees. For example, an undertaking may sell its receivables yet retain a portion of the credit risk in these receivables through guarantees. The recognition of guarantees depends on their nature. Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be recognised as part of provisions or, when the recognition criteria are not met, disclosed as contingent liabilities. Financial guarantees that provide for payments to be made in response to changes in a specified index such as a credit rating should be recognised as financial instruments.
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Initial fair value is established by reference to amounts agreed between the undertaking and the supplier and amounts invoiced from statutory authorities. Accrued expenses are measured at management’s estimate of the fair value of the goods and services received but not yet invoiced. Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should initially be recognised at fair value. Subsequent measurement
Items classified within trade and other payables are not usually re-measured, as the obligation is usually known with a high degree of certainty and its settlement is short-term. Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be re-measured at the higher of (i) the amount recognised under IAS 37 and (ii) the amount initially recognised (that is, fair value) less, where appropriate, cumulative amortisation recognised in accordance with IAS 18. Derecognition
Derecognition occurs when the contractual obligation is cancelled, expired or 21
Presentation of Financial Statements discharged, for example through payment of the amount due, or through the counterparty forgiving the debt.
Presentation and disclosure
Trade and other payables should be presented as a separate line item on the face of the statement of financial position. Such items are classified as current liabilities, even if they are due to be settled more than twelve months after the end of the reporting period. The same normal operating cycle applies to the classification of assets and liabilities. When the undertaking’s normal operating cycle is not identifiable, it is assumed to be twelve months. Examples of current liabilities are financial liabilities, classified as ‘held for trading’, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables.
Solution
Disclosure on the face of the statement of financial position is not mandatory, but it is best practice. IFRS require separate disclosure of amounts due from subsidiaries, but allow this to be presented in the notes rather than on the face of the statement of financial position. The liability is current because the subsidiary does not have unconditional right to defer settlement of the liability. The parent, in its separate financial statements, should also classify the amount due from the subsidiary as a current asset. Financial liabilities that provide financing on a long-term basis (not part of the working capital) and are not due for settlement within twelve months after the end of the reporting period, are non-current liabilities. EXAMPLE- Classification and presentation of current liabilities Issue
EXAMPLE- Presentation of loan from parent Issue
An undertaking shall present further sub-classifications of the line items presented in the statement of financial position. Those sub-classifications may be presented either on the face of the statement of financial position or in the notes, classified in a manner appropriate to the undertaking’s operations. Should a parent, in its single-undertaking financial statements, present amounts due from a subsidiary on the face of its statement of financial position as an asset, and if so how should it be classified? Background
The following current liabilities should be disclosed on the face of the statement of financial position: a) b) c) d)
trade and other payables; provisions; financial liabilities (excluding trade and other payables and provisions); and current income tax liabilities.
The following example highlights specific classes of current liabilities to be disclosed on the face of the statement of financial position, together with examples of items to be included under the headings. Solution
a)
Trade and other payables, including: trade creditors;
A parent provides a loan to a subsidiary. Interest of 8% is paid annually. There is no specified repayment date; however, the loan is payable on demand.
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accruals (for example, accruals for audit fees payable); and 22
Presentation of Financial Statements social security taxes and other amounts, such as payroll taxes payable in respect of wages and salaries. b)
Provisions Provisions for litigation, claims and assessments; and Current portion of provisions for long term employee benefits such as jubilee payments.
c)
Financial liabilities Current portion of fixed term interest-bearing loans; and Loans repayable on demand.
d)
Current income tax liabilities, including: corporate income taxes; and income taxes payable on dividends.
Presentation of provisions and other liabilities with current and non-current portion Issue
How should management present the current and non-current portions of different types of provisions and liabilities in the undertaking’s statement of financial position? Background
An undertaking has recognised the following liabilities in its statement of financial position: a) b) c) d)
guarantee product performance for a twelve-month period are classified as current liabilities. Conversely, warranties that guarantee product performance for an extended period are classified as non-current liabilities.
warranty provisions; provisions for environmental liabilities; pension liabilities; and deferred tax liabilities.
Solution
a) Warranty provisions - current or non-current liabilities
b) Provisions for environmental liabilities - non-current liabilities This type of provision is unlikely to be part of an undertaking’s working capital. Management should therefore classify environmental provisions as non-current liabilities. c) Pension liabilities - non-current liabilities Considering the nature of these liabilities, management is often not able to reasonably determine the current and non-current portion reliably. It should therefore classify these liabilities as non-current liabilities. d) Deferred tax liabilities - non-current liabilities Management should present any deferred tax liabilities as non-current liabilities, even if the temporary differences giving rise to the liabilities are expected to reverse within 12 months.
The treatment of financial liabilities, such as bank loans is strict. The end of the reporting period is the key day by which everything must be in place. If refinancing is to take place, the end of the reporting period is the benchmark. Failure to refinance by this date may require the undertaking to record a finance liability as current, even if it is being renegotiated to be repaid over a longer period. This may have severe consequences, even prohibiting the financial statements to be prepared on a going-concern basis.
An undertaking classifies its financial liabilities as current, when they are due to be settled within twelve months after the end of the reporting period, even if: (i) the original term was for a period longer than twelve months; and
The classification will depend on the terms of the warranty. Warranties that
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Presentation of Financial Statements (ii) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the end of the reporting period, and before the financial statements are approved for issue. EXAMPLE- refinancing after the end of the reporting period
You need to refinance your long-term loan. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February.
be repaid within the operating cycle as non-current liabilities? Background
Undertaking A’s management has entered into a facility arrangement with a financial institution to ensure the availability of A’s bank financing over the long term. The committed facility has a scheduled maturity and the lender is not able to cancel unilaterally. This facility does not expire within the next 12 months.
The long-term loan is shown as a current liability, as it was not refinanced by the end of the reporting period.
Solution
If an undertaking has the discretion to refinance (or roll over) an obligation for at least twelve months after the end of the reporting period, under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period.
The borrowing can be rolled over at the undertaking’s discretion and is not therefore part of its working capital.
EXAMPLE- refinancing after the end of the reporting period, but with an option
You need to refinance your long-term loan. You have an option to renew your facility. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February. The long-term loan is shown as a non-current liability, as you had the refinancing option. EXAMPLE- Classification of liability with roll-over facilities Issue
Undertaking A should classify the borrowing as a non-current liability.
Conversely, where an undertaking does not have the discretion to refinance its borrowings, amounts due should be classified as current liabilities. When refinancing (or rolling over) the obligation is not at the discretion of the undertaking (there is no agreement to refinance), the obligation is classified as current. When an undertaking breaches a covenant of a long-term loan agreement on, or before, the end of the reporting period, with the impact that the liability becomes payable on demand, the liability is classified as current. This applies even if the lender has agreed, after the end of the reporting period, and before the approval of the financial statements for issue, not to demand payment, as a consequence of the breach.
If an obligation can be refinanced or rolled over at the discretion of the undertaking for at least twelve months after the date of the end of the reporting period under an existing loan facility, it shall be classified as non-current.
EXAMPLE- amending a breach of covenant, after the end of the reporting period
This rule applies even if the obligation would otherwise be due within a shorter period. However, when the undertaking has not the discretion to refinance or roll over the obligation (for example, there is no agreement to refinance), the potential to refinance is not considered and the obligation is classified as current.
Your end of the reporting period is December, the lender agrees not to demand payment as a consequence of the breach in January, and you approve your financial statements in February.
You breach the terms of your long-term loan. It becomes payable on demand.
