Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Corporate Reporting
Introduction to the Paper
It has been My Own Style that I get my students introduced to the Subject under Study, break the Syllabus Down into
pieces and Do A Holistic Analysis of Past Questions. This Paper is an extension to Financial Reporting, a Skills Level
Paper. In FR, as the name Implies, we only report the Financial Aspect of the Business, but Corporate Reporting is a
bigger paper. It goes beyond reporting the Financial Aspect of the Business alone. We report everything in relation to
the Corporate World. That is why the Word Corporate comes in.
We do not only report Finance, we also report Risk, CSR, Governance, Strategy, etc. That's why in the Pack, you will
be Seeing Topics Like:
•
•
Beyond Financial Reporting
Other Information in the Annual Report
The Group Accounts Here is A Complex One, not simple Group We did in FR and The Accounting Standards are
Tested in a More Robust and Advanced Way. Even, Ratio Question could be Complicated Here, Each Time You Expect
Cash Flows Statement, just know it’s a Group Cashflow Question. A Lot to Watch Out for In CR Very Advanced in
Nature.
Past Questions Analysis
If You Take A Very Good Look at Most Past Questions, U will observe the Following:
•
•
•
•
Compulsory Questions, Q1 use to be Group Accounts. Where Issue Lies is What Aspect of the Group Accounts
are, they gonna test that Particular Diet? Whether it is Fellow Subsidiary Question or Joint Subsidiary, or Subsubsidiary, Foreign Subsidiary or Piecemeal Acquisition, or Disposal of Subsidiary or Group Cashflows? No One
Knows.
Questions 2 or 3 Used to Be on Ratio and Interpretation of FS. But, this is More Cumbersome than what we did
in Skills Level. The Ratio here could be more Rhombust and Technical. They could be Integrating Consolidation
into Financial Ratios, Testing Ratios of Group Companies, Or Integrating an Accounting Standard into A Ratio
Question, etc.
The Way Accounting Standards are Tested Here is far different from Skills Level Own. This is More Advanced
in Nature. Its A Combination of 2 or more Standards. Otherwise Known as Mixed Questions. The Questions on
Standards are very Long and Detailed and in the end, U have to give your Own View on how A Transaction Should
be Treated In Accordance with One IFRS/IAS. The Implication of this is that, at Professional Level, An
Understanding of IFRS is very Compulsory. Not just an ordinary Understanding, but A Holistic Understanding
and Application of Accounting Standards. Of which One Could Dodge in Skills Level and Scale Through.
Lastly, Section D of the Syllabus. "Current Developments & Beyond Financial Reporting". This is a Crucial
Aspect of this Paper and it makes the Clear Difference Between Skills Level "FR" And Professional Level "CR".
As The Name Implies, CORPORATE REPORTING. We are reporting Something that goes Beyond Mere the
Financial Aspect of the Business Alone. Virtually, Every Diet. ICAN must Test this Area. It's A Must. And It's
Theory. No Calculation Attached. So, To Me It's a Bonus for Students. Only If U Know.
I Think all these Information Are Vital For Our Success in this Subject. Because, we are not Here to Lecture Alone.
APEX Professionals is also After Your Success in this Program. Make Sure U Put this Down Somewhere Strategic in
Your Note.
1
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Chapter 1
The Regulatory Framework
Introduction
There is A Need for regulating Financial Reporting because of the Following:
•
•
•
To Give External Users Assurance on the Information being provided.
To adopt similar accounting treatment for similar items for comparison purpose.
To Avoid Management Misleading the Users of Financial Information.
Sources of Regulation
1. Accounting Standards
2. Company Laws
3. Listing Rules for Quoted Companies (Companies under NSE)
Disadvantages of Harmonisation/Convergence
1. Its Possible that National Legal Requirement conflict with that of IFRSs. Ie. Some Accounts might be prepared for
Tax Purpose.
2. Some Countries like US believe that there is own GAAP is still superior than IFRSs.
3. Cultural Differences in the world may purport that One Set of Accounting Standards may not be flexible enough to
meet the Needs of all Users.
Advantages of Convergence & Harmonisation
1. Investors and Analysts of Financial Statement can make better Comparisons between the Financial position.
2. Simplification of Preparation of Group Accounts, so that there is no need for Consolidating different Subsidiaries
Account.
3. Management can find it easier to monitor Performance with in Group.
4. It can encourage growth in Cross border trading.
5. Companies can access International Finance.
6. As a result of (4 & 5), harmonisation could lead to a Reduction in Cost of Capital.
Convergence with IFRS
This is also known as International Harmonisation of Accounting Standards, which simply advocates that all companies
all over the world should report their Accounts the same way. This will lead to greater efficiency and make Raising
Finance easier and cheaper. The 2 Candidate GAAPs which serves as A Basis for IFRS are:
•
•
US GAAP
IAS/IFRS.
The International Accounting Standards (IASs/IFRSs)
In 1973, International Accounting Standards Committee (IASC) was established to develop IASs with the aim of
Harmonising Accounting Procedures through out the World. Their work was supported by another body known as the
Standing Interpretation Committee (SIC), issuing interpretation of rules in the Standards when there was divergence in
Practice. The 1st IAS was issued in 1975.
In 2001, the constitution was changed leading to the establishment of a Body called IFRS foundation and the
replacement of the IASC and the SIC by new bodies called the International Accounting Standards Board (IASB) and
The International Financial Reporting Interpretation Committee (IFRIC). All standards issued thereafter was named
IFRSs and Interpretation known as IFRICs. Ever Since then, some IASs has been replaced with IFRS while only few
2
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
remained. International Standards cannot be applied in Any Country without the approval of the National Regulators in
that Country.
Up till today, the US Government and China have not adopted the IFRS, but it is hoped that they do that in the Future.
Developing A New Standard
Developing or revising a New Standard requires the Following Steps:
1.
2.
3.
4.
5.
6.
Identification of Issues.
An Advisory Group is established to give advice to the IASB.
A Discussion Document issued for Public Comments.
Exposure Draft is issued including any dissenting opinions.
All comments on the Exposure Draft and Discussion Documents are considered.
Approval and publication of the New Standard.
The Financial Reporting Council of Nigeria (FRCN)
This is the National Standard Setting Body in Nigeria, Which emanated from the Nigerian Accounting Standards Board
(NASB). The NASB was sphere headed by ICAN in 1992 before taken over by Government and they were issuing
Statement of Accounting Standards (SAS). Until 2011, When a new Act was passed in the National Assembly known
as the Financial Reporting Council of Nigeria, FRCN Act , No. 6, 2011 and took charge of the NASB, following the
adoption of International Accounting Standards.
Adoption of IFRSs in Nigeria; The Roadmap
1. Listed Public Companies must adopt Full IFRS as of January 2012.
2. Unquoted Private Companies must adopt Full IFRS as of January 2013.
3. SMEs must adopt IFRS for SMEs for periods as of 2014.
Comments on Nigerian Accounting Standards (SAS)
Nigerian Accounting Standards have been replaced by IFRS. However, Nigerian Standards still include Industry
Specific Rules which are not found in IFRS. Companies covered in such industries are expected to Continue to apply
these rules (in so far they do not conflict with IFRS). Such relevant standards include:
•
•
•
SAS 14: Accounting in the Petroleum Industry: Downstream Activities.
SAS 17: Accounting in the Petroleum Industry, Upstream Activities.
SAS 25: Telecommunications Activities.
Chapter 2
Accounting & Reporting Concepts
Introduction
The Preparation and Presentation of Financial Statements is based on a Large Number of Concepts, principles and
detailed Rules. Some are contained in Laws (Eg. CAMA 2004), some contained in Financial Reporting Standards (Like
IFRSs), while some are mere principles and conventions. All these taken together to form Generally Accepted
Accounting Principles of Any Given Country. GAAPs Vary from country to country due to differences in legal and
regulatory system and the peculiarity of businesses being operated in Each Country.
Conceptual Framework
This is a System of Concepts and principles which underpin the Preparation of Financial Statements. In the Past, the
IASC has issued a Conceptual Framework in 1989, comprising of Different Sections. The New Conceptual Framework
is now being developed by the IASB on Chapter by Chapter Basis, with New Chapters released Afresh and some
retained from the Old Document.
3
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
The New Document has the Following Sections:
1. Chapter 1 - The Objective of General Purpose Financial Statements.
2. The Reporting Entity.
3. Qualitative Characteristics of Financial Information.
4. The Framework, this includes:
•
•
•
•
•
Underlying Assumptions of F. S
The Elements of F. S
Recognition of the Elements in the F. S
Measurement of the Elements in the F.S
Concepts of Capital and Capital Maintenance.
Purpose of Conceptual Framework
1. So that Important Issues can be Addressed. Eg., there was no proper definition of Assets, Liability, Income and
Expenses, until the IASB developed this framework.
2. Since Business Environment is becoming more complex in Nature, it is unlikely that Accounting Standards cover
all possible transactions. In a situation where an entity enters into an Unusual Transaction and there is no relevant
IAS/IFRS that specifically treats it, the framework will assist.
Qualitative Characteristics of Useful Financial Information
In Order for any Financial Information to be Useful For Decision Making, it must Have the following Xtics:
•
•
Fundamental Qualitative Xtics
Enhancing Qualitative Xtics.
Fundamental Characteristics are subdivided into 2:
1. Relevancy, and
2. Faithful Representation
Enhancing Characteristics are subdivided into 4:
1.
2.
3.
4.
Comparability
Verifiability
Timeliness
Understandability
The Idea behind this is that:
"Information Must be Both Relevant And Faithfully Represent what if Purports to represent, before it can be said to be
Useful. While Enhancing Characteristics only Increase the Usefulness of the Information, because they cannot make
Information Useful if they are Irrelevant and not faithful represented."
Each of those Has Their Technical Meaning and Explanation. Just read Up the Pack to Understand Further.
Elements of Financial Statements
There are 5 Elements, 2 in the SCI, while 3 in the SFP.
a. Asset
According to the Framework, it is defined as:
•
A Resource controlled by the Entity,
4
Corporate Reporting – for ICAN Students
•
•
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
as a result of Past Events; and
from which future economic benefits are expected to flow to the Entity.
Explanation
a. Control is the ability to obtain economic benefits from the asset. What this means is that An Entity do not
necessarily need to OWN an Asset before they can classify it as Assets in their SFP. This is where is where
Leased Assets Come in, as a result of Substance Over Form.
b. Past Event Means is that No Asset is created by Future Transaction, A Transaction must have been Entered into
already.
c. Flowing in of Future Economic Benefits means that the Asset Must be Generating Something for the Entity. It
must be Economically Useful, it must not be Useless.
b. Liability
• A Present Obligation of an Entity,
• arising from Past Events,
• the settlement of which is expected to result in an Outflow of Resources that embody economic benefits.
Explanation
a. Present Obligation: The Most Important term in Liability is the Word, Obligation. Something you are binded to do.
This may be Legal In Nature or Constructive.
Legal Obligation is as a result of a Binding Contract, while Constructive Obligation is not contractually binding on the
Organisation to Carry it out, but may be it has being their practice that they do it.
The Other 2 Faction of the Definition were already Explained In that of Asset.
1. Equity:
The Residual Interest in an Entity after the Value of all Liabilities has been Deducted from the Value of all its
Assets. Ie. Assets Minus Liability. It could be classified into Share Capital and Reserves.
2. Income:
Increase in Economic Benefits during the Accounting period in form of inflows or enhancements of Assets. Income
can be of two forms:
-Revenue: Income arising in the course of the Ordinary Activities of the Business. Eg. Sales, interest, fee income, etc.
This is usually recognised in the Statement of Profit or Loss.
-Gains: Any other income aside from Normal Activities of the Business. Eg. Profits on Disposal of Fixed Asset,
Revaluation Gains, etc. Some may be recognised in Statement of P/L, while some in Statement of Other Comprehensive
Income.
5. Expenses:
Decrease in economic benefits in terms of outflow or depletion of Assets.
They include 2 Categories as well:
- Expenses arising from normal course of business activities.
- Other Losses that are not ordinarily among the normal course of Business Activities.
Recognition of Elements in the FS
What Recognition Is Talking about is Whether You are Including the Item in the FS or Not. According to the Conceptual
Framework, Elements in the FS will be recognised if and only if:
5
Corporate Reporting – for ICAN Students
•
•
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
-It Meets the Definition of An Element, as defined earlier.
-Satisfies The Recognition Criteria.
Criteria for Recognition
1. Probability of Future Economic Benefit. Ie. If Its Probable that Future Economic Benefit will flow in.
2. Reliable Measurement. Ie. When the Cost/Value of the Item can be measured reliably.
Those 2 are The Major/General Recognition Criteria. Any other one is An Addition. You Can study your Pack for
further Details. Each Element has its own Recognition Criteria.
Accounting Concepts
Aside from that of IASB framework, some other accounting concepts are used in FR. They are:
1. Consistency of Presentation: This is necessary if truly, we wants the Financial Information to be Comparable.
Don't keep changing Methods. Except in two Scenarios:
-
Where New Accounting Standard arise, consistency is not appropriate.
When Changes will be more Appropriate(IAS 8).
2. Materiality and Aggregation
IAS 1 states that Only Material Items should be disclosed in the FS. Each Material Class of similar items should be
presented separately in the FS. In Addition, items of Dissimilar Nature should not be aggregated together in the FS,
except if Immaterial.
3. Offsetting
This means taking One Item of the Financial Statemnet off another One.
1AS 1 States that:
-
Asset and Liability should not be offset against each other.
Income and Expenses should not be offset against each other as well.
Exception to this is when offsetting is required by An Accounting Standard, eg. IAS 16 allows for Depreciation to be
taken off An Asset.
Basis of Accounting
In Recognizing and Measuring Transactions, There are 3 Basis Important:
1. Accrual Basis
2. Cash Basis
3. Break Up Basis
•
•
•
Accrual Basis of Accounting is a system that recognises transactions in the period they are carried out irrespective
of when Cash Is Received or paid.
Cash Basis of Accounting is Common in the Public Sector, this disregards the Period of transactions. It only takes
note of the Time Cash is flowing in or Out.
Break Up Basis is only considered when a Company is having Going Concern Threat. When a Company is Likely
to be Wound Up, the company Prepares its Account on Break Up Basis, according to IAS1. What it means is that
All Assets will be reported in The Realisable Value. How Much can it be sold in the Market.
6
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Measurement of Elements in the Financial Statement
We Are still on IASB Conceptual Framework, taking their section on after another. We Explained Recognition the other
time and its criteria. Now, if an asset meets the recognition criteria, the next question is what Value should it be
recognised with on the FS?
The Conceptual Framework allows for several Measurements which include:
1. Historical Cost: Assets or liability measured at the exact amount paid while acquiring them.
2. Current Cost or Value: Assets are recognised based on the Amount it could be purchased with at Present. Same
thing with liability, amount you can use to settle it now.
3. Realisable Value: This is relevant under Break Up Basis, when an entity is ranging towards liquidation. What
matters then is the Value we can Realise if we sell the Assets.
4. Present Value: This has to do future cash inflows an Asset is expected to generate, we then discount it to present
value. Same thing with Liability, Cash Outflows discounted to present value.
Also, we have what is Generally Known as Fair Value, but that one is technically treated with a Separate Accounting
Standard, IFRS 13. So, We deal with it Later.
Note: Historical Cost is mostly used. But, Some Specific Standards require other Methods as well.
For Example:
•
•
•
IAS 2 allows that Inventory should be measured at a Lower of Cost or Net Realizable Value. Same with IAS
36, Impairment.
Deferred Income is measured at Present Value.
Some Non Current Assets should be measured at Current Value.
Fair Presentation
This is a common concept In Financial Reporting. According to IAS. This requires the Faithful Representation of the
effects of transactions, other events and conditions in accordance with the Definitions and recognition criteria for assets,
Liabilities, income and expenses as set out in the IASB framework. This requires that Amounts in the FS should be
Classified appropriately and disclosure made in a way that it does not mislead Users.
De-recognition
This is the Opposite of 'Recognition'. And It simply means that an Asset should be taken off the FS once it fails to meet
Up The Recognition Criteria.
Or if it stops meeting the Definition of An Element in the FS. Probably, through Sales or The Company Loses Control.
Chapter 3
IAS1, Presentation of Financial Statements (IAS 34, IAS24 & IFRS 8)
Specific Pronouncements of IAS 1
IAS1 States that for the Purpose of Professionalism, a Published Account must be clearly Identified with the Following
Features:
•
•
•
•
•
Name of the Entity.
Type of the Account (Whether Profit/Loss or SFP)
Period It Covers.
Reporting Currency
Level of Rounding Used.
7
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Other Pronouncements include:
Going Concern Assumption: The Fact That Every Financial Statements must be prepared as if it's gonna Exist for
The Foreseeable Future. And If the Going Concern Basis is In Question, the Accounts should be prepared on Break Up
Basis.
Materiality: This is based on the Judgement of the Accountant and the Size of the Reporting Entity.
Accrual Basis: All Accounts must be prepared on Accrual Basis. Except Statement of Cashflows. And That's why it
has a Separate Standard dealing with it. That's IAS7.
Substance Over Form: IAS 1 states that All Transactions must be Looked at according to their " Substance " Nature.
Rather than their Legal Form. Example of Transactions of this Nature are Lease Transaction, Sales or Return
Transaction, Sales and Repurchase, etc.
IAS1 Sets Out the Rules on The Form and Contents of the Financial Statements Listed Above.
Two (2) Crucial Things:
✓ Form: How Each Statement Must Appear, and
✓ Contents: What Must Be Contained In Them.
Content of a Complete Financial Statements
According to IAS1, a Complete Set of Financial Statement consists of:
1.
2.
3.
4.
5.
6.
7.
Statement of Financial Position (SFP)
Statement of Comprehensive Income (SCI)
Statement of Changes in Equity (SOCIE)
Statement of Cashflows (IAS7)
Notes to these Statements.
Statement of Significant Accounting Policies used in Preparing The Account (IAS 8)
Comparative Information of the Previous Period In respect of Those Accounts Prepared.