What are the conditions under which an undertaking might classify borrowings to
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Presentation of Financial Statements The long-term loan is shown as a current liability: you were in breach at the end of the reporting period. The liability is classified as current because, at the end of the reporting period, the undertaking does not have an unconditional right to defer its settlement for at least twelve months, after that date. However, the liability is classified as non-current, if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the end of the reporting period, within which the undertaking can rectify the breach, and during which, the lender cannot demand immediate repayment. EXAMPLE- amending a breach of covenant, with a period of grace
You breach the terms of your long-term loan. It becomes payable on demand. Your end of the reporting period is December 31. The lender agrees not to demand payment as a consequence of the breach prior to December 31, giving you at least 12 months grace to rectify the breach. The long-term loan is shown as a non-current liability, due to the period of grace.
A non-adjusting event means that you note the new information, but do not update your accounts to reflect it. Thus, current liabilities remain as current liabilities.
15. Information to be Presented on the Face of the Statement of financial position (balance sheet) As a minimum, the face of the statement of financial position shall include line items that present the following amounts: (i) property, plant and equipment; (ii) investment property; (iii) intangible assets; (iv) financial assets (excluding amounts shown under (v), (viii) and (ix)); (v) investments, accounted for using the equity method;
In respect of loans classified as current liabilities, if the following events occur between the end of the reporting period, and the date the financial statements are approved for issue, those events qualify for disclosure as non-adjusting events in accordance with IAS 10:
(vi) biological assets;
(i) refinancing on a long-term basis;
(ix) cash and cash equivalents;
(ii) rectification of a breach of a long-term loan agreement; and (iii) the receipt from the lender of a period of grace, to rectify a breach of a longterm loan agreement, ending at least twelve months after the end of the reporting period.
(vii) inventories; (viii) trade and other receivables;
(x) the total of assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with IFRS 5 (see below)
(xi) trade and other payables; (xii) provisions; (xiii) financial liabilities (excluding amounts shown under (x) and (xi)); (xiv) liabilities and assets for current tax (as defined in IAS 12 Income Taxes); (xv) deferred tax liabilities and deferred tax assets (as defined in IAS 12); (xvi) minority interest, presented within equity; and
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Presentation of Financial Statements (xvii) issued capital, and reserves attributable to equity holders of the parent. The face of the statement of financial position shall include line items that present the following amounts: i.
ii.
the total of assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with IFRS 5; and liabilities included in disposal groups classified as held for sale in accordance with IFRS 5.
Additional line items, headings and subtotals shall be presented on the face of the statement of financial position, when such presentation is relevant to an understanding of the financial position. EXAMPLE –tax losses
You have large tax losses carried forward in your home country, but tax liabilities abroad. You chose to expand the tax liability lines to show both local tax (none) and foreign tax to clarify the position. Deferred tax assets (and liabilities) are always non-current assets (liabilities).
EXAMPLE-assets categorised by function
You lease photocopiers and drinks machines. Identifying the results and net assets (assets and liabilities) employed by each function of the business helps users. The use of different measurement bases, for different classes of assets, suggests that their nature (or function) differs and, therefore, that they should be presented as separate line items. Different classes of property, plant and equipment can be carried at cost, or revalued amounts, in accordance with IAS 16.
16. Information to be Presented either on the Face of the Statement of Financial Position, or in the Notes An undertaking shall disclose, either on the face of the statement of financial position, or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the operations.
Line items are included when the size, nature or function of an item (or aggregation of similar items) is such that separate presentation is relevant to an understanding of the financial position.
The detail provided in subclassifications depends on the requirements of IFRSs and on the size, nature and function of the amounts involved.
The descriptions used, and the ordering of items (or aggregation of similar items) may be amended according to the nature of the undertaking, and its transactions, to provide information that is relevant to an understanding of the financial position.
The disclosures vary for each item, for example:
For example, a bank amends the above descriptions to apply the requirements in IFRS 7.
The judgement on whether additional items are presented separately is based on an assessment of: (i) the nature and liquidity of assets; (ii) the function of assets; and (iii) the amounts, nature and timing of liabilities.
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(i) items of property, plant and equipment are disaggregated into classes in accordance with IAS 16; (ii) receivables are disaggregated into amounts receivable from: -
trade customers,
-
receivables from related parties,
-
prepayments and
-
other amounts;
(iii) inventories are subclassified, into classifications such as: -
merchandise, 26
Presentation of Financial Statements -
production supplies, materials,
Such regulations may be of concern to investors, as this will limit dividends.
-
work in progress and
-
finished goods;
An undertaking without share capital, such as a partnership or trust, shall disclose information equivalent to that required above, showing changes during the period in each category of equity interest, and the rights, preferences, and restrictions attaching to each category of equity interest.
-
(iv) provisions are disaggregated into provisions for staff benefits, and other items; and (v) equity capital and reserves are disaggregated into various classes, such as: -
paid-in capital,
-
share premium and
-
reserves.
17. Statement of comprehensive income An undertaking shall present all items of income and expense recognised in a period: (i) in a single statement of comprehensive income, or
An undertaking shall disclose the following, either on the face of the statement of financial position, or in the notes: (1) for each class of share capital: (i) the number of shares authorised; (ii) the number of shares issued and fully paid, and issued but not fully paid; (iii) par value per share, or that the shares have no par value; (iv) a reconciliation of the number of shares outstanding at the beginning, and end, of the period; (v) the rights, preferences and restrictions attaching to that class, including restrictions on the distribution of dividends, and the repayment of capital; (vi) shares in the undertaking held by the undertaking, or by its subsidiaries, or associates; and (vii) shares reserved for issue under options, and contracts for the sale of shares, including the terms and amounts; and
(ii) in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income).
Information to be presented in the statement of comprehensive income As a minimum, the face of the statement of comprehensive income shall include line items that present the following amounts for the period: (a) revenue; (b) finance costs; (c) share of the income statement of associates, and joint ventures accounted for using the equity method; d) tax expense;
(ii) a description of the nature, and purpose, of each reserve within equity.
(e) a single amount comprising the total of:
EXAMPLE- ‘legal’ reserves
(i) the post-tax profit or loss of discontinued operations and
Some jurisdictions require firms to donate 10% of annual profit to a reserve, sometimes called a legal reserve, that cannot be distributed to shareholders (except in liquidation after all creditors have been paid).
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(ii) the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; 27
Presentation of Financial Statements EXAMPLE- Order of presentation of the income statement’s components
(f) profit or loss; (g) each component of other comprehensive income classified by nature (excluding amounts in (h)); (h) share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and (i) total comprehensive income. An undertaking shall disclose the following items in the statement of comprehensive income as allocations of profit or loss for the period: (a) profit or loss for the period attributable to: (i) minority interest, and (ii) owners of the parent. (b) total comprehensive income for the period attributable to: (i) minority interest, and (ii) owners of the parent. Additional line items, headings and subtotals shall be presented on the face of the statement of comprehensive income and the separate income statement (if presented), when such presentation is relevant to understanding the financial performance. As the impacts of various transactions differ in frequency, potential for gain (or loss) and predictability, disclosing the components of financial performance assists in an understanding of the performance achieved, and in making projections. Additional line items are included on the face of the statement of comprehensive income and the separate income statement (if presented), and the descriptions used (and the ordering of items) are amended, when this is necessary to explain the elements of financial performance.
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Issue
The description and ordering of items on the face of the income statements should be amended when this is necessary to explain the elements of performance. Can management present the lines in the income statement in a different order from that described in IAS 1? Background
Undertaking A’s management wishes to present the results of the undertaking’s share of profits and losses of associates accounted for using equity method before the line of finance costs. Presented below is an extract from the undertaking’s proposed income statement Share of results of associates
XXX
Finance costs
(XX)
Profit before tax
XXX
Solution
There is a suggested ordering of items to be reported on the face of the income statement: finance costs are presented before the results of associates. Deviation from this general sequence would be rare, although permitted when this is necessary to explain the elements of performance. Additionally, management should present and classify items in the income statement consistently from one period to the next.
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Presentation of Financial Statements Factors to be considered include materiality, and the nature (and function) of the components of income, and expenses. For example, a bank amends the descriptions to apply the requirements in IFRS 7. Income and expense items are not offset unless the criteria above are met. No item should be described as extraordinary items, either on the face of the income statement, or in the notes. Profit or loss for the period
An undertaking shall recognise all items of income and expense in a period in profit or loss unless an IFRS requires or permits otherwise. Some IFRSs specify circumstances when an undertaking recognises particular items outside profit or loss in the current period. IAS 8 specifies two such circumstances: the correction of errors and the effect of changes in accounting policies. Other IFRSs require or permit components of other comprehensive income that meet the Framework ’s definition of income or expense to be excluded from profit or loss Other comprehensive income for the period
An undertaking shall disclose the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments, either in the statement of comprehensive income or in the notes. An undertaking may present components of other comprehensive income either: (i) net of related tax effects, or (ii) before related tax effects with one amount shown for the aggregate amount of income tax relating to those components. An undertaking shall disclose reclassification adjustments relating to components of other comprehensive income.
Other IFRSs specify whether and when amounts previously recognised in other comprehensive income are reclassified to profit or loss. Such reclassifications are referred to in IAS 1as reclassification adjustments. A reclassification adjustment is included with the related component of other comprehensive income in the period that the adjustment is reclassified to profit or loss. For example, gains realised on the disposal of available-for-sale financial assets are included in profit or loss of the current period. These amounts may have been recognised in other comprehensive income as unrealised gains in the current or previous periods. Those unrealised gains must be deducted from other comprehensive income in the period in which the realised gains are reclassified to profit or loss to avoid including them in total comprehensive income twice. An undertaking may present reclassification adjustments in the statement of comprehensive income or in the notes. An undertaking presenting reclassification adjustments in the notes presents the components of other comprehensive income after any related reclassification adjustments. Reclassification adjustments arise, for example, on disposal of a foreign operation (see IAS 21), on derecognition of available-for-sale financial assets (see IAS 39) and when a hedged forecast transaction affects profit or loss (see IAS 39 in relation to cash flow hedges). EXAMPLE- Presentation of currency translation differences Issue
Exchange differences arise from the translation of a foreign undertaking’s financial statements for incorporation in a reporting undertaking’s financial statements. Management should classify such differences as equity until the disposal of the net investment [IAS21]. How should management present exchange differences in the undertaking’s statement of changes in equity? Background
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Presentation of Financial Statements An undertaking has subsidiaries in several different countries. All of them are consolidated, and management classifies the currency translation differences arising from the translation of these subsidiaries’ financial statements as translation reserve in equity. Solution
Management should present the gain/loss on currency translations on the face of the statement of changes in equity. Additionally, management should present, in a note to the financial statements, a reconciliation of the amount of such exchange differences at the beginning and end of the period. Reclassification adjustments do not arise on changes in revaluation surplus recognised in accordance with IAS 16 or IAS 38 or on actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19. These components are recognised in other comprehensive income and are not reclassified to profit or loss in subsequent periods.
Stakes are high for companies: broad guidelines offer opportunities to drive their communication based on financial statement presentation. The abuse of this flexibility, however, may do more harm than good in the medium term. Analysts may be confused by presentations of ‘results before bad news and things management didn’t expect’. Regulators will not endorse such flexibility and will request strict rules to be applied. Restatements may occur and companies’ reputations will be tarnished by such behaviour. How can companies acquire a useful and transparent presentation of their results? How presentation format can make a difference
Most users look at the income statement first for information on the company’s financial performance. The notes may provide useful additional information but the size and complexity of these often prevent most users from considering them in detail.
Changes in revaluation surplus may be transferred to retained earnings in subsequent periods as the asset is used or when it is derecognised (see IAS 16 and IAS 38).
The income statement presentation could influence the user’s decision-making. IAS 1 allows companies to report income statements on a functional (costs of sales, selling, marketing, etc...) or a nature (salaries, rent, depreciation, etc...) basis.
Actuarial gains and losses are reported in retained earnings in the period that they are recognised as other comprehensive income (see IAS 19).
The temptation to combine both presentations is high, but will transparency and comparability result from doing so?
Income statement presentation - IFRS News - June 2005
Imagine two similar companies: one excludes depreciation from its cost-of-sales figure to derive its gross profit figure, while presenting depreciation as a separate line item; the other includes depreciation of production equipment in costs of sales to reflect a complete functional presentation.
Any group with international operations, whether listed or not, can benefit from making it easier for its major stakeholders to understand its financial statements.
Income statement presentation is an essential part of stakeholder communications and IFRS aims to add transparency and comparability to this communication. IAS 1, the standard which deals with the presentation of financial statements, contains broad guidelines on presentation format. The qualitative characteristics for the financial statements in the IFRS framework only represent general guidance.
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It would seem that the company that mixes function and nature expense categories generates more gross profit. This only reflects a choice of presentation and not the actual performance of the company. The first presentation could create confusion for the user and it would not be comparable between different companies. 30
Presentation of Financial Statements ‘Industry practice’: slippery slope
presentation are met (see box below).
Many companies suggest that analysts require certain disclosures on the face of the income statement, which are not defined or required under IFRS. ‘Earnings before interest, depreciation and amortisation’ (EBITDA) is an example, which is used in many capital intensive industries.
Restructuring: as restructuring provisions are not separate ‘functions’, it is unlikely that a separate line item for restructuring can be used in a functional expense presentation. Conclusion
Many different calculation methods exist. Some companies exclude all amortisation and depreciation from the subtotal; others exclude all significant non-cash charges such as restructurings and impairments. This makes ‘EBITDA’ a wide category that is non-comparable. Analysts must then make various adjustments to the published EBITDA figures based on information from the notes. Disclosing partial information on the face of the income statement (often without an explanation on its calculation) does not add value for users. Transparency
Transparent reporting would result from use of a format similar to the examples in the application guidance to IAS 1. Subtotals and further line items only result in clearer presentation if certain criteria are met (see box below).
Other common reporting issues
The use of the ‘operating profit’ subtotal: many companies disclose ‘operating profit’ even though IFRS no longer requires it. If this subtotal is presented, IAS 1 states that all activities are presumed to be part of operations apart from the results of financing activities, equity-accounted investments, discontinued operations and taxation. ‘Non-recurring’ or ‘exceptional’ results: another commonly-used subtotal is the division of operating profit to ‘recurring’ and ‘non-recurring’ portions (or similar). Management may wish to make this separation to exclude ‘difficult debits’ or because the items were treated as ‘extraordinary’ under local GAAP.
The income statement presentation can make a difference between companies even if the underlying results are similar. A company that follows IAS 1 will reduce subjectivity and aid comparability between different undertakings. When is a mixed presentation acceptable?