So, This Particular Aspect of The Standard is A Bone of Contention of this Topic itself, of which Most Standards are
Trying To Buttress in one way or Another. The Content is the Format, and there is no Need for me Listing Those ones
Here. Just Check Your Pack and Make Sure that You Master the Format of Each Statement. In fact, Cram the Format.
What I will do is to Pick Each Statement one after another And Give a Breakdown of Those Formats and their Rationale.
Statement of Comprehensive Income
This Can be Prepared In 2 Forms. IAS1 allows for an Entity to Choose Which One They Like.
Either:
•
•
Statements of Profit/Loss and Other Comprehensive Income (OCI) – Two (2) Statements, Or
Statement of Comprehensive Income – One (1) Statement.
IAS1 Stipulates the Compulsory Disclosure of this Statement thus:
1. Revenue or Turnover: A Must Requirement in the SCI. This is Regulated By IFRS 15.
2. Cost of Sales: Not Compulsorily Required by IAS1. But some items there are required to be disclosed as Notes to
the FS. Those are Opening & Closing Inventories and Their Components. (IAS 2)
3. Gross Profit: Its a Must to be disclosed.
4. Admin and Expenses & Other Incomes: Required by IAS1.
5. Depreciation: Though, IAS1 Says we should include it among Admin Expenses or COS, depending on Where the
Asset is Used(Whether used in the Factory or Office). But IAS 16 Says it should be Disclosed in our Asset Schedule.
6. Finance Cost or Income: It Must be disclosed on the Face of the Account.
8
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
7. Taxation: IAS 12. A Must Disclosure.
8. Other Comprehensive Incomes or Expenses (OCI) : These arise as a result of extra ordinary items that are not
Part of the Ordinary Activities of the Business. IAS1 further says that any tax arising from OCI Items should relate
to them under Here.
IAS 1 Stipulates the Accounts to be Prepared, tells us the Minimum Disclosures and How They Should Look Like, tells
us the Features of A Published Account Account and on what Basis they must be prepared.
Statement of Financial Position
IAS1 says we can prepare it in 2 Forms :
•
•
Total Assets = Equity + Liabilities, or
Net Assets = Capital Employed.
Where Net Asset = Total Assets Less Total Liabilities.
Which Ever Format You Like, You can Adopt. But, for simplicity purpose, we will adopt the 1st One.
Total Assets = Equity + Liabilities
ASSETS:
Non- Current Assets
•
•
•
•
•
•
•
PPE - IAS16 ( A Very Important Standard)
Investment Property IAS 40 (This is A Land or Building Own By The Entity But not Used by Them. Rather
put into Investment to generate Income)
Goodwill IFRS 3 (Though, Goodwill is An Intangible Asset, but due to its Nature, IFRS 3 Said it should be
Shown Separately in the FS.)
Other Intangible Assets IAS 38
Investment in Associates IAS 28
Ordinary Investments - IFRS 9 Financial Instruments (Financial Assets)
Right of Use Asset - IFRS 16 Leases
Current Assets
•
•
•
•
Inventory IAS 2 (Lower of Cost or Net Realisable Value)
Receivables: IAS 1 Says just Disclose Them in a Line. Don't Expose the Secret of Your Debtors. That's why
there is no Specific Standard For It.
Cash & Cash Equivalents - IAS 7
Asset held for Sale - IFRS 5.
EQUITY & LIABILITIES
Equities
•
•
Share Capital: IAS1 Says Disclose both The Quantity and Value.
Reserves: These are Other Equity Items as Carefully Disclosed in the SOCIE. Bring them In.
Non Current Liabilities:
•
•
•
Debentures
Long Term Loan Notes - Those 2 are regulated by 3 Standards; IAS 32, IFRS 7 & 9.
Redeemable Preference Shares - According To IAS 32, they should be Classified as Financial Liability because
of their Redeemable Nature.
9
Corporate Reporting – for ICAN Students
•
•
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Lease Liabilities - IFRS 16 Says Bring in the Unpaid Rentals as Liabilities. Though, Classify it into Non Current
and Current Liabilities.
Deferred Tax - IAS 12
Current Liabilities
•
•
•
•
•
Payables - IAS1
Lease Liabilities - (According To IFRS 16, The Ones Falling Due in the Next One Accounting Year should be
Disclosed under Current Liabilities.
Current Tax - IAS 12
Interest Payable
Bank Overdraft.
That's Statement of Financial Position, Analyzed And Torn into Pieces.
Statement of Changes in Equity (SOCIE)
IAS 1 says you should show us any movement that occurred in your Equity Structure with in the Year. SOCIE comprises
of the Following Components:
•
•
•
•
As a Result of Profit/Loss. Ie. Retained Earnings.
As a Result of Other Comprehensive Income Items. Eg. Revaluation Surpluses or Loss.
As a Result of Owner's Capacity. Eg. Issue of New Shares or Redemption of Shares, Payment of Dividend,
Share Premium, etc.
Retrospective Adjustment - IAS 8.
According to IAS 8, Any Prior Error which leads to Overstatement or Understatement of the Profit Figure must be
Adjusted retrospectively. So that we would not Mislead the Users. That's Why IAS1 Says company Should Show Us A
Comparative Statement for Immediate Previous Year. And This can only be done through SOCIE.
Also, Changes in Accounting Policy Must be Retrospectively Adjusted for Comparison Purpose.
Statement of Cashflows - IAS7
This has a Separate Standard on its own, because IAS1 says all accounts must be prepared on Accrual Basis, except this
Particular One. It Must be On Cash Basis. And The Rationale Behind this Statement is that all other 3 Statements, SFP,
SCI & SOCIE are Reporting PROFITABILITY. Which is based on Accrual Concepts.
But, Question Now Arises that How Much Out of the Profits have we got in Cash?
That's a LIQUIDITY Question. It is possible for An Organisation to Make Profit and Majority of the Profit is with
Debtors, not in their Hands. How then do they Pay Salaries, and Short term Obligations.? This Statement will assist Us
in that Sense.
IAS 7 Gave 3 Activities namely:
1. Operating Activities
2. Investing Activities
3. Financing Activities
For Operating Activities Alone, IAS7 allows for 2 Methods. Though, both will provide Same Result.
•
•
Direct Method
Indirect Method.
IAS 7 allows entities to use the Method of their Choice, but encourages Direct Method. However, Indirect Method is
Common in Practice. The Reason Why Entities Do not like using Direct Method is Because it Exposes Some
10
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Confidential Items Like Debtors & Creditors, which they would not like to Disclose to the General Public. That is A
Secret ó, Don't Tell Anyone I Told You.
Notes to The Account
This is not an Account, neither a Statement. It’s an Explanatory Note, which Explains Most of those Aggregated Figures
in the Statements will be Broken Down in Details. Also, Explanations as to why Some Items do not qualify for
Recognition in the Financial Statements.
The Notes are Made Up of the Following:
Disclosure of Significant Accounting Policies
This one explains Each Treatment in the Accounts Prepared, which Forms Accounting Policies. Every Accounting
Standard Chosen by A Company for treating a transaction is an Accounting Policy and IAS 8 Says There should be A
Consistency in This. We will do Much of This Sooner.
Key Measurement Assumption
An Entity must Disclose any key assumptions made concerning some Future Uncertain Items, like Future Interest Rates,
Future Changes in Salary or Price, etc.
Capital Disclosures
An Entity must Disclose Qualitative Information about what it Manages as Capital, and Quantitative Data of what they
also Manage as Capital.
The Topic Consists of 4 Standards, IAS1, IAS24, IAS34 & IFRS 8.
IAS 34 Interim Financial Reporting
Introduction
IAS1 Requires that Financial Statements should Be Produced at Least Annually. At the same time, many companies are
required by National Regulations to Produce Accounts on a Quarterly or Semi-Annually Basis. IAS34 Does not specify
the frequency of Interim Reporting, this is a matter of National Regulation Which Varies between Countries. What it
does is to Give Guidance on Its Preparation.
Form and Content of Interim Financial Statements
1.
2.
3.
4.
5.
A Condensed SFP.
A Condensed SCI.
A Condensed SOCIE.
A Condensed Cashflows Statement.
Selected Explanatory Notes.
Periods to Cover
•
For SFP : They Must Provide For Both The Current Period Under Review, not yet finished and A Comparative
Statements as at the End of Last Financial Year.
While
•
For Others, they Must Present Current Interim Statements and a Comparative Interim Statement For Last Year. Ie.
This Year Interim compared with Last Year Interim.
Recognition & Measurement Basis for Interim Reports
Same Measurement & Recognition Criteria Used for a Normal Account should be used Here as well. Except the
following Situation:
11
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
 Intangible Assets: A Development Cost recognised at the Interim Date, but do not meet up with Recognition
Criteria by the end of the Year Anymore, would be Expensed.
Interim Reporting In Nigeria
The Security And Exchange Commission as A Body regulating the Nigerian Stock Exchange gave the Following
Regulations regarding Interim Reports:
1. Public Quoted Companies must Comply with All IFRSs. Therefore, IAS34 Applies to them.
2. On that Note, they must prepare a Quarterly Report and file it with the Commission within 30Days of the End
of The Quarter.
3. This Must Be Accompanied by A Certification letter Signed By The Chief Executive Officer & Chief Financial
Officer.
Use of Estimates
Although, the interim Financial Statements should be reliable and relevant.
However, IAS34 states that Interim Accounts will rely heavily more on Estimates, rather than Actuals in the Case of
A Usual Annual Financial Statements.
IAS34 gave The Following Examples:
 Pensions: Company is not expected to Obtain An Actuarial Valuation for its Pension Liabilities at Interim Date.
The Standard Suggests that The Most Recent Valuation Should be Rolled Forward.
 Provisions: Same with that of Pension.
 Inventories: A Full Count of Inventory May not be Necessary at Interim Date.
IAS 24 - Related Party Disclosures
Introduction
Users of Financial Statements will normally expect that the financial statements reflect transactions that have taken
place on Normal commercial terms or at arm's length. In a group of companies, one entity might sell to another on more
favorable terms than it would sell to non related party. In this situation, the financial performance and position reported
by the financial statements would be misleading.
Objective of the standard
The objective of IAS 24 is to ensure that an entity's financial statements contain sufficient disclosures to draw user's
attention to the possibility that entity's financial position or profit or loss may have been affected by:
 Related parties relationship and
 Related party transactions.
This is just a disclosure standard as it does not require redrafting financial statements. Specified disclosure are required
of both instances.
Related Party
A party is related to another in any of the following circumstances:
•
•
•
•
•
•
The Party controls the entity or is controlled by it - Parent - Subsidiary Relationship
It has significant influence over the entity - Parent - Associates relationship.
It has joint control over the entity - Joint Subsidiary
Both are under common control - Fellow subsidiary relationship.
The Party is a joint venture with the other
The party is a member of key management personnel of the entity or its parent.
12
Corporate Reporting – for ICAN Students
•
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
The party is a close family member of any of the above.
Close Family members are those family members who may be expected to influence, or be influenced by that individual.
They include:
The Individual Partner, children and dependents.
Children or dependent of a Co partner.
According to IAS 24, the following parties are not related parties:






Two Venturers that simply share joint control over a joint venture business.
Providers of finance
Trade Union
Public Utilities
Government agencies and departments
Customers, suppliers, franchisors, distributors, or other agents with whom the entity transacts a significant
volume of business.
In establishing each possible related party relationship, the entity must look into the substance of the arrangement and
not merely its legal form.
Related Party Transactions
According to IAS 24, a related party transaction is a transfer of resources, services or obligations between related parties
whether a price is charged or not.
The following are examples of related parties:
•
•
•
•
•
•
•
•
•
Purchase or sale of goods
Purchases or sale of property
Rendering or receiving of services
Leases
Transfer of research and development
Finance aarrangements such as loans.
Provision of guarantees
Instangible property
Settlement of liability on behalf of another entity.
Disclosure Requirements
IAS 24 requires the following disclosures as notes to the financial statements.
✨ Whether or not transactions have taken place, an entity should disclose:
❖ The name of the entity's parent
❖ If different, the name of the ultimate controlling party.
✨ Where transactions have taken place between the related parties, irrespective of whether a price was charged or not.
The following should be disclosed:
❖ Nature of the transaction
❖ The amount of the transaction
❖ Outstanding balances and if there is any irrecoverable debt.
The above disclosure should be shown separately for each of the categories of related parties as outlined above.
13
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
In addition, IAS 24 requires disclosure of compensation to key management personnel, in total and for each of the
following categories:
•
•
•
•
•
Short term employment benefits
Post employment benefits - IAS 19
Other long term benefits
Termination benefits
Share based payments - IFRS 2
IFRS 8 - Operating segment
Scope of the standard
The standard applies only to quoted companies who operate in several different industries or markets or diversify their
operations across several geographical locations. A consequence of this is that companies are exposed to different rates
of profitability, different growth prospects and different amounts of risks for each separate segment of their operations.
Objective of the standard
IFRS 8 requires quoted companies to disclose information about their different operating segments in order to allow
users of financial statements gain a better understanding of the company's financial position and performance. The
rationale behind this is because without segment information, good performers among the company business may hide
the poor ones and the true position of the Financial Statements will not be seen.
Definition
IFRS 8 defines an operating segment as a component of an entity:
•
•
•
That engages in business activities from which it earns revenues and incurs expenses.
Whose operating results are regularly reviewed by the entity's chief operating decision maker. And
For which discrete financial information is available.
Not every segment of an entity is an operating segment. As the name implies, a segment that operates in business
activities of the organisation and then earns revenue and incurs profits. For example, a corporate head office may not
earn revenue and would probably not be an operating segment.
Aggregation of segments
Two or more operating segments may be aggregated into a single operating segment if they have similar economic
characteristics in the following respects:
➢
➢
➢
➢
➢
Nature of the products or services
Nature of production process
Classes of customers for their products
Methods of distribution
Regulatory environment
Quantitative threshold
An entity must report separate information about an operating segment that meets any of the following quantitative
thresholds:
▪
▪
▪
It's reported revenue (both external and intergovernmental sales) is 10% or more than the combined revenue of
other operating segments.
It's reported profit is 10% or more than the combined profit of all segments that did report a loss.
It's assets are 10% or more of the combined assets of all operating segments.
14
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Reportable Segments
An entity must reported separate information about each operating segment that:
➢ If it meets the definition of an operating segment
➢ Or aggregated with another segment
➢ Or exceeds the quantitative threshold.
Disclosure Requirements
A measure of profit or loss for each reportable segment
A Measure of total liabilities for each of them
Information about the following items since they contributed to the profit reported
✓
✓
✓
✓
✓
✓
Revenue from external customers
Revenue with other operating segments
Interest revenue
Interest Expense
Depreciation and amortisation
Income Tax expenses will
Chapter 4
Other Information in the Annual Report
What is Annual Reports? It is a Comprehensive Report of a Company's Activities throughout the Reporting Year.
Content in the Annual Report
This Contains:
1.
2.
3.
Numerical & Narrative Information.
Financial & Non-Financial Information.
Mandatory & Voluntary Disclosures.
Mandatory Disclosures are:
 Annual Accounts, eg. Statement of Financial Position, Statement of Comprehensive Income, Cashflows Statements,
Statement of Changes in Equity.
 Directors Report
 Corporate Governance Report.
Voluntary Disclosures are:
1. Social & Environmental Report.
2. CSR / Sustainability Report
3. Key Performance Indicators.
Reasons for Voluntary Disclosures
Question Arises, since the Disclosures are voluntary, why do companies chose to disclose such Reports?
The following Reasons call for it:
1. Companies can use it to Build Goodwill & Enhance Reputation.
2. It serves as a marketing & Public Relation Tool.
3. It Projects a Better Image of an Entity.
15
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
4. It Enhances the Level of Transparency.
5. Investors like to put their wealth into a Transparent Companies.
Limitation of Such Disclosures
1. It causes Information Overload.
2. Lack of Uniformity in the Disclosures since they are not regulated by Law or Standards.
3. They are Subjective, since the company can decide what to disclose & What not to disclose.
Corporate Governance Report
As required by the SEC, Annual Reports of all Quoted Companies must Contain a Corporate Governance Statements,
which contains the Company's:
Governance Structure, &
Policies & Practices To Stakeholders.
Contents of Corporate Governance Report.
1.
2.
3.
4.
5.
6.
7.
8.
Board Composition, Names of The Chairman, CEO & Non-Executive Directors.
Roles of the Board (Setting out matters reserved for the Board & the Ones Delegated to the Mgt).
Board Appointments Processes & Induction Training.
Board Meetings (Numbers of Meeting Held in a Year).
Committees of the Board (Names of Chairmen & Members).
Roles & Responsibilities of the Board Committee.
Risk Mgt Policies.
Code of Business Ethics
Management Commentary
A Narrative Explanation through the Eyes of the Management of how A Company Performed During the Year, covered
by the Financial Statements. It communicates financial Condition and Future Prospects of the Company.
Elements include:
1.
2.
3.
4.
5.
Nature of Business
Objectives & Strategies.
Resources, Risks & Relationships.
Results & Prospects.
Critical Performance Measures.
Risk Reporting
This is part of Corporate Governance Issues, Entities faces different kinds of risks, both Financial & Non- Financial.
Like I told you Guys from the Introduction to this Paper, that this paper pass beyond Reporting the Financial Aspect of
the Business alone, a lot of things are reported, that goes beyond Financial Reporting.
Components of Risk





Risk Agenda: Description & Benefits of Managing Risks
Risk Assessment: Evaluating & Identifying Risk
Risk Response: Controlling & Reducing Risk.
Risk Governance: Body Responsible for Risk Monitoring
Risk Communication: Communicating to the Company Generally.
In Nigeria, the SEC rules that:
1. The Board Must Establish A Risk Mgt Committee.
16
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
2. Every Company Must Include Risk Mgt as part of Its Policy.
3. Public Companies must disclose Strategies for Preventing Risks
Reasons for this:




Management can communicate it's plan better to Users.