The mixture of function and nature, and the use of subtotals, are only acceptable when all of the following requirements are met: The proposed presentation is not misleading: the income statement presentation should be unbiased. The proposed breakdown should not result in a misleading cost-of-sales figure and overstate gross profit. A potential for bias can exist if the subtotal gets undue prominence over the line items and the subtotals normally required by IFRS; The presentation should be applied consistently across all years and the ‘rules’ should be set out in the accounting policies. An undertaking that wishes to present a subtotal for non-recurring items should have an accounting policy which describes the classification rules (to avoid the cherry-picking of items to be classified as non-recurring); and The breakdown of expenses by nature is presented in the notes to the financial statements, as required by IAS 1: the breakdown should be made in a separate note, which could be tied to the total of expenses presented on the face of the income statement.
These subtotals do not usually help to achieve clear and consistent presentation, but may be acceptable if the general criteria for a mixed
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Presentation of Financial Statements
18. Information to be Presented either on the Face of the Income Statement, or in the Notes When items of income and expense are material, their nature and amount shall be disclosed separately. Separate disclosure of items of income and expense include: (i) write-downs of inventories to net realisable value, or of property, plant and equipment to recoverable amount (as well as reversals of such write-downs); (ii) restructurings of the activities of an undertaking (and reversals of any provisions for the costs of restructuring); (iii) disposals of items of property, plant and equipment; (iv) disposals of investments; (v) discontinuing operations; (vi) litigation settlements; and (vii) other reversals of provisions. An undertaking shall present an analysis of expenses, using a classification based on either the nature of expenses, or their function, whichever provides information that and more relevant. Undertakings are encouraged to present the analysis in the statement of comprehensive income or in the separate income statement (if presented). EXAMPLE-results categorised by function
You lease photocopiers and drinks machines. Identifying the results and net assets employed by each function of the business helps users. 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. The first form of analysis is the ‘nature of expense’ method. Expenses are aggregated in the income statement according to their nature (for example, depreciation, purchases of materials, transport costs, employee benefits and
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advertising costs), and are not reallocated among various functions within the undertaking. 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 X goods and work in progress Raw materials and consumables used X Staff benefits costs X Depreciation and amortisation expense X Other expenses X Total expenses (X) Profit X The second form of analysis is the function of expense or ‘cost of sales’ method, and classifies expenses as part of cost of sales, the costs of distribution, or administrative activities. At a minimum, an undertaking discloses its cost of sales separately from other expenses. This method can provide more relevant information to users than the ‘classification of expenses’, but allocating costs to functions may require arbitrary allocations, and involve judgement. An example of a classification using the function of expense method is as follows: Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Profit
X (X) X X (X) (X) (X) X
Undertakings classifying expenses by function shall disclose additional information on the nature of expenses, including depreciation, amortisation and staff benefits expense.
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Presentation of Financial Statements The choice of method depends on historical, and industry factors and the nature of the undertaking. Both methods provide an indication of those costs that might vary, directly or indirectly, with the level of sales (or production). Management should select the most relevant presentation. As 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. EXAMPLES- Presentation of currency translation differences Issue
Exchange differences arise from the translation of a foreign undertaking’s financial statements for incorporation in a reporting undertaking’s financial statements. Management should classify such differences as equity until the disposal of the net investment [IAS21]. How should management present exchange differences in the undertaking’s statement of changes in equity?
that are capitalised during the period? Background
Undertaking A presents in its income statement the analysis of its expenses by nature. During the period, the undertaking capitalised some of the costs related to materials and employees; these costs were capitalised into property, plant and equipment. Solution
Management should present the employee benefits costs and the movement in the inventories on a gross basis. The amounts capitalised should be shown separately as a deduction from expenses in the income statement. The level of detail and prominence of the deduction should be determined according to the size and significance of the amounts capitalised. An example disclosure is given below:
Background
An undertaking has subsidiaries in several different countries. All of them are consolidated, and management classifies the currency translation differences arising from the translation of these subsidiaries’ financial statements as translation reserve in equity. Solution
Management should present the gain/loss on currency translations on the face of the statement of changes in equity. Additionally, management should present, in a note to the financial statements, a reconciliation of the amount of such exchange differences at the beginning and end of the period. Presentation of capitalised expenses Issue
When presenting the analysis of expenses by nature, the expenses are aggregated in the income statement according to their nature, and are not reallocated among various functions within the undertaking. How should management present, in the undertaking’s income statement, costs
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Revenue
X
Other income
X
Changes in inventories of finished goods and work in progress Raw materials and consumables used Employee benefits costs Depreciation and amortisation expense Other expenses Less: expenses capitalised in construction of property, plant and equipment
X X X X X (X)
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Presentation of Financial Statements Total expenses
(X)
Profit
X
The classification of the compensation as income reflects the reason for the compensation, that is, loss of income. The compensation would have been included within other expenses if it had been awarded as compensation for additional costs incurred.
EXAMPLE- Presentation of revenue related to a government compensation Issue
Undertakings shall disclose separately the nature and amount of items of income and expense when they are material. How should management present the revenue related to government compensation in the undertaking’s income statement?
EXAMPLE- Classification of impairment losses Issue
The presentation of expenses by function classifies expenses according to their function as part of cost of sales, distribution or administrative activities. How should management classify the impairment of goodwill?
Background
Background
Undertaking A operates under the terms of a government licence in a regulated industry in country X.
An undertaking has recognised goodwill on subsidiaries’ acquisitions as well as on associates accounted for using equity method. One subsidiary and one associate are located in a country that is experiencing economic crisis.
The undertaking received 3,000,000 from the government as compensation for loss of income that the undertaking suffered because the licence agreement was modified.
During the year, management recognised impairment losses on goodwill related to both the subsidiary and associate.
The original licence granted undertaking A exclusive rights to operate in country X, and the modification allowed competition from locally-owned businesses.
Solution
Receipt of the payment was unconditional. Management therefore recognised it in the income statement on receipt. The compensation represents approximately 30% of the current year profit before tax.
Management should classify impairment on the goodwill related to the subsidiary within other expenses, and the impairment on the goodwill related to the associate within ‘share of profit/loss on associate’.
Solution
The classification of the impairment losses should follow the same classification as the expenses related to the underlying assets.
Management would ordinarily recognise the compensation from the government as part of ‘other income’. However, the nature and size of the revenue is such that management should disclose it in a separate line on the face of the income statement. Management should present this line immediately after or before the line ‘other income’.
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EXAMPLE- Use of different analysis of expenses for parent financial statements and group financial statements Issue
The analysis of expenses shall be presented using a classification based on 34
Presentation of Financial Statements either the nature of expenses or their function within the undertaking. Can management mix different analysis of expenses in the group’s income statement? Background
Undertaking A has six subsidiaries, the largest of which, undertaking B, represents 40% of the consolidated group’s results. B represents a separate business segment. All undertakings in the group present a functional analysis of expenses in their single-undertaking IFRS financial statements, except for undertaking B, which presents an analysis by the nature of expenses. As a functional analysis of B’s expenses has not been prepared, A’s management would like to present the consolidated income statement on a splitmethod basis. B’s results will be presented using a natural analysis, whereas the rest of the group’s results will be presented on a functional basis. A’s management argues that because B’s business is from a different segment and therefore not comparable with the rest of the group, the use of a different presentation basis should be acceptable. Solution
No, management cannot adopt a mix of the two types of analysis in the group’s financial statements. Management must choose which format, functional or natural, is most appropriate for the consolidated financial statements. The results of all undertakings within the group must be prepared on the chosen basis, which will require part of the group to convert their results from that used in their single-undertaking financial statements to that used in the consolidated financial statements.