There is Better Understanding of F. S for Better Decision.
It Makes Annual Reports More Explanatory to Users, who may find Figures not interesting.
It Explains how Non- Financial Factors have influenced the Figures presented in the FS.
Chapter 5
Beyond Financial Reporting
Introduction
As the Name of the Chapter Implies, what is Required of Accountants Nowadays Goes Beyond Financial Reporting or
Figures alone. A Lot of Reports are Required. Amongst Which are Treated In Chapter 4. Others are treated Here.
Corporate Social Responsibility
A Term Used to denote Such Responsibility a company should have towards society & The Environment it Operates.
It says A Company must be a Good Citizen in its Environment.
Areas It Covers:
1.
2.
3.
4.
5.
Business Ethics
Treatment of Employees
Respect for Human Rights.
Relationship with the Society
Sustaining the Environment.
Contents of Environmental Report
1.
2.
3.
4.
5.
Policies towards Environmental Issues.
Government Regulations towards Environmental Issues.
Whether the Company comply with it or not.
Key Environmental performance indicators.
Financial Information relating to Environmental Costs.
Contents of Social Report
1.
2.
3.
4.
5.
6.
Health And Safety Issues.
Number of Employees in the Company.
Employees Sick Leave.
Recruitment of Ethnic Minorities.
Recruitment of Disabled.
Recruitment of Women.
Sustainability Reporting
This Relates to CSR Reporting. And What This one is Telling is that Organisations should meet their Needs Today
without compromising the Needs of the Future Generations. The Environment Should be Preserved for the Benefit of
the Society At Large. Ie. They should Sustain the Environment.
The Way at which this is communicated to the public is called Sustainability Reporting. Although, it is a Voluntary
Disclosure, but some Countries & Stock Exchange Market made it Compulsory.
17
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Codes for This:
1. Global Reporting Initiative (GRI)
2. Sustainability Accounting Standards Board (SASB).
Read more from the Pack.
Integrated Reporting
A Framework Developed by International Integrated Reporting Council (IIRC) and supported by IFAC. The Idea behind
this is that Traditional Financial Reporting are no more meeting the capital allocation needs of Finance Providers of
the 21st Century.
The Following are the Limitations posed against Traditional Financial Reporting:
1.
2.
3.
4.
5.
It only reports Historical Performance.
It Ignores Core Capabilities & Competencies of the Coy.
It is based on too much Estimates & Subjective Judgements.
It attracts Information Overload.
It does not consider intangible assets like Intellectual Assets, human relationships, etc. Whereas, these assets
are important for value creation in the 21st Century.
As a Remedy to the Limitations Above, the introduction of Integrated Reporting came in.
Contents of Integrated Reporting
1.
2.
3.
4.
5.
6.
7.
8.
Integrated Reporting Focus More On Future Outlook of the Organisation.
Business Model
Opportunities
Risks.
Performance of the Entity.
Resources Allocation.
Corporate Governance.
Competitive Advantage.
You Can Convert those elements to Advantages of Integrated Reporting. It’s Just a Matter of Your Explanation Prowess.
Chapter 6
IAS 8, Accounting Estimates, Changing in Accounting Policies and
Errors
Introduction
As the Name of the Standard Implies, its a Combination of 3 Different Stuffs.
Accounting Estimates
Accounting Policies, and
Errors.
The Standard Gives a Clear Standard on how these Situations should be Managed in Respect to Preparation and
Presentation of Financial Statements, in Order to Make Sure That Users are not misled.
Another Important Thing we need to Note is that this Topic will be Useful Very well for Statement of Changes in
Equity, SOCIE. I Told u in the Last Lecture if u still recall.
18
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Accounting Policy
These are specific Principles, bases, conventions, rules, judgement and practices applied by an Entity in Preparing and
Presenting their Financial Statements.
Selection of Accounting Policies
How Do Companies select the Choice of Accounting Policy they feel like? It's Not Arbitrary at all.
The Following Procedures apply:
1. For Areas Covered By IFRS: If an Accounting Standard or Its Interpretation Applies to an Item in The FS., the
Accounting Policy is determined by mere applying the standard on it.
2. Areas not Covered By IFRS: In A Situation where there is no Specific Standard Applicable to an Item, or a
transaction In the Financial Statement, the Mgt of the Entity should Use Its JUDGEMENT to apply which Policy
is Suitable. In so far as the Information Meet the Qualitative Characteristics, such as:
• Relevancy
• Faithful Representation
• Reliability, and
It must also reflect the Economic Substance of the Transaction not the Legal Form.
Mgt Judgement will follow this Order before being applied as Accounting Policy:
1. The Mgt will Look for The Requirement of a Standard Dealing with Similar Issue
2. Then, if that one does not work, they apply the IASB Framework regarding Definition, Recognition and
Measurement of Elements in the FS.
Consistency of Accounting Policy
According to IAS8, the application of Accounting Policy in dealing with Similar Transactions must be Consistent over
time, and must not be changed anyhow.
Except if an Accounting Standard Permits Categorization of Items, for which Different Policies may be appropriate.
For Example: IAS16 allows the Use Of Cost or Revaluation Model for measuring PPE. An Entity can decide to Chose
Cost Model for One Class of Asset like Motor Vehicles and Chose Revaluation Model for Another Class of Asset like
Plants and Equipment.
Only that all Motor vehicles must always be reported Using Cost Model, while All P & M must Consistently Be Using
Revaluation Model.
Changes in Accounting Policies
IAS 8 requires consistency and consistent application of Accounting Policy, because a useful financial Information must
be Comparable over the Period. So, Changing Policies may mislead Users.
However, Accounting Policy can only be changed On 2 Occasions:
If and Only If:
 The Change is Required By An Accounting Standard (Probably A New Standard or An Old One Revised). Of which
In a Situation like this, New Standards usually come with Transitional Provisions, how it will be easy for Entity to
Migrate. But, in absence of that, we can as well apply Retrospective Approach
 Changing The Policy will result into More Reliable & Relevant Information. This One Will always Require
Retrospective Application.
19
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Note: According to IAS 8, applying an Accounting Policy to a New Type of Transaction, which does not occur
previously is Not a Change of Accounting Policy. Because, there is nothing that has already been Included Wrongly in
the Previous FS that need to be Compared With.
What Do We Mean by Retrospective Application of Changes in Accounting Policy?
Like I said up there, that when a change in Accounting Policy is not as a result of New Standard, which usually have
Transitional Provision, It should be Applied Retrospectively, by:
 Adjusting The Opening Balance for Each Item of the Equity Affected, and
 Continuously Applying that Policy To the Current Comparative Figures.
Limitation of Retrospective Application
At times, Retrospective Application might not be practicable in a situation. Either the specific period is not determined
or the cumulative effect is not determined. In this Case, we should Apply Prospective Approach.
How to Determine Whether There is A Change in Accounting Policy or Not
This is Very Important. Because a lot of Students Usually Confuse Accounting Policy with Accounting Estimates. The
Following Tips Will assist You to Identify Whenever there is A Change in Accounting Policy:
1. Recognition: In Which Statement An Item is to be Recognised. Capitalising It Into the SFP or Writing It off into
the SCI. Eg. IAS 23, Borrowing Cost. So, If a Company has been Capitalising An Item Over the Period, of which
the Treatment is Wrong, and he now wants to Start Expensing It, Its a Change in Accounting Policy.
And It's not as Easy as That. They can not just Apply it on the Present and Subsequent FS. They need to Go Back to
Previous F. S and Correct it through Statement of Changes in Equity. Because, Verily, an Item of Equity must have
been Affected significantly.
2. Measurement Issue: Ie. An Entity Has been using Cost Model for an Item before, then decide to Change to
Revaluation Model. IAS 16.
3. Presentation Issue: For Example, an Entity has been Classifying Cost As Cost of Sales before, then decide that its
not the Correct Classification. Now wants to start Classifying it as Administrative Expenses.
Disclosures of A Change
If Caused By A Standard, an Entity should disclose:
1. Title of the Standard or Interpretation.
2. Any Transitional Provision.
If Voluntary Change, the Company Must Disclose
1. The reason for the Change, and
General Disclosures
1.
2.
3.
4.
The Nature for the Change.
The Amount to be Adjusted.
Prior Year Figure Affected.
If Retrospective Adjustment not practicable, an Explanation on how it's Been Applied.
Accounting Estimates
These are management Judgements, made for an Item in the Financial Statements, when the item can not be measured
with Precision. IAS 8 allows Reasonable Estimates to be made concerning certain Items in the FS. Like:
•
Estimates of Bad Debts Debt.
20
Corporate Reporting – for ICAN Students
•
•
•
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Estimates of Useful Life of Asset.
The Most Appropriate Method of Depreciation.
Etc.
Note that Accounting Estimates are not Accounting Policies. Eg. Depreciation of an Asset is an Accounting Policy, but
the method to use is an Accounting Estimate.
Changes in Accounting Estimates
This is usually a change or an adjustment in the Carrying Amount of an Asset or a Liability, which can occur due to a
change in the Useful Life of the Asset or Method of Depreciation. Changes like these should be Applied Prospectively.
Ie. From that Year the change occurs, going forward to Subsequent Years. Not Prospectively like Accounting Policies.
Prior Period Errors
Errors are omissions from, and Misstatement in the Financial Statements Items that are not Material In Nature. Most of
those errors are related to Prior Year, a period after the Financial Statements have been Published.
Such Errors Could Be:
1.
2.
3.
4.
5.
Mathematical Errors.
Mistakes in applying Accounting Policies.
Oversights.
Misinterpretation of Facts.
Fraudulent Practices.
Correction of Errors
Any error that is Material should be corrected Retrospectively. The Same way with Accounting Policy.
IAS 10 - Events After Reporting Period
Definition
These are events, Favorable or Unfavorable, that Occur between End of the Reporting Period and the Date the Financial
Statements are authorised for Issue. It takes entities some Months to get the Annual Reports Ready to the Public or
Probably not yet approved by the Board. For Example, Let's Say A Company Closes Its Financial Year End in
December. But, but not yet Approved until March. Any Events between January & March is an EVENT After The
Reporting Period.
The Standard has 2 Major Objectives:
1. To Specify when a Company Should Adjust Its F.S. - Adjusting Events.
2. To Specify when a Company Should just give Mere Disclosure. - Non Adjusting Events.
Types of Event
1. Adjusting Events: Those Events which relate back to a Condition already existing as at the End of Reporting
Period.
2. Non Adjusting Events: These are those whose conditions only arise after the Year End.
Note: Application of this Particular Standard is different from that of IAS 8 " Correction of Past Year Errors". The One
we just finished. Under IAS 10, Accounts Have Not Been Published Yet. So, the Company can easily adjust their
Financial Statements, if It requires Adjustment, or disclose it in the FS., if it only requires Disclosure. But, in the Case
of Errors, IAS 8, Accounts for Last Year have been published already. So, What Companies Usually Do is to correct
the opening Figures in the SOCIE.
Dividends
21
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
IAS 10 also contains specific provisions about Proposed Dividends when they are declared after the Reporting Period.
Treatment of Each Categories
Adjusting Events - Compulsory Adjustment.
IAS 10 states that If A Company Discovers an Adjusting Event, it should update an earlier amount recognised in the
Financial Statement. Though, it occurred after the Reporting Period, but since the Accounts are not yet approved.
Examples of Adjusting Events are:
1. Settlement of a Court Case.
2. Discovery of fraud or error.
3. Information about making a provision for Bad/Irrecoverable Debt, against a trade Receivable earlier recognised in
the Book.
4. Information about Impairment* of an Asset.
5. Information about Write Down of an Inventory. Where NRV is less than Cost.
Non-Adjusting Event - Ordinary Disclosure.
IAS 10 says When Such Event arise, a company should only disclose them as a Note to the Account. Because though,
they are not Adjusting, but they could influence the economic Decision taken By Users. No Need to Update or Adjust
the Financial Statements.
Examples are:
1.
2.
3.
4.
Acquisition or Disposal of a Major Subsubsidiary.
A plan to discontinue a major Operation.
A plan to commence a Major Restructuring.
Destruction of A Major plant by Fire.
Chapter 7
Impact of Changes in Accounting Policies
Introduction
It is required that Financial Statements are fairly Presented by Showing The Truthfulness of Events & Transactions
therein. However in reality, this encompasses a range of different figures. This is due to the fact that:
 Alternative Accounting Policies can Produce Different Results.
 Application of Accounting Policies in accordance with IAS 8 is often based on Estimates & Judgements.
On this Note, Estimates & Judgments are Management Views and will reflect how figures are presented in the F.s. And
Profit Presented to Users.
Problems with this
•
•
It can lead to Creative Accounting, or
Loss of Comparability in the FS.
This is due to the Fact that some Transactions are not covered by IFRS, while some are equally very Complex, difficult
to device an Accounting Approach for them.
How to Reduce this Problem
1. By removing Choices of Accounting Policies.
2. By Providing Stringent Rules on Selection of Accounting Policies.
22
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
3. By Including a Firmer Guidance on Fair Value.
4. By Requiring Disclosures of Significant Accounting Policies, Judgements, Estimates, & Sources of Measurement
Uncertainty.
Creative Accounting
This is the use of aggressive, questionable Accounting Techniques to produce a desired Accounting Results.
Management Uses this to manipulate the View given in the Financial Statements while Complying with All Applicable
Standards. This is not illegal but can lead to Fraudulent Accounting Practices.
Techniques for Creative Accounting are:
1. Window Dressing: Entering into a Transaction just before the Year End and reverses it back after the Year End.
2. Profit Smoothening: By Recognising some Assets or Liabilities in Advance which does not meet the Definition,
and later release it to Income Statement. Eg. Provision.
3. Changing Accounting Policies & Estimates: Where Company sees it is favourable for them to do So. Eg. Changing
From Cost Model to Revaluation Model. Or changing method of Depreciation.
4. Capitalising Expenses not meeting recognition criteria of an Asset: IAS 38 says all Internally Generated Intangibles
should not be recognised except Development Expenditure. Eg. Advert Expenses, Marketing Expenses, Internally
Generated Brands and Customer List.
5. Aggressive Earnings Management: Recognising Revenue in advance or delaying recognition of expenses.
Earnings Management
As said earlier, it is a form of Creative Accounting which mislead users. It becomes a criminal offence when it's
aggressive in nature. This usually occur due to some Commercial Pressure Such as:
1.
2.
3.
4.
Desire to understate Profits in order to reduce Tax Liabilities.
Need to Ensure Compliance With Loan Covenants to Pacify bankers.
Regulatory Requirements (NSE Listing Requirements) to meet specific ratios.
Director's Bonus linked to Performance Measurement.
In Conclusion, Potential Chartered Accountants are required to be Watchful of the Recognition Criteria, Measurement
& Presentation of Elements of the Financial Statements. The Underlying Effect of this is that Some Key Performance
Ratios Like ROCE, EPS & Gearing Ratio will be affected.
Inventory - IAS 2
Definition
Inventory is defined as:
•
•
•
Assets held for Sale in the Ordinary Course of Business. Ie. Finished Goods for a Manufacturing Outlet or
Purchased For Retail Business.
Assets In the Production for Sale. Ie. "WIP" For A Manufacturers Only.
Assets in form of Materials or Supplies to be consumed in the Production Process. Eg. Raw Materials that are
directly used for Production.
Supplies: are Unidentifiable or Untraceable Substance Used for Production Goods. Eg. Petrol, Oil for Fueling The Plant
in A Manufacturing Setting.
Components of Inventories
23
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
For A Manufacturing Company:
•
•
•
Raw Materials & Supplies.
Work in Progress
Finished Goods
For A Trading Company:
•
Stock Purchased For Sale.
Cost of Inventory
IAS 2 Says Inventory should be Initially Recognised with the following 3 Cost Components:
1. Purchase Cost: Original Purchase Price, Import Duties, Transport Costs, Less Non Refundable Taxes.
2. Conversion Costs : This Consists of Direct Labour & Production Overheads.
3. Other Incidental Costs.
Net Realisable Value (NRV)
As the Name Implies, the Amount at which we can sell the Inventories in their Present State. This is Derived by:
Estimated Selling Price Xx
Less Selling Expenses (Xx)
Measurement or Valuation of Inventory
IAS 2 requires that Inventory Must be Measured in the FS Using the Lower of:
1. Cost (Historical Cost)
or
2. Net Realisable Value (NRV).
Explanation
1. When Using Cost, the Standard Says It can be done in 2 Ways:
Individual Assets: By Just Counting Individual Items of Inventory when they are Huge in Nature. Eg: Motor Vehicles,
Houses.
Cost Formula: When the Inventories are Similar or are too Many to Count. Eg. Bags of Cement, Bags of Flour, Drinks,
etc.
Under this, the Standard Allows Only 2 Methods of Stock Valuation. "FIFO & Weighted Average Method".
2. NRV & Write Down of Inventory
In An Ideal Scenario, Cost of Inventory Suppose to be Lower than NRV. But, in a situation Where NRV is Lower than
Cost, that means Inventory Lost its Value.
Then, we need to Write Down the Cost to the NRV, and any difference is recognised as Expense in the Income
Statement (Same Policy with Impairment Loss).
Reasons for Write Down
1. When Inventories are Damaged.
2. When Inventory becomes Obsolete.
3. When Selling Price Declined.
24
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Disclosure Requirements of IAS 2
1.
2.
3.
4.
5.
The Accounting Policy Adopted for Measurement.
Total Carrying Amount Of Inventories Classified appropriately into Categories (Eg. RM, F. G, WIP).
The Amount of Inventory carried at NRV.
The Amount of Inventory written down to NRV, and so recognised as Expense during the Year.
Details of any Circumstances that led to the Write down.
Impact of Inventory Valuation on Profit
Valuation of Inventory, and the Method used there on, has direct Effect on the Profit for the Year. Most Especially the
Closing Inventory. Any Increase in it will Increase the Net Profit of the Organisation.
IAS 16 - Property, Plant & Equipment
Introduction
This is a very Important Standard as far as Published Account is Concerned. It comes Up in every Question. However,
ICAN Can Separately test it as a Whole Question and Add Sauce in it.
Let me List Out the Highlights of what we have to Do Here:
✓
✓
✓
✓
✓
✓
✓
✓
Definition
Recognition
Cost Component
Measurement (Initial & Subsequent)
Depreciation
Revaluation
Disposal
Derecognition
Let's Take them One After Another.
Definition
IAS 16 Defines PPE as Tangible Assets that are:
•
•
Held For Use in the Production, Supply of Goods & Services, or Administrative Purposes. and
are expected to be use for More than One Accounting Period.
Breaking It Down Further
As the Name Implies, It is a Combination of Three Classes of Assets. Ie.
 Property: Land & Building.
 Plant: A Faction of the the Coy where Production Takes Place.
 Equipment: Fixtures & Fittings, Computers, Motor Vehicles, etc.
Let Me Take an Example of Property to Explain the Definition Better
•
•
•
Building Used for Factory Purpose, or Offices or Selling Points. These are accounted for using IAS 16 as Defined
Earlier.
Building used for Rental to others, while the Company is not using it at all. That's An Investment Property regulated
by IAS 40.
Buildings Built in Bulk for Resale Purposes. For an organisation dealing in Property & Development Management.
These are Inventories, regulated by IAS 2.
25
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Recognition
This answers the Question whether An Item of PPE should be recognised In the SFP or not. Before an item of PPE
being recognised in the FS, it must fulfil the Normal 2 Recognition Criteria:
1. Future Economic Benefit
2. Reliable Measurement.
Cost Components of PPE
Initial Cost of a PPE Comprises of the Following:
1. Purchase Expenses
2. Directly Attributable Expenses(If Any)
3. Cost of Dismantling (If Any)
Let's Break it Down Further:
Purchases Expenses is made up of:
•
•
•
Original Cost of the Item
Import Duties/Non Refundable Taxes
Less: Any Trade Discount/Rebate.
Directly Attributable Cost Comprises of:
•
•
•
•
•
•
•
Delivery Cost
Borrowing Cost(During Construction Phase, IAS23)
Cost of Site Preparation
Installation & Assembly Cost
Professional Fees directly attributable to the Purchase.
If Self Constructed, own employees costs arising from construction & installation.
Testing Costs to assess whether the asset is functioning well or not. (Less Sales Proceed of Items Produced
during the Testing Phase).
Cost of Dismantling or Decommissioning the Project at the End of It's Life: To be Discounted Back to Present Value,
except if the Question is silent about it or it Says Ignore) - IAS 37 Provision.
According to IAS 16, the Following Costs are not Part of Initial Cost:
1. Cost of staff training.
2. Administrative Costs.
3. Cost of introducing new Products, eg. Advertising & Promotion.
Subsequent Expenditure Incurred on PPE
This is giving us a Guidance Concerning such Expenses that are not Directly or Initially incurred in the Purchase or
construction of The New Asset Per Se. But, spent on it as an additional cost in the Subsequent Year.
IAS 16 Says that Expenditures incurred on PPE After its being initially recognised & measured can be classified
subsequently as:
•
Revenue Expenditure: Expenditure spent in order to maintain or service the Non Current Asset. Eg. Roofing,
Painting, etc. Such Expenditure should be written off Into the Income Statement as Usual Expenses.
26
Corporate Reporting – for ICAN Students
•
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Capital Expenditure: They are spent to Improve, Upgrade, Expand the Value of the asset or extend its Useful
Life. Such Expenses are Capitalised to the Statement of Financial Position, added to the Original Cost in the
SFP.
Measurement of PPE
IAS 16 says an Item of PPE can be measured :
Initially at Cost, and
Subsequently at Cost or Revaluad Amount.
Let's Take them One After Another.
1. Cost Model:
Cost
XX
Less: Accumulated Depreciation
(Xx)
Less: Accumulated Impairment Losses (Xx)
3. Revaluation Model:
Using this Model, An Item of PPE is Carried at at Revalued Amount. Ie.
Fair Value
Xx
Less: Accumulated Depreciation
(Xx)
Less: Accumulated Impairment Losses (Xx)
Any of the Model an Organisation uses forms an Accounting Policy, therefore, they must be Consistent with it. However,
different model can be used for different classes of Assets. Eg. Cost Model for Motor Vehicles, Revaluation Model for
Property. We treated this Earlier, under IAS 8.
We Have Some Terminologies we need to look at in that Previous Stuff.
Terminologies like:
•
•
•
Fair Value
Impairment
Depreciation
We shall treat them One After Another. Let's Take Depreciation 1st.
Depreciation of PPE
This is a Systematic Allocation of Depreciable Amount of an Asset over its Useful Life. There are some Key Note
Words there.
1. Depreciable Amount = Cost Less Residual Value.
2. Useful Life Can be:
• ⚫Number of Years as asset Stayed before being ineffective any more. Or
• ⚫Number of Production obtainable from it.
 Carrying Amount: The Amount at which an asset is recognised after deducting Accumulated Depreciation &
Impairment Losses.
 Commencement of Depreciation: We Begin to charge Depreciation at a Point the Asset is Available for Use.
Even if not actually used. Even when an asset is Idle, Depreciation continues.
27
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
 Cessation of Depreciation: We stop charging Depreciation on an Asset from a point it is derecognised or classified
as Held for Sale.
 Land & Buildings: They are Separate 2 Assets, even if acquired together. For Depreciation purpose, we should
split them & Calculate Depreciation on Building only. Because Land do not Depreciate.
 Review of Useful Life: IAS 16 requires both Useful Life & Carry Amount of an Asset to be reviewed every year
end & Depreciation will be based on The Remaining Useful Life. This Usually Arises when as asset is Revalued or
Impaired.
 Review of Depreciation Method: Only 2 Methods are widely Used. Straight Line Method & Reducing Balance
Method. A Company is allowed to change its Method of Depreciation. Method of Depreciation is An Accounting
Estimate, not An Accounting Policy.
Revaluation of PPE
As Said Earlier, IAS 16 allows an asset to be subsequently measured at cost or Revaluation Model.




What the Standard Says is that At every year end, an asset should be revalued.
By comparing the Revalued Amount to the Carrying Amount, it may lead to Revaluation Surplus or Deficit.
Revaluation Surplus is recognised in the Other Comprehensive Income & not in P/L.
It is Transferred into Revaluation Reserve Account separately and not Posted to Retained Earnings therefore not
Distributable as Dividend, Until When The Asset is Subsequently Disposed off. Then, An Entity can now Realise
It.
 However, when there is A Revaluation Deficit or Impairment Loss in subsequent periods, IAS 16 Says We Should
offset it from the Previous Revaluation Surplus. That's why the Standard Says we should not Realise it As Retained
Earning Yet. Until the asset it sold. Because, so far the asset is still in use, there is Every Possibility that its Value
Reduces.
 Mostly, Revaluation alters the Useful Life of the Asset. Therefore, Depreciation should be based on the Revalued
Amount.
 Lastly, Revaluation Might Cause Excess Depreciation due to the changes in the Depreciation earlier charged using
Historical Cost & that of the Revalued Amount.
IAS 40 Investment Property
Outline
•
•
•
•
•
•
•
•
Definition
Recognition
Measurement
Why Separate Standard
Revaluation & Other Provision
Disposal of Investment Property
Transfer of Investment Property
Disclosure Requirements
Definition
Investment Properties are Properties (ie. Land or Building or Both, or Part of a Building) held to earn Rentals or Capital
Appreciation, or Both. The Property could be Held by Owner or a Lessee under Operating/Finance Lease.
Let me Break it down further. As the Name Implies:
 Investment: It is expected to generate Wealth to the Entity, through Capital Appreciation. Ie. It might not be the
Ordinary Business Activity of the Entity, its a Secondary Source. That's the Idea behind Every Investment.
 Property: Instead of now investing the Surplus Cash in some Shares or Other Marketable Instruments, the
Company Decides to invest in Tangible Properties like Land and/or Building.
28
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
So, the Investment Property Stands in between:
PPE - IAS 16, and
Investments - IFRS 9
Why Separate Standard from PPE?
1. Other Properties are Said to be used by Owner Itself, while Investment Properties are Said to be Used by other
Persons.
2. Investment Property Primarily Generate Large Cahsflows of Revenue to the Entity Unlike Properties in PPE.
Recognition Criteria
The Same General Recognition Criteria with that of IAS 16, PPE.
 Flow of Future Economic Benefit.
 Reliable Measurement.
Only that this one must not be Used by the Owners.
Measurement
 Initial Measurement: All the Same Cost Components in IAS 16, applies here. It should be recognised @ Cost, as
at the Time of Purchase.
 Subsequent Measurement: And It should Subsequently be Measured at Cost or Revalued Amount. Same way
with that of IAS 16, but some slight differences.
Cost Model
Same way with that of IAS 16, where we measure it at Historical Cost and the Non-Land Element is Depreciated &
Impaired.
Cost
xx
Less: Accumulated Depreciation
(xx)
Less Accumulated Impairment Loss (Xx)
Revaluation Model
This treatment to this is different to that of IAS 16, PPE. Investment Properties must be Revalued every year end and
that's the Value to be Carried to your SFP. However, Any Gain/Loss upon Revaluation should be recognised
immediately in the Income Statement, not in the Other Comprehensive Income Side like that of PPE. Ie. Revaluation
Gain is Recognised as Income Straight Away, while Revaluation Loss is recognised as Expense thereon. Also, No
Depreciation for Revaluation Model of Investment Property.
Opening Balance
Xx
Addition (If Any)
xx
Disposal (If Any)
(Xx)
Revaluation Gain/Loss xx/(Xx)
Other Pronouncements of IAS 40
•
•
IAS 40 specifically said that Cost Model should be used Only if the Fair Value can not be Measured Reliably.
Irrespective of which Model you are using, whether Cost or Revaluation, all Investment Properties must be Fair
Valued and the Fair Value must be disclosed in the Book.
29
Corporate Reporting – for ICAN Students
•
•
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
The Reason Being that for Investment Property, its the Fair Value that's More Important, and not Depreciable
Amount, like PPE. Amount it could be Sold at Any Point in Time.
Although, IAS 40 encourages Revaluation Model, but allows A Choice of Accounting Treatment for 2 Reasons:
a. So that Preparers of F. S can Have Enough time to gain Experience in the Use of Fair Value.
b. To allow less developed countries with less Valuation Professionals and Property markets to Mature.
Transfer or Reclassification of Investment Property
Properties can be reclassified as Investment Properties or stopped being Classified as Investment Property, as the Case
May be, when there is A Change in Use.
Examples are:
1.
2.
3.
4.
Transfer from Owner Occupied to Investment Property = If the Owner Stop Using It.
Reclassified from being An Investment Property to Owner Occupied = If the Owner Starts Using It.
Transfer from Investment Property to Inventory = When the Owner wishes to sell it Together with Other Products.
Transfer from Inventory to Investment Property = When the Owner Starts Leasing it out as Operating Lease.
Disposal of Investment Property
Any Gain or loss upon Disposal is recognised in the the Income Statement, same way with IAS 16, PPE.
Disclosure Requirements
All Disclosures of IAS 16 applies Here as well, with the following additional disclosures:
▪
▪
▪
▪
▪
Rental Income/Expenses
Their Fair Value
Method of Valuation Used
Information about the Independent Valuer.
Any Transfer or Reclassification during the Year.
That's all About the Standard.
IAS 23 - Borrowing Cost
Provision of the Standard
Any Interest on Loan Paid during the period an Asset is being Constructed should be Capitalised together with the
Original Cost of the Asset, in the SFP.
➢
➢
Such Loan must have been Contracted for the Purpose of that Asset and not for Sth Else.
The Asset must be a Qualifying Asset. Ie, that asset that takes substantial period of time before it gets ready for
Use. Mostly, Self Constructed Assets.
o
o
o
o
o
Commencement of Capitalisation: When assets Starts to be constructed and borrowing costs are being
Incurred.
Suspension of Capitalisation: IAS 23 says that Capitalisation must be Suspended when there is an Extended
Break in the Construction Activity. Within that period, interest paid Should not be Capitalised.
Cessation of Capitalisation: Capitalisation should stop Once The Asset is Completed and ready for Use (Not
when they Start Using It).
Any Interest Received from Reinvestment of the Borrowed Fund, should be set off the Interest Paid.
Specific Borrowings: Any Borrowing that is Specific to the acquisition of those assets, rate to apply is the
Original Interest Rate of the Borrowing.
30
Corporate Reporting – for ICAN Students
o
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
General Borrowings: If there are Number of Borrowings the Company Made and they now take from the Pool
of Funds to finance the asset, the Question is What Rate is to be Used for Capitalisation Purpose? The Rate to
be used is Called "Capitalisation Rate". And it is Derived by Dividing the Interest with the Capital Amount.
Examinable Questions on IAS 23 can be so Confusing, You can study them with past questions.
Government Grants - IAS 20
Government Grants are Financial Assistance issued to Corporate Firms in order to assist them pursue a Course of
Action, which are deemed to be Socially or Economically Desirable.
Recognition
IAS 20 says Government Grants be recognised if there is a reasonable assurance that:
The Grant will be Received
The Entity will comply with Any Conditions attached to it.
Types of Grants
1. Income Related Grant: This can be treated in 2 Ways. Ie
▪ Include it as Other Income in the P/L Statement, or
▪ Deduct it from any related Expense.
2. Asset Related Grant: Those ones granted for Capital Projects. They can be treated in two Methods as well.
▪ Deduct the Grant from the Cost of the Asset, then Depreciate the Net Amount.
▪ Treat it as Deferred Income in the SFP, and gradually release it into the Income Statement over the Useful Life
of the Asset. Though, The Deferred Income be splitted into Current & Non-Current Liabilities.
Study the Examples in the Pack.
IAS 12 - Income Taxes
Introduction
We need to Understand that Accounting Standards and Principles are different from Tax Laws. The Way Financial
Accountants treat transactions or Items is different from how the Tax Authority treat it. Therefore, the Accounting Profit
arrived at by A Financial Accountant needs to be Adjusted to arrive at the Taxable Profit.
Format for Taxable Profit
Study it from the Pack and take the Example there on. However, it’s the same format we knew from our knowledge of
companies income tax and ascertainment of profits.
Provisional Tax Payment
When Financial Statements are prepared, the tax charged to the Income Statement is likely to be An Estimate, because
by the year end, tax computation will be done based on what the actual tax payment should be taken into consideration
any necessary adjustment as the acts permits. This tax paid could be different from the One Estimated in the Book. And
it can lead to Over estimation or Under Estimation of the Previous year tax and needs to be adjusted in the Current
Year.
Adjustments
1. Under-Estimation - Add it to the Current Tax
2. Over Estimation
-
Deduct it from the Current Tax
Categories of Taxes
31
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
IAS 12 identifies 2 Categories of Taxes:
•
Current Tax: Actual Tax Paid or payable for that Accounting Year. This one does not have much
Complications. Note that not all the time tax becomes payable. It could be recoverable some times when the
have paid more than actual in the previous period.
•
Deferred Tax: This is the Emphasis of IAS 12, otherwise the Standard would have become Silent.
Deferred Tax
As the name implies, these are not paid immediately but deferred as a result of Differences between Accounting Profit
& Taxable Profit (Timing Differences) or as a result of differences between the Carrying Amount & Tax Written Down
Value of Asset or liability (Temporary Differences).
Timing Differences: Differences as a result of timing of when items are treated in the Income Statement and when they
are assessable to Tax. Ie. The Difference will occur truly in the tax Computation, but they are not totally abrogated.
What this then postulates is that in the longrun, the end result will be the same. The company will still enjoy the benefit,
but the timing is what is bring issues.
Temporary differences: differences between the carrying amount of an asset or liability in the statement of financial
position and its tax base, i.e. its value for tax accounting purposes. Temporary differences may be either:
• taxable temporary difference, or
• deductible temporary difference
Typical examples are:
•
•
Depreciable Assets
Fair valuation of investment property
Provisions for impairment of receivables (or Bad debts provision)
Fair value movements on financial assets
Revaluation Gain/Loss of Non-Current Assets
Stock Valuation, etc.
Unabsorbed Capital Allowances carried forward
Unutilized Tax Losses carried forward
Unrealized exchange gain/losses carried forward (asset)
Unrealized re-measurement gain
Retirement benefit provision
•
•
•
•
•
•
•
•
•
Each one will be considered separately
Depreciable PPE
This gives rise to Temporary differences and in turn result to deferred tax assets / liabilities:
➢
Depreciation for tax purposes (called “capital allowances”) is calculated at specific rates as determined by
the Act.
➢ These rates may be different from the accounting rates, thus giving rise to a temporary difference. Ie. on
yearly basis, the carrying amount and the tax written down value will be different from one another.
➢ The difference is temporary because, over the course of the asset’s lifetime, the aggregate accounting
depreciation and aggregate tax depreciation (capital allowance) charges will converge towards each other
until both result in a fully depreciated asset.
32
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
➢
In calculating the current tax charge, the accounting depreciation is added back, and the capital allowances
are taken as a charge against profits.
➢ Deferred tax is provided for at 35% on the resultant temporary difference.
➢
Similarly, when an item of PPE is disposed:
✓
✓
the accounting profit/loss on disposal is added back to accounting profit
tax profit/loss (“balancing charge/allowance”) is taken instead.
Illustration: Beginning of Year 1, a Company purchased laptop computers costing N6,000. Accounting depreciation
rate is 33.3% capital allowances rate is 25%.
Accounting depreciation is N2,000 p.a. with the asset being fully depreciated at the end of Year 3. Capital allowances
are N1,500 p.a. with the asset being fully depreciated at end of Year 4. The Company made an accounting profit before
tax of N20,000 p.a.