19. Statement of Changes in Equity This statement is new to many jurisdictions. Most movements on equity were traditionally shown on the face of the Income Statement. Dividends would be shown, (but increases in capital would mostly not be shown). The difference between opening and closing equity was detailed in the Income Statement. Charging (or crediting) directly to equity was prohibited in many jurisdictions. Foreign currencies (involving investments) and revaluations have been instrumental in providing the need for this separate statement. It reconciles the Income Statement with the movements on equity for the period. RESERVES summary What are reserves?
Reserves, together with share capital and own equity instruments, make up the shareholders’ equity section of an undertaking’s statement of financial position. Reserves are not specifically defined in IFRS. Reserves include fair value reserves, hedging reserves, asset revaluation reserves, foreign currency translation reserves and retained earnings. These reserves result from fair value and foreign currency translation adjustments which IFRS requires to be reflected in equity rather than income. Reserves are not re-measured, but they may need to be restated where an undertaking is reporting in the currency of a hyperinflationary economy. Fair value reserve
Unrealised gains/losses (net of tax) on investments classified as available-for-sale shall be recognised in equity (within a fair value reserve). These gains/losses are recycled to the income statement on disposal or when the asset becomes impaired. Hedging reserve
IFRS requires that the effective portion of gains and losses (net of tax) arising from the revaluation of a financial instrument designated as a cash flow hedge, be deferred in a
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Presentation of Financial Statements separate component of equity. The reserve is usually described as a hedging reserve. These deferred gains and losses are subsequently released to the income statement in the period or periods when the hedged item affects the income statement. If the hedged cash flows result in the recognition of a non-financial asset or liability on the statement of financial position, the undertaking can choose to adjust the basis of the asset or liability by the amount deferred in equity. However, this is not permitted if the hedged cash flows result in the recognition of a financial asset or liability. If the hedging relationship ceases because one of the criteria for hedge accounting is no longer met, the hedge is revoked or the hedging instrument is expired, sold, terminated or exercised, the gains/losses accumulated in equity are either:
Foreign currency translation differences shall be recognised in equity in a foreign currency reserve. Translation adjustments must be separately tracked in equity. On disposal of a foreign undertaking, the cumulative translation difference relating to the undertaking is transferred to the income statement and included in the gain or loss on sale. Retained earnings
Retained earnings reflect the undertaking’s accumulated earnings less dividends accrued and paid to shareholders, and transfers from other reserves as outlined above. The cumulative effect of changes in accounting policy and the correction of errors is also reflected as an adjustment in retained earnings. Presentation and disclosure
released in profit and loss if the hedged item is no longer expected to occur; or
Reserves
left in equity until the hedged cash flow occurs or is no longer expected to occur .
An undertaking should disclose:
Asset revaluation reserve
a)
movements in the fair value reserve, hedging reserve, asset revaluation reserve and foreign currency translation reserve in a separate statement of changes in shareholders’ equity;
b)
either on the face of the statement of financial position or in the notes, a description of the nature and purpose of each reserve recognised within equity; and
c)
any restrictions on the appropriation or distribution of reserves. If statutes or shareholders’ resolutions restrict the application of retained earnings and reserves, undertakings should disclose the specific terms of such restrictions for each item.
Subsequent to initial recognition, an item of property, plant and equipment may be revalued to fair value. The revaluation surplus is recognised in equity unless it reverses a decrease in the fair value of the same asset which was previously recognised as an expense, in which case it is recognised in profit or loss. A subsequent decrease in the fair value must be charged against this reserve. The revaluation surplus may be transferred to retained earnings periodically, net of the tax effect. The amount realised is the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. When the asset is sold or scrapped, the balance in the reserve may be transferred to retained earnings as a realised gain, without passing through the income statement.
If a standard restricts the use of certain reserves, a clear description of the items makes additional disclosure of their purpose unnecessary. Retained earnings and dividends
An undertaking should disclose: Foreign currency translation reserve
a)
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the balance of retained earnings at the start of the period, and at the end of the
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Presentation of Financial Statements reporting period, and the movements in retained earnings either in the statement of changes in shareholders’ equity, or in a note to the financial statements; b)
the amount of dividends recognised as distributions to equity holders during the period, and the related amount per share.
An undertaking shall present a statement of changes in equity showing on the face of the statement: (a) total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to minority interest; (b) for each component of equity, the effects of retrospective application or retrospective restatement recognised in accordance with IAS 8; (c) the amounts of transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners; and (d) for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing each change. An undertaking shall present, either in the statement of changes in equity or in the notes, the amount of dividends recognised as distributions to owners during the period, and the related amount per share.
Solution
No, the undertaking should present each of these items separately (and a total) in its statement of changes in equity. The components of equity include, for example, each class of contributed equity, the accumulated balance of each class of other comprehensive income and retained earnings. Changes in an undertaking’s equity between the beginning and the end of the reporting period reflect the increase or decrease in its net assets during the period. Except for changes resulting from transactions with owners in their capacity as owners (such as equity contributions, reacquisitions of the undertaking’s own equity instruments and dividends) and transaction costs directly related to such transactions, the overall change in equity during a period represents the total amount of income and expense, including gains and losses, generated by the undertaking’s activities during that period. IAS 8 requires retrospective adjustments to effect changes in accounting policies, to the extent practicable, except when the transition provisions in another IFRS require otherwise. IAS 8 also requires restatements to correct errors to be made retrospectively, to the extent practicable.
EXAMPLE- Statement of changes in equity - Netting of gains and losses Issue
Undertakings should present a separate statement showing: Can management present, as a single line item only the total gain and losses recognised directly in equity? Background
Undertaking A recognised during the period gains and losses related to changes in the fair value of available-for-sale investments and PPE. Management wishes to present the gains and losses in one line in the statement of changes in equity, and then provide a reconciliation of the movement in a note to the financial statements.
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Retrospective adjustments and retrospective restatements are not changes in equity but they are adjustments to the opening balance of retained earnings, except when an IFRS requires retrospective adjustment of another component of equity. IAS 8 requires disclosure in the statement of changes in equity of the total adjustment to each component of equity resulting from changes in accounting policies and, separately, from corrections of errors. These adjustments are disclosed for each prior period and the beginning of the period.
20. Statement of Cash Flows 37
Presentation of Financial Statements Cash flow information provides users with a basis to assess the ability to generate cash, and the needs of the undertaking to utilise those cash flows. IAS 7 sets out requirements for the presentation of the cash flow information and related disclosures.
21. Notes Structure
The notes shall: (i) present information about the basis of preparation of the financial statements, and the specific policies; (ii) disclose the information required by IFRSs that is not presented in the financial statements; and (iii) provide additional information relevant to understanding the financial statements. Notes shall be presented in a systematic manner. Each item in the statements of financial position and of comprehensive income, in the separate income statement (if presented), statement of changes in equity, and cash flow statement shall be cross-referenced to any related information in the notes. Notes are normally presented in the following order, which assists users in understanding the financial statements, and comparing them with those of other undertakings: (i)
a statement of compliance with IFRSs
(ii)
a summary of significant policies supporting information for items presented in the statements of financial position and of comprehensive income, in the separate income statement (if presented), statement of changes in equity and cash flow statement, in the order in which each statement and each line item is presented; and
(iv)
other disclosures, including: contingent liabilities and unrecorded contractual commitments; and
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- non-financial disclosures, such as the undertaking’s financial risk management objectives and policies). It may be necessary, or desirable, to vary the order of items within the notes. Information on changes in ‘fair value’ recorded in income statement may be combined with information on maturities of financial instruments, although the former disclosures relate to statement of comprehensive income or separate income statement (if presented) and the latter relate to the statement of financial position.. A systematic structure for the notes is retained, as far as practicable. Notes providing information about the basis of preparation of the financial statements, and specific accounting policies, may be presented as a separate component of the financial statements. Disclosure of Accounting Policies
An undertaking shall disclose in the summary of significant policies: (i) the measurement bases used in the financial statements; and (ii) the other policies used, that are relevant to an understanding of the financial statements. Users should be informed of the measurement bases (historical cost, current cost, net realisable value, fair value or recoverable amount) because the basis on which the financial statements are prepared affects their analysis. (see Framework workbook ). When more than one measurement basis is used in the financial statements, for example when particular classes of assets are revalued, it is sufficient to provide an indication of the categories of assets (and liabilities) to which each measurement basis is applied. In deciding whether a particular policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions are reflected in the reported financial performance, and financial position. 38
Presentation of Financial Statements Disclosure of particular policies is useful when those policies are selected from alternatives allowed in Standards. An example is disclosure of whether a venturer recognises its interest in a jointly controlled undertaking using proportionate consolidation, or the equity method (see IAS 31 Joint Ventures). Some Standards specifically require disclosure of particular policies, including choices made by management between different policies they allow.