Accounting
Tax
Difference
Purchase of asset
6,000
6,000
–
Depreciation charge at 33.3% / 25%
(2,000)
(1,500)
(500)
Accounting NBV / tax WDV at end of year
4,000
4,500
(500)
Depreciation charge at 33.3% / 25%
(2,000)
(1,500)
(500)
Accounting NBV / tax WDV at end of year
2,000
3,000
(1,000)
(2,000)
(1,500)
(500)
-
1,500
(1,500)
Depreciation charge at 0% / 25%
-
(1,500)
1,500
Accounting NBV / tax WDV at end of year
-
-
Year 1
Year 2
Year 3
Depreciation charge at 33.3% / 25%
Accounting NBV / tax WDV at end of year
Year 4
-
• The current tax charge will be as follows:
Year 1
Year 2
Year 3
Year 4
Total
Accounting profit
20,000
20,000
20,000
20,000
80,000
Add back: Accounting Depreciation
2,000
2,000
2,000
-
6,000
Less: capital allowances
(1,500)
(1,500)
(1,500)
(1,500)
(6,000)
Taxable profit
20,500
20,500
20,500
18,500
80,000
Current tax @ 35%
7,175
7,175
7,175
6,475
28,000
Current tax as a % of profit
35.9%
35.9%
35.9%
32.4%
35.0%
Year 1
Year 2
Year 3
Year 4
Total
4,000
2,000
-
-
The deferred tax (credit) / charge will be as follows:
Accounting Net Book Value
33
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Tax Written down value
4,500
3,000
1,500
-
-
Temporary Differences
(500)
(1,500)
(1,500)
-
-
Movement in the temporary Differences
(500)
(500)
(500)
1,500
-
Deferred tax credit/charge @ 35%
(175)
(175)
(175)
525
-
Year 1
Year 2
Year 3
Year 4
Total
Accounting profit
20,000
20,000
20,000
20,000
80,000
Current tax charge @ 35%
7,175
7,175
7,175
6,475
28,000
Deferred tax credit/charge @ 35%
(175)
(175)
(175)
525
-
Actual Tax Expense
7000
7000
7000
7000
-
Actual tax as a % of profit
35%
35%
35%
35%
35%
The effect of recognizing deferred tax is as follows:
Note: In a situation where both depreciation and capital allowance rates are the same, there will be no deferred tax
implication just because there will be timing differences because the aggregate accounting depreciation and aggregate
tax depreciation (capital allowance) charges will be fully enjoyed the same time. This also applies even if the carrying
amount is different from the tax base.
In a situation of asset disposal, the following illustration will work.
Illustration 2: In the beginning of Year 1, a company purchased electronic equipment at a cost of N8,000. Accounting
depreciation rate is 33.3% while rate of capital allowances is 25%.
In Year 1, Accounting depreciation is N2,667, Capital allowances are N2,000.
In Year 2, Company disposes of the asset at the beginning of the year for proceeds of N5,000.
The Company made an accounting profit before tax of N10,000 p.a.
Accounting
Tax
Difference
Purchase of asset
8,000
8,000
–
Depreciation / Capital All at 33.3% / 25%
(2,667)
(2,000)
(667)
Accounting NBV / tax WDV at end of year
5,333
6000
(667)
Proceeds
(5,000)
(5,000)
-
Loss on Disposal/Balancing allowance
(333)
(1,000)
(667)
Depreciation / Capital All at 33.3% / 25%
(2,667)
(2,000)
(667)
Loss on Disposal/Balancing allowance
(333)
(1,000)
(667)
Aggregate Impacts on results
(3,000)
(3,000)
-
Year 1
Year 2
Total Impacts on results
34
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Provisions for impairment of receivables (or Bad debts provision)
Accounting Principles allow for a recognition of provision of bad debts or impairment of receivables which is deducted
as expense in the Income Statement. However, bad debts are only deductible for current tax purposes when they are
actually written off. This creates a difference in accounting and taxable profits, thus giving rise to a temporary
difference.
Illustration: In Year 1, a company made an accounting profit of N100,000 after creating provision of N10,000 against
impairment of an overdue receivable. In Year 2, the overdue debtor has gone into liquidation, and the Company will
only receive the N1,000 of the amount owed to it. Company X therefore releases the provision (credit to profit or loss)
of €10,000 that it created in Year 1 and writes off the bad debt of €9,000 (debit to profit or loss).
Solution
Year 1
Profit before mvmt in provision
110,000
110,000
Mvmt in provision for impairment
(10,000)
–
Accounting profit / Taxable profit
100,000
110,000
Profit before mvmt in provision
79,000
79,000
Mvmt in provision for impairment
10,000
–
Impairment charge
(9,000)
(9,000)
Accounting profit / Taxable profit
80,000
70,000
Aggregate profit
180,000
180,000
Year 2
Key Note: The movement in the provision is disallowed for tax accounting. Financial accounting principles allow it
only for it to crsytallise in the 2nd year. The Provision was eliminated thereby resulting into same aggregate profit in
the end.
The current tax charge will be:
Year 1
Year 2
Total
Accounting profit
100,000
80,000
180,000
Movement in provision for impairment
10,000
(10,000)
–
Taxable profit
110,000
70,000
180,000
Current tax charge @ 35%
38,500
24,500
63,000
Current tax charge as a % of Accounting Profit 38.5%
30.6%
35.0%
Comments: The provision gives rise to a deductible temporary difference, i.e. a deferred tax asset . The difference is
temporary because the provision will be allowed for current tax purposes at a later stage, i.e. when the loss materializes
or crystalizes. See below:
35
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
The Deferred tax charge will be:
Year 1
Year 2
Total
Movement in provision for impairment
10,000
(10,000)
-
Deferred Tax Credit/Charge @ 35%
(3,500)
3,500
-
The effect of recognizing deferred tax is as follows:
Year 1
Year 2
Total
Accounting profit
100,000
80,000
180,000
Current tax charge @ 35%
38,500
24,500
63,000
Deferred Tax Credit/Charge @ 35%
(3,500)
3,500
-
Actual Tax Expense
35,000
28,000
63,000
Actual Tax Expense as a % of Accounting Profit 35.0%
35.0%
35.0%
Fair valuation of investment property
When investment property is fair valued, besides taking the movement in fair value of the investment property in profit
or loss, we should also adjust for the tax liability that would be incurred on its disposal. The tax liability may vary, in
accordance with the local tax legislation.
The deferred tax liability on investment property follows the way an eventual disposal would be charged to current tax.
Current tax would be charged as follows:
• if acquired prior to 1 January 2004: 10% of the proceeds on sale
• If acquired on or after 1 January 2004: 8% of the proceeds on sale
Example: Company G acquired investment property in 2002. Carrying amount at commencement of current year is
N240,000, being the value determined from a valuation carried out in the previous year. At the end of the year, the fair
value is established at N260,000 - fair value gain, credited to profit or loss, is therefore N20,000. Deferred tax will be
charged to profit or loss @ 10% of the fair value gain of N20,000, i.e. N2,000. The deferred tax liability, which stood
at N24,000 at the commencement of the current year (i.e. 10% of previous fair value of N240,000) will now increase to
N26,000.
Property Value
Deferred Tax
Balance at Jan 1
240,000
24,000
Fair Value increase during the year
20,000
2,000
Balance at Dec 31
260,000
26,000
Treatment of Deferred Tax
Deferred Tax arising as a result of Items that belong to the Normal Activity of the Business are treated in the Profit/Loss
Account. Eg. Depreciation. While for Extra Ordinary Items, deferred tax are treated in the Other Comprehensive Income
Statement.
Also, deferred tax can lead into Asset or Liability.
Carrying Amount > Tax Base = D. T Liability.
36
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Carrying Amount < Tax Base = D. T. Asset.
1. Deferred tax liabilities - The amounts of income taxes payable in future periods in respect of taxable temporary
differences. Eg. An entity recognises an unrealised gain of 20 on fair valuation of a financial investment, with the gain
only becoming taxable upon an eventual disposal of the investment.
2. Deferred tax assets - The amounts of income taxes recoverable in future periods in respect of:
-
deductible temporary differences,
-
the carryforward of unused tax losses, and
-
the carryforward of unused tax credits.
IAS 36 - Impairment
Definition
A reduction in the Recoverable Amount of Non-Current Asset (Or Goodwill) below its Recoverable Amount.
Impairment = Recoverable Amount < Carrying Amount
Ie. Impairment Loss only arises when Recoverable Amount is Less than Carrying Amount of an asset. When
Recoverable Amount is Higher than Carrying Amount, there is no Impairment.
Recoverable Amount: Higher of:
▪
▪
Fair Value less Cost to Sell,
or
Value in use (Present Value of the Future Cashflows). That is, all the Future Cash flows of an Asset should be
discounted using appropriate Discounting Factor.
Testing for Impairment
IAS 36 requires that Entities should carry out An Impairment Test on Non-Current Assets, Only if there is an Indication
For Impairment arise. However, the Following assets Must be reviewed for Impairment at least Once in Year, even
when there is no Indicator For Impairment:
1. Goodwill acquired in a Business Combination.
2. An Intangible Asset with an Indefinite Useful Life.
Impairment Indicators
The following factors will indicate whether an asset should undergo Impairment Test or Not:
A. External Indicators: Factors beyond the Control of the Entity. Such Factors are:
▪
▪
▪
▪
Fall in the Mkt Value of the Asset.
Significant Changes in Technology, Market, Regulatory Environment, which has adverse effect on it.
Increase in Interest Rate, affecting the asset value.
Any Government Policy affecting the Usage of the Asset.
A Very Good Example is the Ban on Okada & Keke Drivers in Lagos State. It will affect the Recoverable Amount of
Motorcycles & Tricycles.
B. Internal Indicators
▪
▪
Reduction in the expected useful life.
Loss of Key Operators of the Business.
37
Corporate Reporting – for ICAN Students
▪
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Major Reorganisation in the Business.
Treatment of Impairment Loss
The Same way we treat Write Down of Inventory, flash back to IAS 2. Each time the Carrying Amount is Higher than
Recoverable Amount, we write down the value of the Asset to the Recoverable Amount, and Write off the Impairment
Loss to the Income Statement.
However, If there is any Previous Revaluation Surplus for that particular asset, we use the surplus to relieve the
Impairment. And if we flash back to IAS 16, Revaluation Surplus are usually Posted to Other Comprehensive Income
(OCI). That means, in Such Scenario, Impairment would be posted to OCI, to reduce the Amount there, and if the
Amount of Impairment Swallows the Amount of Revaluation, the remainder will be posted to Statement of P/L.
Cash Generating Units (CGUs)
IAS 36 defines it as a Smallest Identifiable Group of Assets that generates Cash Inflows that are largely independent of
the other Assets or Group of Assets. The idea behind this is that it is not always possible to calculate the Recoverable
Amount of Individual Assets.
The Procedure is to Calculate the Impairment, Eliminate Goodwill first, then allocate the remaining Impairment to other
Non-Current Assets using their Proportion.
IAS 38 - Intangible Assets
Definition
These are identifiable, non-monetary Assets without Physical Substance.
Breaking down the Definition
•
•
It Must first meet the Definition of an Asset as given by the IASB framework.
Identifiable: We said this is intangible, and IAS 38 said it must be identifiable. This means it must be:
✓ Separable, Ie. Sold separately from the Company.
✓ Arising from Contractual or Other Legal Rights.
Types of Intangible Assets
Intangible Assets can arise from one of the following:
1.
2.
3.
4.
5.
Separate Acquisition.
Internally Generated.
Acquired through Business Combination.
Exchanged for another Asset.
Given by way of Government Grant.
Each of them has Its own Separate Measurement & Recognition Criteria. Let's take them one after Another.
Separate Acquisition
▪
▪
Recognition: When it fulfils the 2 General Recognition Criteria of Probability of future Cashflows and Reliable
Measurement.
Cost Guidance: Cost Comprises of Purchase Cost Plus Any Directly Attributable Cost.
Eg. If An Entity Buys Patent Right, or Copy right, or License to Produce a Product, It's Treatment is just as if the Entity
is buying any other Asset .
38
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Exchange Transaction
Cost Guidance: When an Entity acquires an intangible asset in Exchange or Part Exchange for Another Intangible Asset,
the Cost is measured at Fair Value, because there is No Purchase Cost.
By way of Government Grant – IAS 20
Where Government gives a Licence to operate Radio or Television Station, Import Licence, etc for free, they are said
to be by a way of Grants. The Question is how do we recognise them in the Book, because we did not Pay Government
for That. IAS 20, Government Grants allows them to be recorded at Fair Value. Thank God we just did this Last Week.
Acquired through Business Combination – IFRS 3
A Very Good Example of this is Our Usual Friend in Group Accounts, Goodwill, and IFRS 3 Specifically says it should
be recognised in the Book as Separate Asset. It Must not be Amortised, because it has Infinite Useful Life, but to be
Impaired on Yearly Basis.
Internally Generated
This is An Intangible created by the company through its Efforts. IAS 38 specifically says Internally Generated
Intangibles should not be recognised in the Book, with the exception of Development Cost. Any other Intangible Asset
generated internally, must be written off into the Income Statement.
Examples are:
▪
▪
▪
-Internally Generated Goodwill
-Internally Generated Brands
-Internally Generated Customer List. Etc.
All the above must not be recognised as Asset.
Research & Development – IAS 38
IAS 38 says Research Expenses should be Written Off to the Income Statement, but Development Expenditure should
be Capitalised, ie. Recognised as Intangible Asset, only if Certain Conditions are met. The Conditions are:
1.
2.
3.
4.
5.
6.
Probability that it will generate Future Economic Benefits.
If the Cost arising to the Development can be measured Reliably.
The Company must have the Intention to Complete the Development.
The Company must have the Technical Feasibility to complete it.
The Company must have Intention to Use or sell it.
The Company must possess Adequate Technical, financial and other resources to complete, use or sell it.
Subsequent Measurement
Intangibles are initially measured at cost and subsequently measured at Cost or Fair Value. The Same Way with IAS
16, Only that Market for Valuation of Intangibles is rare in Practice.
Amortisation of Intangibles
Depreciation is to Tangible Assets, while Amortisation is to Intangibles. An entity should determine whether Useful
Life of An Intangible Asset is finite or infinite.
▪
▪
Intangibles with Finite Useful Life: It Should be amortised over the Useful Life.
The Ones with Infinite Life: Not amortised, rather Impaired on regular Basis. Eg. Goodwill.
Factors to be Considered in determining the Useful Life of an Intangible Asset
1. Expected Usage of the Asset.
39
Corporate Reporting – for ICAN Students
2.
3.
4.
5.
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Life Cycle of the Asset.
Technological Obsolescence.
Output derived from the Asset.
Whether its Useful Life depends on the Useful Life of another Asset.
Disposal of Intangibles
The Same Provision with IAS 16.
Disclosure Requirements
The Same Disclosure Requirements with IAS 16, only that the following are added:
▪
▪
▪
▪
Whether Useful Life of the Intangible Asset Is Finite or Infinite.
Where Finite, Amortisation Rate Used.
Where Indefinite, reasons why.
Accounting Policies in terms of Amortisation.
We are done with The Standard. Sincerely, this is the Most Comprehensive Lecture you can ever get on IAS 38 Intangible Asset, through a Platform Like this
ICAN have tested it twice for the Past 10 Diets.
-May 2015 Q5, and
-Nov 2018 Q6.
IAS 37 - Provisions, Contingent Liabilities & Contingent Assets
There are 3 Stuffs here, we are gonna take them one after another. Though, Provision is the Major Pronouncement in
this Standard and It is one of the ICAN Favourite these Days, due to its Subjective Nature and difficulties of Applications
in Practice.
PROVISIONS
These are Liabilities of Uncertain Timing & Amount. They are next to Liabilities in the Nature at which they behave in
Accounting Principles. While Liabilities are Something we can predict how much and when to Pay back the Obligation,
Provisions are unpredictable.
Accounting Issues with Provisions
1. Recognition - Whether to Include it in the Book or not.
2. Measurement - What Value to be Used.
3. Double Entry on Initial & Subsequent Measurement.
Let's Take them one after Another:
Recognition
A Provision should be recognised when:
▪
▪
▪
A Company has a Present Obligation (Legal or Constructive) as a result of Past Event.
It is Probable that an Outflow of Economic Benefit will be required to settle the Obligation.
A Reliable Estimate can be made of it.
If you are so observant, You will discover that it Captures all the Definition of A Liability, buts its degree of Uncertainty
makes It to have a Separate Standard, with separate Treatment.
▪
Legal Obligation arises from a Contract or other aspect of legal agreement.
40
Corporate Reporting – for ICAN Students
▪
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Constructive Obligation is as a result of Company's Past Actions. Eg. When they use to replace Faulty Products
returned by Customers.
Measurement
IAS 37 requires that the Amount Recognised must be best estimate as at the End of the Reporting Period.
Uncertainty, time Value of money & future events must be put into Consideration.
Accounting Entries
Initial Measurement
When Provision is to be Initially recognised, the following entries should be Passed.
Dr
P/L (Expense)
Cr
SFP (Provision)
When the Expense is Later Paid, the entries goes thus:
Dr
SFP (Provision)
Cr
Cash.
Note: If Provision is more than the Amount Needed to settle the Liability Provided for, then the Remaining Balance is
released to the Income Statement (ie. Credited as Income). However, if it is insufficient to settle the liability, an extra
expense is recognised from the Income Statement. Also, IAS 37 states that a Provision must be used for Expenditure
originally provided for and not for other Stuff.
Subsequent Measurement
According to IAS 37, Provision Must be reviewed at the end of every Reporting Period.
This might lead into any of the 3:
▪
▪
Derecognition of Provision: When it no longer meet the recognition criteria.
Remeasurement: Which might lead into Increase or Decrease in the Expense earlier Recognised.
Double Entry for each of them are:
1. Derecognition: Dr Provision, Cr Income Statement.
2. Decrease in Provision: Dr Provision, Cr Income Statement.
3. Increase in Provision: Dr Income Statement, Cr Provision.
Examples of Provision
1. Warranty/Guarantee: An Obligation that item sold will function well given a stipulated period (Say 12 Months. If
any damage arise, then item can be returned for repair.