An undertaking shall disclose, in the summary of policies or other notes, the judgements (apart from those involving estimations) management has made in the process of applying the policies that have the most significant impact, on the amounts recorded in the financial statements. EXAMPLE-estimate - warranty provision
You have introduced a new product. You create a warranty provision for client claims, but have to use claims relating to other products to estimate the amount of the provision. This is an example of an estimate.
EXAMPLES-Disclosure of management choices Possible sources of estimation uncertainties:
IAS 16 requires disclosure of the measurement bases used for classes of property, plant and equipment.
• Changes in foreign exchange rates and affecting assets or liabilities denominated in foreign currencies;
Each undertaking considers the nature of its operations, and the policies that the users would expect to be disclosed for that type of undertaking.
• Assumptions to determine amount of provisions;
EXAMPLE-Tax
• Useful lives and residual values of fixed assets;
An undertaking subject to income taxes would disclose its policies for income taxes, including those applicable to deferred tax liabilities (and assets).
• Interest rates, affecting pension liabilities and impairment calculations;
• Technological obsolescence of inventories; • Property prices used as the basis for revaluing properties;
EXAMPLE-Foreign operations and currencies
When an undertaking has significant foreign operations, or transactions in foreign currencies, disclosure of policies for the recognition of foreign exchange gains (and losses) would be expected. EXAMPLE-Group accounts
When business combinations have occurred, the policies used for measuring goodwill, and minority interest are disclosed.
• Growth rates and interest used in an impairment calculation for property, plant and equipment; • Assessment of the percentage of completion on services or construction contracts. Possible areas of critical accounting judgements: • Classification of held-to-maturity financial assets;
An policy may be significant because of the nature of the undertaking’s operations, even if amounts for current, and prior periods are not material.
• Revenue recognition: transfer of substantially all significant risk and rewards; • Classification of complex lease transactions;
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Presentation of Financial Statements • Impairment of an available-for-sale investment;
causing a material adjustment to the carrying amounts of assets (and liabilities) within the next financial year.
• Control over a special purpose undertaking.
In respect of those assets (and liabilities), the notes shall include details of:
Source: IFRS News July 05
(i) their nature; and (ii) their carrying amount, as at the end of the reporting period.
In the process of applying policies, management makes various judgements, apart from those involving estimations, which can significantly affect the amounts recorded in the financial statements. For example, management makes judgements in determining:
Determining the carrying amounts of some assets (and liabilities) requires estimation of the impacts of uncertain future events on those assets (and liabilities) at the end of the reporting period.
(i) whether financial assets are held-to-maturity investments; (ii) when substantially all the significant risks (and rewards) of ownership of financial assets, and lease assets, are transferred to other undertakings; (iii) whether, in substance, particular sales of goods are financing arrangements, and therefore do not give rise to revenue; and (iv) whether the substance of the relationship between the undertaking, and a special purpose vehicle, indicates that the special purpose vehicle is controlled by the undertaking. In rare cases, an undertaking owns the majority of a subsidiary but does not control it, and therefore does not consolidate it. IAS 27 requires an undertaking to disclose the reasons why the undertaking’s ownership interest does not constitute control, in respect of an investee that is not a subsidiary (even though more than half of its voting, or potential voting power, is owned directly or indirectly through subsidiaries). IAS 40 requires disclosure of the criteria developed by the undertaking to distinguish investment property from owner-occupied property, and from property held for sale in the ordinary course of business, when classification of the property is difficult. Key Sources of Estimation Uncertainty
An undertaking shall disclose, in the notes, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of
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EXAMPLE- estimated provision
You have been sued in court. You have lost the case. Your total costs are not finalised When the accounts are prepared, you estimate your provision for the costs of the liability. For example, estimates are necessary to measure: the recoverable amount of classes of property, plant and equipment, the impact of technological obsolescence on inventories, provisions subject to the future outcome of litigation in progress, and - long-term staff benefit liabilities such as pension obligations. These estimates involve assumptions about the risk adjustment to cash flows (or discount rates used), future changes in salaries, and future changes in prices affecting other costs. These disclosures are not required for assets (and liabilities) with a significant risk that their carrying amounts might change materially within the next financial year if, at the end of the reporting period, they are measured at fair value, based on recently-observed market prices. These disclosures are presented in a manner that helps users to understand the judgements management makes about the future and about other key sources of estimation uncertainty.
40
Presentation of Financial Statements The nature, and extent, of the information provided vary according to the nature of the assumption, and other circumstances. Examples of the types of disclosures made are: (i) the nature of the assumption, or other estimation uncertainty; (ii) the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for the sensitivity; (iii) the expected resolution of an uncertainty, and the range of reasonably possible outcomes within the next financial year, in respect of the carrying amounts of the assets (and liabilities) affected; and (iv) an explanation of changes made to past assumptions, concerning those assets and liabilities, if the uncertainty remains unresolved. EXAMPLE- uncertainty - lawsuit
At the start of a lawsuit, the result may be difficult to estimate, and only a contingent liability can be noted. As a lawsuit nears conclusion, the result may be estimable, and a provision or asset may be recorded. Narratives should be included in each financial statement to explain progress and identify what still needs to be resolved.
IFRS 7 requires disclosure of significant assumptions applied in estimating fair values of financial assets, and financial liabilities, that are carried at fair value. IAS 16 requires disclosure of significant assumptions applied in estimating fair values of revalued items of property, plant and equipment.
22. Capital An undertaking shall disclose information that enables users to evaluate the undertaking’s objectives, policies and processes for managing capital. The undertaking discloses the following: 1. qualitative information about its objectives, policies and processes for managing capital, including:
i.
a description of what comprises its capital;
ii.
when an undertaking is subject to externally imposed capital requirements, the nature of those requirements and how those requirements are incorporated into the management of capital; and
iii.
how it is meeting its objectives for managing capital.
It is not necessary to disclose budget information, or forecasts, in making the disclosures. When it is impracticable to disclose the extent of the possible impacts of a key assumption, the undertaking discloses that it is reasonably possible, that outcomes within the next financial year could require a material adjustment to the carrying amount of the asset (or liability) affected. In all cases, the undertaking discloses the nature, and carrying amount, of the specific asset or liability (or class of assets or liabilities) affected by the assumption. The disclosures of particular judgements management made in the process of applying the undertaking’s policies do not relate to the disclosures of key sources of estimation uncertainty.