2. Cleaning up of Environmental Damages, like Oil Spillage.
3. Onerous Contract: A Contract where the Unavoidable Costs of fulfilling the contract now, exceed the benefits to be
Received.
4. Decommissioning Liability: Restoring, removing or Dismantling a Constructed Asset, after Its Useful Life. Same
way with Cleaning Up of a site, it's to be discounted back to Present Value.
Contingent Liabilities
This is a Present Obligation as a result of past event, but not recognised as Provision because it is not Probable that an
Outflow of Economic Benefit will be required to Settle the Obligation, or can not be Measured Reliably. It can not be
recognised as Provision because it fails one of the Conditions, set out for Provisions. Example: If A Company has a
41
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Legal Dispute, with a Customer. If the Company's Lawyer believes that there is Likelihood that the Customer Succeeds
the Claim he's Making. Ie. Possible Instead of Probable, then its a Contingent Liability.
Contingent Asset
A Possible Inflow of Cash whose existence is confirmed only by Occurrence or non occurrence of one or more Uncertain
Future Event, not wholly within the Control of The Entity. Eg. A Claim or Damages that the Company can receive from
A Legal Dispute, only if the Outcome is favourable to them.
Recognition Criteria for Contingencies
Both of them should only be disclosed as A Note in the Financial Statement. They are not recognised in the Surface of
the Account.
Disclose Requirements
▪
▪
For Provision: For Each Class of Provision, An Entity Should disclose;
o Opening Balance, Movement during the Year & Closing Balance
o Nature, timing of Settlement & Degree of Uncertainty.
For Contingencies: A Brief Description of Nature and Degree of Uncertainty.
IAS 41 - Agriculture
Scope of this Standard
This IAS covers the following Agricultural Activities:
▪
▪
▪
Biological Assets, except for the Bearer Plant.
Agricultural Produce
Government Grants for Agriculture.
This Standard is not applicable to:
1.
2.
3.
4.
Harvested Agricultural Product: This Becomes Inventory, IAS 2 applies.
Land Relating to Agricultural Activities: IAS 16 or 40 applies here.
Intangible Assets relating to Agriculture: IAS 38 Applies.
Bearer Plants: They are expected to bear plants for more than one Period. They include tea bushes, grape vines,
& Rubber Trees. They will be Accounted for using IAS 16.
Definition of Terms
➢ Agriculture Activities: Activities that entails biological transformation of Biological Assets. Ie.
▪
▪
▪
-For Sale
-Into Agriculture Produce
-Into Additional Biological Assets.
➢ Biological Assets: A Living Animal Or Plant, such as Sheep, Cows, Rice, Wheat, Potatoes, etc.
➢ Biological Transformation: The Process of growth, reproduction, procreation that cause changes in the Quality
or the Quantity of a Biological Asset.
➢ Harvest: Detachment of Produce from a biological asset or cessation of a biological asset life.
➢ Biological Produce: Harvested Products of the Biological Assets. Eg. Milk, Wool, Felled Trees, Plucked
Leaves, etc.
42
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Illustrations:
▪
▪
▪
▪
▪
A Farmer has a field of Lambs - That's Biological Asset.
As the Lamb grows to become Sheeps - They go through Biological Transformation.
As Sheeps procreate another Lambs - Additional Biological Assets.
The Wool from Sheep provides Source of Revenue to the Farmer (Though, not yet Detached) - This becomes
Agricultural Produce.
Once the Wool has been sheared from Sheep (harvested), IAS 2 applies here. Ie, it should be accounted for As
Inventory.
Main Issue addressed by IAS 41
✓ When should a Biological Asset or Agricultural Produce be recognised in the Statement of Financial Position?
- Recognition Issue
✓ At What Value should they be Measured? - Measurement Issue
✓ How should the differences in Value between 2 Accounting Year End be Accounted For? - Subsequent
Measurement.
Recognition Criteria:
IAS 41 specifies the Usual Tests in order that a Biological Assets or Agricultural Produce be recognised in the SFP.
Namely:
❖ Control: The Enterprise must have Control over them.
❖ Future Economic Benefits are expected to Flow into the Enterprise.
❖ Cost or Fair Value be measured reliably.
Measurement
❖ Biological Assets: Both at Initial and Subsequent Recognition, they should be measured at Fair Value Less
Cost to Sell (FVLCS)
❖ Agricultural Produce: This Should be measured at the Point of Harvest, at Fair Value Less Cost to Sell at the
Point of Harvest.
Note: The Point of Harvest Represents the Transition between Accounting for Agricultural Produce Assets Under IAS
41 & Under IAS 2. However, Any Gain or Loss arising out of Revaluation is recognised immediately in the Profit/Loss
Account.
Note: Any Government Grant should be Accounted For according to IAS 20.
Presentation
Non-Current Assets:
▪
▪
PPE : This will include Bearer Plants. - IAS 16
Biological Assets: Those Produce beyond 12 Months. - IAS 41
Current Assets:
▪
▪
Biological Assets: Those Produce within 12 Months. - IAS 41
Inventories: Processed Products from Agricultural Produce. Eg. Tea produced from Tea Leaves. - IAS 41
That Standard is one of the Uncommon Standards to Students.bIn fact, in most Tuition Centres, they don't bother
Treating it.
43
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
IFRS 5 - Non-Current Assets Held for Sale & Discontinued
Operations
Introduction
The Standard is treating 2 different Transactions. In the previous years, it used to be IAS 35 and only treating
Discontinued Operations. But, IFRS 5 is bringing the 2 of them together, because their are common features between
them.
NON-CURRENT ASSET HELD FOR SALE
Rules & Criteria for Classification
1.
2.
3.
4.
AVAILABLE: The Asset must be available for Sale in it's Present Condition.
EXPECTED: It must be Expected to be sold in the Next 12 Months.
LOCATE: The Company must be actively trying to sell it or locate a Buyer.
SELL: There must be a Clear Intent to sell it at the Year End.
Accounting Treatment
✓ From the Date it's Classified as Held For Sale, Such asset must be presented separately on the Surface of the
Statement of Financial Position & Classified under Current Asset, since its to be sold within 12 Months.
✓ It Must not be Depreciated any more.
✓ It Must be measured at lower of Carrying Amount and Fair Value Less Cost To Sell (IAS 36).
✓ Any Gain or Loss as a result of Sales Should be Recognised in The Income Statement.
Note: If there is any Impairment Loss, we recognise it in the Income Statement.
Changes in Plan to Sell
If an asset (or disposal group) has been earlier Classified as Held for Sale in the Financial Statements, but the Criteria
are no Longer Met, it must be removed from this Classification and Reversed back @ It's lower of:
✓ It's Original Amount before it was Classified, or
✓ Its Recoverable Amount at the date no more sale.
DISCONTINUED OPERATION
According to IFRS 5, Such Operations Could be a Component of an Entity which:
▪
▪
Represents A Major Line of Business or a Geographical Area of Operations,
A Subsidiary acquired exclusively with a View to Resale.
Criteria for Discontinued Operations
1. Such Component must have been discontinued before the Year End,
2. Sold during the year, or
3. Held for Sale during the Year.
Accounting Treatment
In the Income Statement
▪
▪
▪
▪
A Single Amount arising from Post Tax Profit/Loss of Discontinued Operation.
A Single Amount arising from Post Tax Gains/Loss from disposal of Assets therefrom
An Analysis of the Single Amounts should be given as Note to the Account. Eg. Revenue, Expenses, Income Tax.
A Comparative Figure of the Previous Year must be Given as well.
44
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
In the Statement of Financial Position
▪
Assets & Liabilities related to a Discontinued Operation should be Separately disclosed from other Assets.
IAS 19 - Employees Benefits
Definition
All forms of of Consideration given by an Entity in Exchange for service rendered by Employees or for the Termination
of Employment.
Forms of Employee Benefits
1.
2.
3.
4.
Short Term Benefits - Basic Salary, Annual Leave, Benefit in Kind.
Other Long Term Benefits - Sabbatical Leave.
Termination Benefits - Gratuity.
Post Employment Benefits - Pension, Post employment life insurance.
The 1st 3 has no much headache. They are Accounted for Using the Normal Accrual Concept. Its the last One that has
a Bit Issue.
Post-Employment Benefits - (Pension)
These are Monthly Payments made to an Employee after the Completion of his Service.
There are 2 Forms:
1.
Defined Contribution Plan: Under this Plan, the company pays a fixed Percentage of Contribution into a Separate
entity (Fund) and will have no legal or constructive obligation to pay more than that in future period. It can be
shared between the employer and the employee, depending on the Policy of the Company.
Accounting Treatment
Dr Expenses
Cr Cash/Bank
2.
Defined Benefit Plan: The Employer agrees to pay certain Amount to the Employee on Retirement. The Risk here
usually lies with the Employer because if at the end, there is an insufficient Fund to provide employees with the
guaranteed Pensions, then the employer makes it Up. This one requires Actuarial Techniques.
Actuary: A Highly Qualified Specialist in the Financial Impact of Risk and uncertainty. They advise the Company on
the Conduct of their Pension Plan.
Differences between the 2
1. Under Defined Contribution Plan (DCP), Amount received by the employee is not predetermined while Under
Defined Benefit Plan(DBP), the amount is Predetermined.
2. Under DCP, the risk lies with the Employee. While risk lies with the Employer under DBP.
3. Under DCP, the Entity is not required to bear any shortfall if Pension Fund does not have enough Asset to cover
Up. While under DBP, the Entity is bears the shortfall if the Pension Fund is not enough to pay the retirement
of the Employees.
4. Under DCP, There is no need for Actuarial Valuation, while there is a need for Actuarial Valuation under DBP.
In A Nutshell, Examinable Questions usually Come in the Case of Defined Benefit Plan.
ICAN tested it in:
Nov. 17 Q5 and May 2019
45
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
IFRS 2 - Share Based Payments (SBP)
Definition
This is a transaction where by:
▪
An Entity buys Goods from Supplier or Receives services from Employee, instead of paying Cash as Consideration,
they do not pay Cash.
They either:
▪
▪
Pay in Shares or Share Options (Equity Settled SBP)
Or
Pay Cash that is based on Share Price (Cash Settled SBP)
This is a common way of rewarding Employees in some Entities.
Types of SBP
1. Equity Settled SBP: The Coy issues Shares in return for the Provision of Goods or Services.
Dr. P/L Cr. Equity
2. Cash Settled SBP: The Company pays Cash in return for provision of goods and services.
Dr. P/L
Cr. Liability
Terminologies in SBP
▪
▪
▪
Grant Date: When the term of scheme was agreed.
Vesting Date: When Employees become entitled to the Share Based Payment.
Exercise Date: When Employees receives the Share Based Payments.
3 things are important here:
•
•
•
Fair Value
Vesting Period
Number of Employees expected to exercise the Option.
Treatment of SBP
▪
▪
Equity Settled: We use Fair Value of the Option @ Grant Date, and do not change through out the Periods.
Cash Settled: We use the Fair Value of the Cash @ each Reporting Date.
That's All About that Standard. There is a Calculation, but it used to be Very Simple.
Just Study Your Pack for Questions on IFRS 2.
IFRS for Small & Medium Enterprises (SMEs)
Definition
SMEs are Entities that has no Public Accountability, because they are Not Listed in the Stock Exchange and has
Minimum Source of Finance. The Users of Financial Statements for SMEs are different from the Users of The F.S of
Quoted Companies. The only users of SMEs are normally:
▪
▪
▪
It's Shareholders
Senior Management
Possibly, Govt Agencies.
46
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Arguments for developing IFRS for SMEs
Some Professionals believe SMEs should not adopt full IFRSs for the Following Reasons:
▪
▪
▪
Some Standards deal with Matters of no Relevance to SMEs. Eg. Accounting Standards on Consolidation,
Associates, Joint Ventures, Deferred Tax, Interim Reporting.
The Costs of Complying with Full IFRSs can be relatively high. The Cost is higher than the benefits derived.
Users of FS for SMEs are not many. So, it would be Waste of time & Cost to Comply with Full IFRS.
Because of all those Reasons outlined above, there is a need to develop IFRSs for SMEs separate from that of the Usual
IFRSs.
Argument against It
The following are the Reasons why there is no need for developing IFRSs for SMEs separately from that of Full IFRSs.
Some Professionals believe that SMEs should also adopt the Full IFRSs with Others. Due to the Following:
▪
▪
▪
If they use different Accounting Rules to prepare their Own Financial Statements, there will be a 2 - Tier
Systems of Accounting.
We will not be able to Compare results for Larger & Smaller Companies.
If SMEs Later grow in Size and Obtain a Stock Market Quotation, there will be a Transitional Problem.
The Document - 2009
It is a Stand-Alone Document. Ie. It refers to all rules to be followed by SMEs without referring to Other IFRSs. A
paper of 230 Pages, arranged into 35 Sections, covering:
▪
▪
▪
▪
Measurement,
Recognition
Presentation, &
Disclosure Requirements.
All in a Very Simplified Manner.
Need for Its Adoption
1.
2.
3.
4.
5.
6.
It Provides Less Guidance.
It reduces disclosure Requirements.
Written in a Clear & Unambiguous Language that can easily be Understood.
Topics not relevant to SMEs are taken out from the Document.
Where full IFRSs allow for Choice, it goes for the Easier One.
Recognition & Measurement of FS elements are Simple.
Highlights of IFRSs for SMEs
The IASB applied Some Simplifications to the IFRSs for SMEs by applying the following Simplifications:
1. Removal of Irrelevant Standards to SMEs
The IASB framework removed those Standards relating to Listed Companies. Eg: IAS 33 EPS, IFRS 8 Operating
Segment, IAS 34 Interim Financial Reporting, IFRS 5, Etc.
2. Removal of Choices Concerning Treatment of Some Accounting Standards. Eg:
▪
▪
Goodwill: IFRS 3 allows for Full or Partial. IFRS for SMEs Says that SMEs can adopt Partial Goodwill
Method.
PPE: IAS 16 allows for Cost or Revaluation Model. IFRS for SMEs says Cost Model is OK.
47
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
The Reason being that determining Fair Value of an Asset requires an Estate Valuer, while that Of NCI requires a
Financial Analyst or Expert. So, it will cost them More.
3. Other Simplifications: Eg:
▪ IAS 38 Which Says Development Cost should be Capitalised if Certain Conditions are Met, while Research
Expenditure Written Off. IFRS for SMEs says Both R&D Cost should be Written Off.
▪ IFRS 3 which says should be tested for Impairment on Annual Basis and should not be Amortised like other
Intangibles. IFRSs for SMEs says No need for Impairment of Goodwill, and Goodwill Should be Amortised
over 10 Years on Straight Line Basis.
▪ IAS 23 which says Borrowing Costs should be Capitalised. IFRSs for SMEs says Borrowing Cost should be
Written off into the Income Statement.
If you check Your Past Questions Very Well, ICAN used to test this Topic.
IFRS 1 - First Time Adoption of IFRS
This Standard gives procedures and rules for an Entity who is just Adopting the International Standards for the 1st
Time.
The Following Pronouncements were issued:
▪
▪
▪
An Entity switching from Local GAAP to IFRS should not just Migrate like that.
It Must go back to adjust the Last Accounts Prepared based on Local GAAP to IFRS, for Comparative
Purpose.
It Must state the effect of Some Material Figures due to that Translation.
Why Retrospective Adjustment?
The Rationale behind this is that this forms a Change of Accounting Policy (IAS 8) if u recall, and Items in the FS
would be affected. We only Compare Like Items with another, or else the Financial Statements will not provide the
Qualitative Characteristics it suppose to provide.
Financial Instruments
Before, this used to Cover 4 Standards. IAS 32 & 39. IFRS 7 & 9. But, IFRS 39 have been Overthrown by IFRS 9.
So, we are left with 3 Standards.
Definition: These are instruments which create Asset to one entity and a Liability to another entity. They are
Categories of Investments, whereby an entity is having Less than 20% Interest in Another Entity or Vice Versa.
IAS 32 - Presentation
The Standard says that Financial Instruments should be presented as an Asset or A Liability on the Face of the
Statement of Financial Position. The Standard further says that all Complex/Compound financial Instruments should
be splitted into Equity & Liability Elements due to the Features Presented in them.
Examples of Compound Instruments are:
▪
▪
Preference Shares with Option (Either to redeem @ Maturity or concerted to Ordinary Shares at Maturity).
Loan Note with Option
Accounting Entry of Such Instruments:
-
Dr
Cr
Cr
Bank Loan with Money received
Equity Option
Liability Element
IFRS 9 - Financial Instruments; Recognition & Measurement
48
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
The Standard was issued in 2009, with effective date 2015. But Updated in 2010 to include Financial Liabilities,
thereby replacing IAS 39. The Standard states that An Entity Should recognise a Financial Asset on its SFP only when
it becomes Party to the Contractual Provision to the Instrument.
At Initial Recognition, all financial instruments must be recognised through P/L or OCI using Fair Value or
Amortised Cost. IFRS 9 encourages the Use of Fair Value. Although, Entities can use Amortised Cost if they can pass
2 Tests:
1. Cashflows Test: It must be Probable that an Entity will receive Both Principal & Interests Attributable to the
Financial Instrument at its Expiration.
2. Business Model Test: It Must be probable that the Entity will hold the Financial Instrument till Maturity. Ie. They
are not purchased with the intention to resell them.
Types of Financial Instrument
1. Financial Asset
2. Financial Liability
➢
➢
Financial Asset could be further classified into 3:
• Debt Instrument Financial Asset: This one should be initially measured at Fair Value. But subsequently
measured at Fair Value or Amortised Cost through Profit/Loss. Note, Amortised Cost applies if it pass the 2
tests.
• Equity Instruments held for trading: This must be measured at Fair Value through Profit or Loss and Gain or
Loss Recognised Immediately in the Income Statement.
• Permanent Equity Instrument: Such instrument can not be reclassified due to their permanent nature.
Therefore, the standard says that any Gain/Loss Must be recognised in OCI. Until when disposed off, that's
when Net Gain or Loss should be reclassified.