2. summary quantitative data about what comprises its capital. Some undertakings regard some financial liabilities (eg some forms of subordinated debt) as part of capital. Other undertakings regard capital as excluding some components of equity (eg components arising from cash flow hedges). 3. any changes in (1) and (2) from the previous period. 4. whether during the period it complied with any externally imposed capital requirements to which it is subject. 5. when the undertaking has not complied with such externally imposed capital requirements, the consequences of such non-compliance.
IAS 37 requires disclosure, in specified circumstances, of major assumptions concerning future events affecting classes of provisions.
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Presentation of Financial Statements These disclosures shall be based on the information provided internally to the undertaking’s key management personnel. An undertaking may manage capital in a number of ways and be subject to a number of different capital requirements and restrictions. For example, a conglomerate may include undertakings that undertake insurance activities and banking activities, and those undertakings may also operate in several jurisdictions. The undertaking shall disclose separate information for each capital requirement (rather than aggregate information) to which the undertaking is subject where this would be aid the understanding of users.
23. Other Disclosures
The IASB published Amendments to IAS 1 in September, completing Phase A of the Board’s joint project with the FASB. The changes align some aspects of IAS 1 with SFAS 130, Reporting Comprehensive Income. Implications
Transactions with owners are analysed separately from those relating to the performance of the undertaking. The user of the financial information will need to become familiar with understanding and explaining this new way of presentation. The amendment defines ‘owners’ as being “the holders of instruments classified as equity”. This definition also includes interests and is likely to include holders of compound financial instruments, such as convertible debt. Those undertakings that have previously presented a separate statement of recognised income and expense (SoRIE) will now be required to provide in addition a statement of changes in equity. This will present information that has previously been provided in the notes.
An undertaking shall disclose in the notes: (i) the amount of dividends proposed (or declared) before the financial statements were approved for issue, but not recorded as a distribution to owners during the period, and the related amount per share; and (ii) the amount of any cumulative preference dividends not recorded. An undertaking shall disclose the following, if not disclosed elsewhere in information published with the financial statements: (i) the domicile, and legal form, of the undertaking, its country of incorporation and the address of its registered office (or principal place of business, if different from the registered office); (ii) a description of the nature of the undertaking’s operations, and its principal activities; and (iii) the name of the parent and the ultimate parent of the group.
24. Annex- Amendments to IAS 1 - IFRS News November 2007 www.banks2ifrs.ru
These undertakings can decide to make no change at all to the SoRIE or can elect to combine the SoRIE with the income statement into a single statement of comprehensive income. Undertakings are no longer allowed to present a statement of changes in equity that includes items of comprehensive income and changes due to transactions with owners. The amendment considers aligning the comprehensive income concept with FAS 130; however, there are still some differences. For example, FAS 130 permits a third option of displaying comprehensive income in a statement of changes in equity. IAS 1 revised does not permit this third option. There are other items that are required by one standard but not the other. For example, the amendment to IAS 1 requires an undertaking to display the share of each item of associates’ other comprehensive income; FAS 130 does not provide explicit guidance. The amendments do not address a number of issues of practical application of IAS 1, such as the presentation of gains and losses of financial instruments. These may be dealt with in Phase B of the project, but the outcomes of Phase B are not expected for a number of years, and inconsistencies might still appear in the intervening period. 42
Presentation of Financial Statements It does, however, add some potential practical difficulties in estimating the tax effects of each item within comprehensive income.
changes in equity; - ‘Non-owner’ changes in equity and the related tax impact are presented in
The changes are likely to reduce comparability between undertakings because they allow choices in the presentation of financial information and in the names of the primary statements.
comprehensive income*; - Comprehensive income is presented in either a single statement or in two
statements (an income statement and a statement of comprehensive income); Next steps
The FASB did not publish a separate document considering Phase A of the project. It will expose its Phase A decisions along with its Phase B decisions.
- Dividends and per share amounts are presented in the statement of changes in
Phase B
- A statement of financial position (statement of financial position) at the
The Boards are jointly undertaking Phase B, which considers more fundamental questions, such as:
beginning of the corresponding period is presented where restatements have occurred; and
• consistent principles for aggregating information in each primary statement;
- Reclassification adjustments (recycling) and the related income tax are
equity or in the notes;
disclosed in the comprehensive income. • the totals and subtotals that should be reported in each primary statement; • whether the direct or the indirect method of presenting operating cash flows provides more useful information; and
* Comprehensive income for a period includes profit or loss for that period and the components of ‘recognised income and expense’ previously reported in equity such as:
• whether components of other comprehensive income should be reclassified to profit or loss and, if so, the characteristics of the transactions and events that should be reclassified and when reclassification is made.
changes in revaluation surplus;
The IASB expects to publish a discussion paper early next year.
gains and losses arising from translating the financial statements of a foreign operation;
actuarial gains and losses on defined benefit plans recognised in equity;
Phase C
gains and losses on remeasuring available for sale financial assets and; Phase C will address presentation and display of interim financial information in US GAAP. The IASB may reconsider the requirements in IAS 34, Interim Financial Reporting. IAS 1 revised is effective for annual periods beginning on or after 1 January 2009. Early application is permitted. The revised IAS 1 resulted in consequential amendments to five IFRSs, 23 IASs and 10 interpretations. Key changes to IAS 1 - Changes in equity arising from transactions with owners (such as dividends and
shares repurchases) and the related tax impact are presented in the statement of
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the effective portion of gains and losses on hedging instruments in a cash flow hedge.
25. Multiple choice questions 1. Financial statements provide information about an undertaking’s:
(i) Assets. (ii) Liabilities. 43
Presentation of Financial Statements (iii) Equity. (iv) Income and expenses, including gains and losses. (v) Other changes in equity. (vi) Cash flows. (vii) Employment policies. 1. 2. 3. 4.
(i)+(iii)+(iv)+(v) (i) – (iii) (i) – (vi) (i) – (vii)
4. Users knowledge of business and accounting is assumed to be:
1. Reasonable. 2. Negligible. 3. Comprehensive. 5. A fair presentation also requires an undertaking to:
(i) Select policies in accordance with IAS 8. (ii) Provides relevant, reliable, comparable and understandable information. (iii) Provide additional disclosures. (iv) Provide an audit report.
2. A complete set of financial statements comprises:
(ii) a statement of comprehensive income for the period;
1. (i)+(iii)+(iv) 2. (i) – (iii) 3. (ii) – (iv) 4. (iii) – (iv)
(iii) a statement of changes in equity for the period;
6. Inappropriate accounting policies are rectified by:
(i) a statement of financial position as at the end of the period;
1. Disclosure of the accounting policies used. 2. Notes. 3. Explanatory material. 4. None of these.
(iv) a statement of cash flows for the period; (v) notes, comprising a summary of significant accounting policies and other explanatory information; and (vi) a statement of financial position as at the beginning of the earliest comparative period when an undertaking applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. 1. (i)+(iii)+(iv)+(v) 2. (i) – (iii) 3. (i) – (iv)+(vi) 4. (i) – (vi) 3. Environmental reports and value added statements are:
1. An integral part of financial statements. 2. Outside the scope of IFRS. 3. Never provide with financial statements.
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7. When the departure from a Standard creates a continuing impact:
1. A return to the Standard is required. 2. This must be disclosed in each period. 3. A deferred tax asset is created. 8. Accounts produced on a going-concern basis suggest the business will continue in operation for:
1. 6 months. 2. 1 Year. 3. The foreseeable future. 9. In June, you pay factory rent relating to October, November, and December. You expense rent in:
1. June. 44
Presentation of Financial Statements 2. December. 3. Spread it over October, November, and December. 10. In June, you buy some goods on credit. You pay cash in March. Your December accounts will show:
1. A trade payable. 2. An account receivable. 3. A provision.
1. (i)+(iii)-(vi) 2. (i) – (iii) 3. (i) – (iv) 4. (i) – (vi) 15. Assets and liabilities must be presented on the statement of financial position:
1.Split into current and non-current. 2.Broadly in order of liquidity. 3.Either 1 or 2.