Financial Liability: According to the Standard, both initial and subsequent recognition should be at Fair Value.
Amortised Cost is not allowed here at all.
Derecognition of Financial Instrument
The Standard says that Financial Asset & Financial Liability should be Derecognised only when both parties to the
financial instruments carry out their Obligations.
Impairment of Financial Instrument
The Standard says that Financial Asset can be Impaired if the Recoverable Value is less than the Carrying Value.
IFRS 15 - Revenue from Contracts with Customers
A new standard which closed the Gap between IAS 18 & IAS 11 and replaced them eventually.
The Former 2 Standards that treated Revenue has the Following Shortfalls:
1.
2.
3.
4.
5.
Limited Revenue Recognition Guidance.
Presence of 2 Accounting Standards is not appropriate.
Application of the Standard may not faithfully represent the true nature of transaction.
Application of Risk & Reward of Ownership has being applied Subjectively.
Principles are inconsistent with One another.
The Standard Introduced 5 Steps for Recognising Revenue:
Step 1 - Identify Contract with Customer
49
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
A Contract is an agreement btw 2 or more Parties that Creates enforceable Rights & Obligations. A Contract can be
written, Verbal or Implied.
This applies only when:
•
•
•
•
The Parties have approved the Contract.
Payments term can be identified.
Contract has Commercial Substance.
It is Probable That the Consideration will be received.
Step 2 - Identify the Separate Performance Obligations
A Performance Obligation is a Promise in a Contract for a Supplier to transfer either:
•
•
A Good/Services (or a bundle of Both) that is distinct or,
A Series of Goods or services that are substantially the Same.
Step 3 - Determine The Transaction Price
Transaction Price is the Amount of Consideration an Entity expects to receive in respect of Goods or Services exchanged
Under a Contract.
The Following Factors should be Considered:
•
•
•
Variable Consideration
Non-Cash Consideration
Time Value of Money
Step 4 - Allocate the Transaction Price (Step 3) to the Performance Obligation (Step 2)
In Doing that, we make use of Stand-Alone Price. A Stand Alone Price is that which the Company will originally sell a
Promised Good or service separately to a Customer. IFRS 15 suggested the following 3 Methods:
•
•
•
Adjusted Market Assessment Approach
Expected Cost Plus Margin Approach
Residual Approach
Step 5 - Recognise Revenue When or as an Entity satisfies Performance Obligations.
Revenue is recognised only when the Risk & Reward of Ownership transfer to the Owner and he Obtains Control Over
the Goods.
IFRS 16 - Leases
About the standard
This is a New Standard, Published in 2016, but effective 2019 Financial Year. And That's Why Most Companies who
deal with Leasehold Properties a lot are having Serious Transition as far as Last Year Financial Statement is concerned.
It Replaced IAS 17 and It Brought a Lot of Guidance as to how Leases should be Treated. The Major Changes in IFRS
16 is only in the Book of The Lessee. There is no difference between IAS 17 & IFRS 16 regarding Treatment of Leases
in the Book of The Lessor.
What IFRS 16 did is that It Abrogated the Classification of Leases into Operating & Finance Lease in the book of the
LESSEE. There is nothing of Such Classification Anymore. Before, Operating Lease Use to be An Off Balance Sheet
Item. But, the New Standard is Saying: No More Off Balance Sheet Items.
50
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Show All Your Leases in the Statement of Financial Position, with the Exemption of Some Few Items that are not
Material.
Definition
A lease is a contract or part of a contract where the lessor convene to the lessee the right to use an asset in return for a
payment or series of payment for an agreed period of time.
Types of lease
1. Operating Lease
2. Finance Lease
Differences
1. Risk and reward of ownership
•
Under Operating lease, that resides with the lessor
•
Under Finance Lease - that resides with the lessee
2. Duration/Tenure of the Lease Term
•
Operating Lease - Usually Short than the useful life of the asset.
•
Finance Lease - Usually Long or most times, equal with the useful life of the asset.
3. Tax Incentive
Operating Lease - The lessor claims Capital Allowance.
•
•
Finance Lease - The lessee claims capital allowance here.
4. Proviso of acquisition
•
Operating Lease - No Provision that the lessee can acquire the asset at the end of lease term.
•
Finance Lease - There is usually a provision that the lessee can eventually purchase the asset at the end of
the lease term.
Provision of IFRS 16
Once there is a lease arrangement, 2 things are important. An entity should create:
•
•
️ Right of Use Asset - This takes care of the asset part of the transaction.
️ Lease Liability - This takes care of the Liability Part of the Transaction.
The Right of use asset is made up of the following costs:
-
Any Payment made to the lessor at the commencement date xx
Less: Any Lease Incentives
Add: Initial Direct Cost incurred by the lessee
Add: Any Possible cost of dismantling
The Right of use asset is subject to depreciation every year which goes into the income statement and its calculated on
straight line basis using the shorter year between the useful life of the asset and the lease period.
•
•
•
•
Lease liabilities should be measured at the present value of the minimum lease payments.
Discount Rate to use to derive the present value is the interest rate of the lease.
Also, the lease liability should be classified into current and non current liabilities.
And the interest portion of the liability should be recognized in the Income Statement.
Assets exempted
•
•
Leases with a lease term of 12 months or less and containing no purchase option.
Leases with Low value assets. Eg. Personal Computers, telephones, tablets, small items of furniture.
Residual Value Guaranteed
51
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
This is the value of which the right of use asset must worth after the duration of the lease. Some lease agreement contains
this. At the point of returning back the asset to the lessor, all payments made should be equal or more than this. If not,
this becomes payable by the lessee to be paid together with the last settlement.
Double entries
Dr - Right of use asset
Cr - Lease liability
IAS 21 - Effect of changes in foreign currency exchange rate
Introduction
Functional currency is the currency of the primary economic environment in which the entity operates. The primary
economic environment is that which it normally generates and expends Cash. The following factors determines the
functional currency of an entity:
️ The currency that mainly influences the determination of goods and services of that entity.
️ The Currency that mainly influences labour, material and other costs.
️ The Currency in which funds from financial activities (Debts and equity) are generated.
Other factors include:
The Degree of autonomy of foreign operation.
Whether transactions from the reporting entity are a high or low proportion of the foreign operation's activities.
Treatment of Foreign Currency Transactions
An entity can enter into transactions denominated in foreign currency. They must be translated into the company's
functional currency before being recorded into the books of the company.
This can be categorised into:
•
•
Initial Recognition - Items are carried at spot rate on that same date, and there will be no exchange gain/loss
arising from such since no difference occurs between date of transaction and date of settlement.
Subsequent Recognition - What this denotes is that a situation whereby date of the transaction differs from
Date of settlement.
This can be classified into the following:
Monetary Items: These are Current assets and liabilities, eg. Cash and cash equivalent items, payables, receivables and
Loans.
Treatment
•
•
️ Closing Rate should be used, if not yet settled by the end of the year.
️ Prevailing rate should be used, if settled before the year end.
This usually leads to exchange gain/loss and it should be recognised straight away in the Income Statement.
Non-Monetary Items: These are non current assets, depreciation and other non current liabilities.
Treatment
•
️ Historical Rate/Acquisition Rate will be used to translate it upon settlement. This does not usually lead to
exchange gain or loss because there is no effect at all.
52
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Non-Monetary Items carried at fair value. Eg. Investment Property.
Treatment
•
️ Exchange Rate prevailing at the Fair Value date. This will lead to exchange gain or loss because the rate at
the date of transaction will be different from that of the date the asset is fair valued. However, exchange gain
or loss in this scenario will be recognized in the income statement (Profit/Loss A/c) and included in ‘other
income & losses’.
Translation of financial statements of a foreign subsidiary
Translating financial statements items usually arise at the point of consolidation. According to IAS 21, each element of
the FS should be translated thus:
•
•
•
️ Assets and Liabilities - They are translated at closing rate prevailing at year end.
️ Income and Expenses - These items will affect Profit or loss of the entity. So, they should be translated using
the exchange rate of the transaction date itself. However, because income and expenses transactions usually
take place through out the year, average rate is allowed, If there is no great fluctuation in the exchange rates.
️ Goodwill including any Fair Value adjustment - They are treated as assets or liability as the Case May be and
therefore translated at their closing rates.
Any Exchange gain or loss as a result of translation should be recognised in the statement of other comprehensive
income. When a subsidiary is newly acquired, spot rate on acquisition date should be used to recognise the investment
in the books of the parent company.
Earnings per share (EPS) IAS 33
Introduction
Earnings are profit available for equity holders to distribute. So, EPS is a measure of the amount of earnings in a financial
period for each equity shares. It is an investor ratio used by investors or potential investors as a measure of performance
of companies which they have already invested in or looking up to invest in.
The Price earnings ratio (P/E Ratio)
This is a key stock market ratio for measuring the company's current share price (market price) in relation to the EPS.
It can be used by investors to assess whether the shares of a company appear cheap or expensive. A high P/E ratio
indicates strong performance of the company. Therefore, investors are prepared to pay high price to buy their shares.
P/E Ratio = Market Value per share/Earnings per share
Or total market value/total earnings
Scope of IAS 33
The standard applies only to quoted companies and those about to be quoted. Although, most public quoted companies
prepare consolidated financial statements as well as separate accounts. In that case, IAS 33 requires disclosure based
on the consolidated financial statements.
Major Requirements
IAS 33 requires entities to calculate:
•
•
Basic and diluted EPS on its continuing operation
Basic and diluted EPS on its discontinued operations
Basic EPS will be different from diluted EPS where there are potential ordinary shares in existence.
53
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
❖ Ordinary Shares are those instruments held by the ultimate owners of the company known as the ordinary
shareholders or equity holders. They are the ones entitled to the residual profit of the entity after dividends relating
to all other classes of shares have been paid.
❖ Potential Ordinary Shares - These are financial instruments or any other contract that may entitle its holders to
ordinary shares in the future. Examples are:
• Convertible Preference shares or debentures
• Share Options or warrants (Where it's holders has the right to purchase ordinary shares in the future)
• Shares that will be issued if certain contractual conditions are met.
Formula for EPS
EPS = Profit after tax - Preference dividend/No of ordinary shares
Note preference share are not considered in the calculation of EPS same as their dividend will be excluded from profit.
Changes in number of shares during the period
Sometimes, ordinary shares of a company can change before the year end. In a situation like this, changes can occur in
3 different ways:
 Fresh Issue - Issued for full consideration or full market price.
 Right Issue - Issue for a consideration less than the market price but higher than the nominal price.
 Bonus Issue - Issue for no consideration at all.
Note that each of the cases above will lead to time apportionment because they are issues with in the year and we will
then be required to calculate weighted average number of shares. However, for full market price, there will be no bonus
fraction, but for bonus and right issues, bonus fraction and rights fraction will arise.
For right fraction, it is calculated as Market Price/TERP
Diluted EPS
Dilution means watering down the EPS taking into consideration the effects of all potential shareholders who at the
present are not shareholders yet, but can become shareholders in the future once they exercise their right. The idea is to
show the investors what's at stake if potential shares become actual. As said earlier, this usually arises as a result of:
•
•
•
Convertible preference shares
Convertible bonds
Share Options or warrants.
In that sense, some adjustments need to be made to total earnings and number of shares before we then calculate diluted
EPS.
❖ Add back preference shares to Profit because they wouldn't have been paid if preference shares were classified
ordinary shares.
❖ Add back interest charge on bonds or any debt security taking into consideration the tax relief relating to that
interest by removing it.
❖ Add back potential shares to ordinary shares.
Disclosure requirements
•
•
Total amount used as numerator (total earnings)
Total Amount used as denominator (weighted average number of shares).
Both should be disclosed as a note to the account.
EPS as a measure of performance
54
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Investors and their advisers often pay close attention to net Profit for the period. However, this can include large and
unusual items and also the results of discontinued operations. This may make it volatile and users can find it difficult to
assess trends in the profit figure or to make use of the current year's profit to predict future performance.
The trend in an entity's published EPS figure can sometimes be a more reliable indicator of future performance due to
the following reasons:
•
•
•
Both basic and diluted EPS are based on continued operations. Results of discontinued operations (which may
distort the total profit) are excluded.
An Entity may decide to present one or more alternative versions of EPS by excluding large or unusual
amounts.
Diluted EPS provides an early warning of any changes to an investor's potential return on their investment due
to future share issues.
Limitations of EPS
EPS being a form of ratio has some of the limitations with Ratios.
1. Not all entities use same accounting policies. Making it difficult to compare between EPS of different entities.
2. EPS does not take account of inflation, so growth in EPS over the years might be misleading.
3. EPS measures an entity's profitability and but this is only part of an entity's overall performance. Other aspects like
cashflows may be as important as profit because it determines immediate survival.
4. Diluted EPS is a warning to investors that return on their investment may fall sometimes in the future.
IFRS 13 - Fair Value Measurement
Introduction
There are many instances where IFRS requires or allows entities to measure for disclosure the fair value of assets and
liabilities. Examples include:
•
•
•
•
•
•
•
•
IAS 16 & 38 - The standards allows the use of revaluation model for the measurement of assets after their initial
recognition at cost.
IAS 40 - The standard allows the use of fair value model for measuring investment property. The asset must be
fairvalued at each reporting date.
IAS 19 - The standard says defined benefit plans should be measured at fair value of the plan assets less present
value of the plan's obligations.
IFRS 2 - This requires that an equity share based payment transactions should be accounted for using fair value
at grant date.
IFRS 3 - For the purpose of calculating goodwill, fair value of consideration paid and fair value of net assets at
acquisition should be used.
IFRS 7 & 9 - All financial instruments at initial recognition must be measured at fair value. Subsequently,
financial assets that meet certain conditions are measured at amortised costs but anyone that does not meet the
conditions should be measured at fair value. Also, financial liabilities are sometimes measured at fair value.
IFRS 5 - The standard indirectly incorporate the use of fair value measures when it says an asset held for sale
should be measured at the lower of its carrying amount and fair value less cost to sell.
IFRS 36 - Same provision as IFRS 5, where impairment loss arises when carrying amount is less than its
recoverable amount. Then recoverable amount is the lower of value in use and fair value less costs to sell.
Some of these standards contained little guidance on the meaning of fair value. Others that did contain guidance has
been developed over many years and in piece meal manner.
55
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Purpose of the standard
The standard does not change what should be fair valued once fair value is permitted by other standards whether to
initial measurement or subsequent. The purpose is just to:
➢
➢
➢
Define fair value
Set out a single framework for measuring fair value
Specify disclosure about fair value.
Scope of the standard
IFRS 13 does not apply to IFRS 2 share based payments and also IAS 2 where inventory is measured at lower of cost
or net realistisable value.
Definition
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at measurement date. The definition emphasises that fair value is a market based
measurement and it applies to both assets and liabilities because those two are the Primary focus of Accounting
measurement. Also, note that fair value is an exit price, ie. the price that an asset would be sold and not an entry price
(purchase price).
An entity must use the assumptions that market participants would use when pricing the asset or liability under current
market conditions for when measuring fair value, taking into consideration all characteristics that a market participant
would consider relevant to the value. The characteristics include:
•
•
The condition and location of the asset
Restrictions, if any, on the sale/use of the asset
Market participants are buyers and sellers in the principal or most advantageous market for the asset or liability.
Measurement
Fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market
participants to sell the asset or transfer the liability at measurement date under current market conditions.
For that purpose, market can be active, principal or most advantageous.
✓ Active Market - A market in which transactions for the asset or liability takes place with reasonable volume
and on frequent basis.
In the absence of such active market, then a valuation technique will be necessary to determine the fair value.
✓ Principal Market - The market with the greatest volume and level of activity for the asset or liability.
✓ Most advantageous market - The market that maximizes the amount that would be received to sell the asset or
minimise the amount that would be paid to transfer liability, after taking into consideration transaction and
transport costs.
Valuation Techniques
IFRS 13 allows one of the following 3 valuation techniques to be used:
1. Market Approach - by using the transaction prevailing in the market.
2. Cost approach - by making use of replacement cost.
3. Income approach - by discounting future cashflows and bringing it to current value.
An entity should make use of the most appropriate valuation technique given that sufficient information is available to
use it.
56
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Chapter 29
Analysis and interpretation of Financial Statements
Introduction
Financial Statements are used for decision making. They are used by a number of groups including shareholders,
lenders, management, etc. The financial statement contain a large number of figures which do not by themselves make
sense to most users unless interpreted. Two techniques can be used to interprete financial information:
1. Common Size Analysis
2. Ratio Analysis
Techniques can be used in different ways to provide:
➢ Vertical Analysis
➢ Horizontal Analysis
➢ Trend Analysis
Users of financial information and their need
Users include:
1.
2.
3.
4.
5.
6.
7.
Investors and potential investors
Lenders
Employees
Suppliers
Customers
Government and their agencies
General Public
Each user group has different information need but as a general rule, financial statements prepared in accordance with
IFRSs should provide all user groups with most of their needs. Each group is interested in financial performance,
position and cashflows. Some users may be interested in performance and profitability, while some may be more
interested in Liquidity and and gearing. For example:
•
•
•
A Private Investor needs to know whether to continue to hold shares or sell them. So he may tend to be more
interested in profitability Ratios like gross profit margins, bet profit margin, and ROCE. He will also be
interested in investors ratio like EPS, P/E ratio, or dividend cover.
A potential acquirer may Need information about an entity's profitability and probably information to showcase
that the entity is managed well.
A Lender will be interest in whether it will receive interest payments when due. So, he'd interested in Liquidity
Ratios like current ratio and acid rest ratio, gearing ratio and interest cover.
Common Size Analysis
This involves expressing each line in a financial statements as a percentage of the base amount for that period. For
example, for income statement the base amount for common size is revenue so expressing an item in the income
statement as a percentage of revenue. Also, for Statement of Financial Position, the base amount is total asset.
Ratios Analysis
This is a measure of entity's performance and it is a relationship between two or more items to present financial
information in a more understandable form.
Ways of comparing Ratios
57
Corporate Reporting – for ICAN Students
•
•
•
By: Yusuff Kabiru Aremu ACA, 08169069670
Comparison with different company
Comparing with previous years (Trend)
Comparison with industry average
Categories of financial ratios
1. Probability Ratios
•
•
•
•
•
•
•
ROCE
ROA
ROE
Gross Profit Margin
Net Profit Margin
Overhead percentage
Net cost plus
2. Short term Liquidity
•
•
Current ratio
Quick or acid test ratio
3. Efficiency Ratios
•
•
•
•
Inventory Turnover or Average Inventory Days
Receivables Turnover or receivables days
Payable turnover or payable days
Asset turnover
4. Long term solvency
•
•
Gearing ratio
Interest Cover
5. Investors ratio
•
•
•
•
•
•
•
EPS
DPS
P/E Ratio
Dividend Cover
Earnings Yeild
Dividend Yeild
Dividend payout ratio.
Limitation of interpretation techniques
1.
2.
3.
4.
5.
Differences in accounting policies
Ratios are calculated from historical costs and can be misleading.
Differences in calculation of Ratios.
Difference in industry of operation.
Use of creative accounting
58
@ Apex Professional Associates
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Non financial information
Financial performance alone does not give a complete picture of the performance of an entity. Financial performance is
the result of other factors such as market Share and customer satisfaction. The following areas are where non financial
indicators are identified:
•
•
•
Human resources
Customer satisfaction
Quality
️ Human Resources
A well motivated and trained workforce is vital to an organisation in achieving its objectives. For that, possible NFPIs
include:
1.
2.
3.
4.
5.
Labour Turnover
Labour Productivity
Absenteeism rate
Average hours worked.
Idle time
️ Customer Satisfaction
Customers are so important because they ultimately determine the level of profits for an organisation. Their satisfaction
can be measured using the following:
1.
2.
3.
4.
Percentage new subscribers
Number of complaints
Results of customer's satisfaction surveys
Speed of complaint resolution
️ Quality
Quality is linked to customer's satisfaction. As treated in earlier chapter, resolving quality issues has a direct cost (e.g.
the cost of replacing an item) and indirect costs (e.g. lost of goodwill leading to future lost sales). Possible quality
measures include:
1.
2.
3.
4.
Proportion of returns
Proportion of sales
Number of successful inspections
Proportion of re-worked items during production.
NFPIs for different departments
For different departments in an entity, performance targets can be set, which includes:
Sales and customer service
•
•
•
•
Calls per hour
Average waiting time
Proportion of returning customers
Proportion of satisfied customers
Online Sales
▪
▪
Number of visits to website
Website down time
59
Corporate Reporting – for ICAN Students
▪
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Delivery times
Inventory Control
➢ Proportion of wastage
➢ Number of stockouts
➢ Average Inventory holding
Sustainability/Environmental measures
✓ Proportion of recycling
✓ Annual percentage reduction in CO2 emissions
✓ Proportion of components sourced from green materials.
Group Accounts & Consolidation
When we are considering Group Accounts, The following Accounting Standards will be Looked into:
•
•
•
•
•
IFRS 3 - Business Combination
IFRS 10 - Consolidation of Financial Statements
IFRS 11 - Joint Arrangements
IAS 28 - Associates
IAS 21 - Foreign Exchange
Introduction: Before we dabble into Group Accounts, let's Understand The Table of Investment & Relationship between
Entities.
1. A Subsidiary has a Control Relationship and we Consolidate its Accounts to that of Its Parent.
2. An Associate has a Significant Influence relationship and we roll over its Investment using Equity Accounting,
not Consolidation.
3. A Joint Venture has equal Interests and we also roll it over.
4. Other Investments: Passive Interest, that consists of Financial Instruments.
If we talk about Group Accounts, we are talking About 4 Statements:
•
•
•
•
Consolidated Statement of Financial Position
Consolidated Statement of Comprehensive Income
Consolidated Statement of Cashflows
Consolidated Statement of Changes in Equity
Recall in Financial Reporting, what you studied is Basic Group Accounts. Basic in the Sense that what concerns you is
a Simple Subsidiary.
Which Means One Parent, One Subsidiary and Possibly, One Associate.
Consolidation Statement of Financial Position
There are 3 things to Note Here:
Group Structure: Whether Simple or Complex. Get the Percentage of Acquisition. The Following needs to be Noted:
1. Date of Acquisition: Mostly end of the Year, but its possible there is Mid-Year Acquisition.
2. Get the Number of Shares. Don't assume all Shares are Quoted in #1 all times. It might be 50k or 25k.
3. Compare the Purchase Consideration with the Investment given in the SFP (Under Parent Company Figures),
whether there are other Investment.
Consolidation Adjustments: Examples are:
60
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
1. Fair Value Adjustment, which leads to Post-Acquisition Depreciation.
2. Provision for Unrealised Profit, each time there is Inter-Company Sales. This usually affects Consolidation
Date.
3. Intercompany Payable or Receivables Cancellation, Inventory, Cash in Transit.
The Big 3
✓ Goodwill: Purchase Consideration, Add NCI Value(Fair Value Or @ Proportionate, depending on the Goodwill
Method Used) Less: Fair Value of Net Assets @ Acquisition.
That Requires Further Breakdown. We have 3 Components in That Goodwill. Let us Take those Components one after
Another.
1. Fair Value of Purchase Consideration
2. Fair Value of NCI
3. Fair Value of Net Assets
1. Purchase Consideration: IFRS 3 allows 4 Elements of Purchase Consideration, namely(Not all applied in All
Questions).
• Cash Consideration: The Most Simplest One of all. It can be given straight away or U Multiply the Shares
Acquired in the Subsidiary Company by Share Price, which will be Given in the Question.
• Deferred Consideration: Any Consideration to be received in The Future, but should be discounted to Present
Value using Appropriate Discount Rate.
Note: This Will lead to Unwinding of the Interest at the End of Each Accounting Year and it will affect the Consolidated
Retained Earnings.
•
•
Contingent Consideration: As the name implies, this Occurs when a Consideration will be paid in Future as a
result of Occurrence or non occurrence of Event. And this will lead to Liability In the Statement of Financial
Position.
Share for Share Exchange: This is a Consideration whereby the Parent Company Exchange a Portion of Shares
Acquired in the Subsidiary Company at the Rate of the Parent's Market Price in the Stock Market.
This will lead to Additional Share Capital, upon Consolidation and Share Premium. The Difference between the Par
Value and the Market Price multiplied by the Shares exchanged will be Share Premium.
2. Non-Controlling Interests - According to IFRS 10, Non Controlling Interest(NCI) Measurement depends on The
Method of Goodwill Used.
Whether its FULL or PARTIAL Goodwill
If Its Full Goodwill Method: NCI is measured at FAIR VALUE.
If Its Partial Goodwill Method: NCI is measured at Proportionate of Net Assets of Subsidiary @ Acquisition.
The Major Difference Between the Methods is the Treatment of Goodwill Impairment.
➢ If NCI is Measured @ Fair Value: We Split Impairment between the The Parent and NCI, based on Percentage
Holding.
➢ If NCI is at Proportionate: Impairment will be borne by the Parent Only. Therefore, it will be deducted from
The Consolidated Reserves.
Note: Impairment Loss is an Expense, it will be deducted from Goodwill and the Second Leg from Retained
Earnings/NCI as the case may be.
Consolidated Reserves consists of:
➢
Parent's Retained Earnings
Xx
61
Corporate Reporting – for ICAN Students
➢
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
Add: Parent's Share of Post Acquisition Reserves xx
o Less: Impairment of Goodwill (xx)
o Less: Unrealised Profit (If its parent that Sold) (xx)
o Less: Professional Fees (If Any)
(xx)
o Less: Interest (If There is Deferred Consideration) (xx)
Consolidated Statement of Comprehensive Income
The Following Complications should be Noted:
➢
➢
➢
➢
➢
➢
➢
Acquisition During The Year
Inter-Company Trading
Fair Value Adjustment
Additional Depreciation
Impairment of Goodwill
Inter-Company Dividend, Interest/Finance Cost, or Management Fee
Consolidated Profits, which should be Attributable btw NCI & Owners of the Group.
Chapter 31
Technology and soft skills in corporate reporting
Application of technologies in Corporate Reporting
There are so many areas of financial reporting that could be enhanced by the use of technology. They include:
a) Data collation: The starting point of the financial reporting process is identification and collection of data from
multiple sources within and outside the organisation. Data identification and collation can actually be automated
through the integration of the entity’s accounting software with the various data sources. It is equally possible to
convert the unstructured and ‘dirty’ data into a format and structure ready for entry into the accounting system with
the help of some advanced technology tools.
b) Data recording: Once data is collated from various sources, the next course of action is to enter (record) the data
into the accounting system. Technology tool such as optical character recognition (OCR) has made it possible for
organisations to capture and record data seamlessly with little or no human intervention. The data in source
documents (customer orders; invoices and delivery notes) are captured through scanners or mobile device cameras
and posted into the appropriate ledgers within the accounting system.
c) Report preparation: A well-designed and automated accounting system will be able to aggregate all relevant
information from individual ledger accounts to the general ledger which forms the basis of preparing the trial
balance and ultimately, the financial statements and other products of financial reporting. Modern technology can
enhance this process efficiency by replacing mechanistic human processing of underlying transactions and
transforming the various data into proper accounting and management information, which ultimately feeds into a
company’s annual reports.
d) Report distribution: Traditionally, annual reports of companies are published several months after the financial year
end and sent to shareholders and other stakeholders through the postal or courier services. In recent times, many
organisations through the adoption of relevant technology tools have started hosting the annual reports on their
websites or put them on CDs and send to the stakeholders. Also, there are instances where the soft copies of the
annual reports are sent to each stakeholder’s email address for downloading. In highly regulated sectors, such as
banking industry, the regulators could provide a web portal where each operator is required to submit the annual
reports and other returns electronically.
62
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
e) Report consumption: Once the various stakeholders and investors receive the annual reports of an entity, they
attempt to analyse and make useful meaning from them. Most institutional investors are already using technology
to enhance effectiveness of investment analysis by extracting meaning and value, not only from company reporting,
but also from various sources of alternative data. Data analytic solutions can be used to perform detailed analysis
of any company’s information for a deeper insight that would aid decision making of investors.
Technology tools for financial reporting
Digital transformation inspired by unprecedented pace of technological advancement is disrupting nearly every industry,
and accounting is no exception.
Some of the new technologies disrupting the accounting profession include:
(a) Cloud computing technology: There are quite a good number of accounting software that are hosted in the cloud.
Like many other enterprises, accounting businesses must leverage on cloud computing and switch to cloud-based
accounting to stay relevant and competitive now and in the future. Popular accounting solutions, such as
QuickBooks; Sage; SAP; etc are all available in the cloud.
(b) Artificial intelligence and robotics: Artificial intelligence (AI) is widely used, though it is not taken note of. Every
time a search is made using Apple Siri, search Google or ask Amazon’s Alexa a question, a form of artificial
intelligence is in use. Many banks in Nigeria have equally deployed AI as part of their internet banking platforms.
The technology has also radically altered processes like buying an airline ticket and making a hotel reservation.
Major accounting firms are using artificial intelligence to sort through contracts and deeds during audits. The
computer does a risk assessment and flags potential problems.
(c) Blockchain technology: Blockchain technology became popular globally through the advancements in digital
currency transactions such as Bitcoin. Many businesses now leverage on the blockchain technology to record their
financial and non-financial transactions in an open, secured and decentralised ledger. In addition to keeping the
financial transactions transparent and auditable, blockchain further makes the transaction records accessible to
authorised users at any time and any location. Blockchain enables quick funds transfer, recording of financial
transactions accurately, recording smart contracts, protecting and transferring ownership of assets, verifying
people's identities and credentials, and much more. Once blockchain is widely adopted, and challenges around
industry regulation are overcome, it will benefit businesses by reducing costs, increasing traceability, and enhancing
security.
(d) Data analytics technology: Data has become the new cash, as it is extremely crucial to make useful business
financial decisions. Today, data is not just numbers and spreadsheets that accountants have been familiar with for
years; it also includes unstructured data that can be analysed through automated solutions.
Examples of top data analytics software include: • MySQL Workbench; • Datapine; • R-Studio; • SAS Forecasting for
Desktops; • Erwin Data Modeler; and Talend.
Soft skills in corporate reporting
Multiple capitals
The study of the concept of multiple capitals is essential to future ready accountants as integrated reporting takes centre
stage in the near future. Integrated reporting is assuming greater importance as many investors, particularly, institutional
investors observe the inadequacies of the financial reporting framework in accounting for the resources employed by
an entity to achieve the reported performance. It is stated that organisationsutilise more capitals than financial capital
(accounted for by the current financial reporting framework), giving rise to the demand for integrated reporting.
63
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
The use of the six capitals model
The six capitals model can be used to allow organisations to develop a vision of what sustainability will be for its own
operations, products and services. The vision is developed by considering what an organisation needs to do in order to
maximise the value of each capital. However, an organisation needs to consider the impact of its activities on each of
the capitals in an integrated way in order to avoid ‘trade-offs’. Using the model in this way for decision-making can
lead to more sustainable outcomes.
The six capitals are discussed below:
(a) Natural Capital: This is any stock or flow of energy and material that produces goods and services. It includes: i.
Resources - renewable and non-renewable materials; ii. Sinks - that absorb, neutralise or recycle wastes; and iii.
Processes - such as climate regulation. Natural capital is the basis not only of production, but also for sustenance of
life itself;
(b) Human Capital: This consists of people's health, knowledge, skills and motivation. These are required for
productivity at work. Enhancing human capital through education and training is central to a flourishing economy;
(c) Intellectual capital: This is the result of mental processes that form a set of intangible objects that can be used in
economic activity and bring income to its owner, that is. the organisation. It is the sum of everything everybody in
a company knows that gives it a competitive edge. The term is used to account for the value of intangible assets not
listed explicitly on a company's statement of financial position (balance sheets).
(d) Social Capital: This concerns the institutions that help us maintain and develop human capital in partnership with
others; e.g., families, communities, businesses, trade unions, schools, and voluntary organisations;
(e) Manufactured Capital: Thiscomprises material goods or fixed assets which contribute to the production process
rather than being the output itself – e.g., tools, machines and buildings;
(f) Financial Capital: This capital plays an important role in our economy, enabling the other types of capital to be
owned and traded. But unlike the other types, it has no real value itself but is representative of the natural, human,
intellectual, social or manufactured capital, e.g., shares, bonds or banknotes.
The role of the six capitals in integrated reporting
The following are some means by which the six capitals contribute to integrated reporting:
a. The primary purpose of an integrated report is to explain to financial capital providers how an organisation creates
value over time. The best way to do so is through a combination of quantitative and qualitative information, which
is where the six capitals come in;
b. The capitals are stocks of value that are affected or transformed by the activities and outputs of an organisation. The
framework categorises them as financial, manufactured, intellectual, human, social and relationship, and natural.
Across these six categories, all the forms of capital an organisation uses or affects should be considered; and
c. An organisation’s business model draws on various capital inputs and shows how its activities transform them into
outputs.
Implementation of integrative thinking in an organization
The following considerations will facilitate the adoption of integrative thinking in an organisation:
a. Understanding what value means in the context of the organisation and how its business model creates value;
b. Developing a clear explanation of the positive and negative impacts of trends shaping the company’s current and
future operating environment across the different types of capital;
c. Identifying non-financial metrics that are significant to the success of the business, gathering reliable data,
conducting meaningful analysis, and reporting this information to the board as prominently as the key financial
metrics;
64
Corporate Reporting – for ICAN Students
By: Yusuff Kabiru Aremu ACA, 08169069670
@ Apex Professional Associates
d. Relating non-financial metrics to the long-term financial success of the business. Explaining why the non-financial
factors being measured is important;
e. Demonstrating to the board linkages between strategy, strategic objectives, performance, risk, and incentives across
financial and non-financial information.
Integrated thinking
Integrative thinking is “the ability to face constructively the tension of opposing ideas and instead of choosing one at
the expense of the other, generate a creative resolution of the tension in the form of a new idea that contains elements
of the opposing ideas but is superior to each”. The philosophy of integrative thinking Roger Martin presented a heuristic
model, The Philosophy of Integrative Thinking, as a basis for integrative thinking.
It comprises four interrelated elements as follows:
(a) Salience;
(b) Causality;
(c) Architecture; and
(d) Resolution.
This philosophy encourages high tolerance for change, openness, flexibility and disequilibrium. This is contrary to the
common managerial endeavour to attain predictability and measurable clarity.
1. Salience: Salience is the determination of information or variables relevant to the decision. As many relevant
variables as possible are considered. This approximates better to reality. For example, when a company decides to
relocate a factory from one place to another, the company may only consider the economic benefit to the
shareholders, not bearing in mind the political implication of such a move. This may be a wrong decision by the
company.
2. Causality: In dealing with causes of observations, integrative thinkers do the following: • establish causal
relationship between the variables and the decision; • consider non-linear and multi-directional causal relationship,
rather than simple, uni-directional relationships; • create multiple causal models and developing many alternative
theories to deal with any ambiguities observed; and • deliberate on some unexplained observations, though, no
causal relationship is established.
3. Architecture: The next step in integrative thinking is architecture. This is building a model to capture all the salient
variables. This model incorporates the complexities in the process and considers the interrelationships between the
salient variables. This method does not attempt to over-simplify the model, but deals with the complexity, by
bringing most relevant parts at a point to the fore, while retaining the other parts in the background. At other times,
focus will be on those other parts. In this way, no part of the causal map is ignored.
4. Resolution: Resolution is the final stage, at which decision must be made. At this stage the attitude of the decisionmaker is critical. Less integrative thinkers get into a ‘bind’ i.e. seeing the choices being limited to either one or the
other, when neither is fully satisfactory and dealing with it by proffering solutions to ameliorate the negative effects
of the choice made. The integrative thinker will not see the challenge as a bind, but rather a tension to be creatively
and flexibly managed, even if it requires a delay and continual rethinking and restructuring of the problem and its
logic.
65