11. Consistency entails:
1. The ability to compare the figures of different periods. 2. No changes in accounting policies. 3. No new Standards being introduced.
16. You need to refinance your long-term loan. Your end of the reporting period is June, you sign the refinancing in July and approve your financial statements in August. The long-term loan is shown as:
1. A current liability. 2. A non-current liability. 3. A contingent liability.
12. Gains and losses on foreign currencies are reported:
1. Within revenue. 2. On 2 separate lines. 3. Net, on a separate line. 13. Reimbursement of provisions should be:
1. Shown as an asset on the statement of financial position. 2. Netted against the provision in the income statement. 3. Shown on separate lines in the income statement. 14. Each component of the financial statements shall be identified clearly. In addition, the following information shall be displayed prominently:
(i)
The name of the reporting undertaking.
(ii)
The author(s).
(iii)
Whether the financial statements cover the individual undertaking, or a group.
(iv) The end of the reporting period, or the period covered by the financial statements, whichever is appropriate to that component of the financial statements. (v) the presentation currency, (vi) the level of rounding used in presenting amounts in the financial statements.
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17. You breach the terms of your long-term loan. It becomes payable on demand. Your end of the reporting period is June 30. The lender agrees not to demand payment as a consequence of the breach prior to June 30, giving you at least 12 months grace to rectify the breach. The long-term loan is shown as:
1. 2. 3.
A current liability. A non-current liability. A contingent liability.
18. Deferred tax liabilities are always shown as:
2. 3.
1. A current liability. A non-current liability. A contingent liability.
19. The judgement on whether additional items are presented separately is based on an assessment of:
(i)The nature and liquidity of assets. (ii)The function of assets. (iii) The amounts, nature and timing of liabilities. 45
Presentation of Financial Statements (iv) The space available in the financial statements. 1.(i)+(iii)+(iv) 2. (i) – (iii) 3. (ii) – (iv) 4. (iii) – (iv) 20. As a minimum, the face of the income statement shall include line items that present the following amounts for the period:
(vi) litigation settlements; and (vii) other reversals of provisions. should be presented: 1. On the face of the income statement. 2. In the notes. 3. Either 1 or 2.
(i) Revenue.
22. This presentation is:
(ii) Finance costs.;
Revenue Other income Changes in inventories of finished X goods and work in progress Raw materials and consumables used X Employee benefits costs X Depreciation and amortisation expense X Other expenses X Total expenses Profit
(iii) Share of the income statement of associates, and joint ventures accounted for using the equity method. (iv) Pre-tax gain (or loss) recorded on the disposal of assets, or settlement of liabilities attributable to discontinuing operations. (v) Tax expense. (vi) Profit, or loss. 1 (i)+(iii)-(vi) 2. (i) – (iii) 3. (i) – (iv) 4. (i) – (vi) 21. The following:
(i) write-downs of inventories to net realisable value, or of property, plant and equipment to recoverable amount (as well as reversals of such write-downs);
X X
(X) X
1. Nature of expense method. 2. Cost of sales method. 3. Function of expense method. 23. The Statement of Changes in Equity links:
1. The cash flow statement to equity movements. 2. The income statement to equity movements. 3. The notes to equity movements.
(ii) restructurings of the activities of an undertaking (and reversals of any provisions for the costs of restructuring);
24. An undertaking shall present a statement of changes in equity (plus notes) showing:
(iii) disposals of items of property, plant and equipment;
(i) Profit (or loss) for the period.
(iv) disposals of investments;
(ii) Each item of income and expense that is recorded directly in equity, and the total of these items.
(v) discontinuing operations;
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(iii) Total income and expense (calculated as the sum of (i) and (ii)), showing separately the total amounts attributable to equity holders of the parent, and to minority interest. and 46
Presentation of Financial Statements (iv) For each component of equity, the impacts of changes in accounting policies, and corrections of errors recorded in accordance with IAS 8. (v) The amounts of transactions with equity holders acting in their capacity as equity holders, showing separately distributions to equity holders. (vi) The balance of retained earnings (accumulated profit (or loss)) at the beginning of the period, and at the end of the reporting period, and the changes during the period.
1 (i)+(iii)-(vi) 2. (i) – (iv) 3. (i) – (vi) 4. (i) – (vii) 26. Estimates are necessary to measure:
(i)
(vii) A reconciliation between the carrying amount of each class of contributed equity, and each reserve at the beginning and end of the period, separately disclosing each change. 1 (i)+(iii)-(vi) 2. (i) – (iv) 3. (i) – (vi) 4. (i) – (vii) 25. The notes shall present, disclose and include:
(i) Present information about the basis of preparation of the financial statements, and the specific policies. (ii) Disclose the information required by IFRSs that is not presented on the face of the statement of financial position, income statement, statement of changes in equity, or cash flow statement. and (iii) Provide additional information relevant to understanding the financial statements. (iv) A statement of compliance with IFRSs. (v) A summary of significant policies . (vi) Supporting information for items presented on the face of the statement of financial position, income statement, statement of changes in equity and cash flow statement, in the order in which each statement and each line item is presented. (vii) Other disclosures, including: -
contingent liabilities and unrecorded contractual commitments. and
- non-financial disclosures, such as the undertaking’s financial risk management objectives and policies).
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(ii) (iii) (iv) (v)
The recoverable amount of classes of property, plant and equipment. The impact of technological obsolescence on inventories. Provisions subject to the future outcome of litigation in progress. Long-term employee benefit liabilities such as pension obligations. Accounts receivable.
1 (i)+(iii)-(v) 2. (i) – (iii) 3. (i) – (iv) 4. (i) – (v) 27. Examples of the types of disclosures about uncertainty are:
(i) The nature of the assumption, or other estimation uncertainty. (ii) The sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for the sensitivity. (iii) The expected resolution of an uncertainty, and the range of reasonably possible outcomes within the next financial year, in respect of the carrying amounts of the assets (and liabilities) affected. and (iv) An explanation of changes made to past assumptions, concerning those assets and liabilities, if the uncertainty remains unresolved. (v) The total number of transactions that have previously been analysed in the same manner. 1 (i)+(iii)-(v) 2. (i) – (iii) 3. (i) – (iv) 4. (i) – (v) 47
Presentation of Financial Statements 28. An undertaking shall disclose in the notes, if not disclosed elsewhere: (i) The amount of dividends proposed (or declared) before the financial statements were approved for issue, but not recorded as a distribution to equity holders during the period, and the related amount per share. (ii) The amount of any cumulative preference dividends not recorded. (iii) The domicile, and legal form, of the undertaking, its country of incorporation and the address of its registered office (or principal place of business, if different from the registered office). (iv) A description of the nature of the undertaking’s operations, and its principal activities. The name of the parent and the ultimate parent of the group.
26. Answers to multiple choice questions
(v) The names of previous directors of the undertaking.
Question
1 (i)+(iii)-(v) 2. (i) – (iii) 3. (i) – (iv) 4. (i) – (v)
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1.
2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.
Answer 3 3 2 1 2 4 2 3 3 1 1 3 2 1 3 1 2 2 2 4 3 1 2 4 4 48
