for Accounting Professionals
IAS 1 Presentation of financial statements
2011
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1
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Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking
Moscow, Russia
2011 Updated
Presentation of Financial Statements
CONTENTS
19. Statement of Cash Flows
45
1.Presentation of Financial Statements – Introduction 4
20. Notes
45
2. Definitions
22. Capital
50
3.Fair Presentation and Compliance with IFRSs 7
23. Other Disclosures
50
4. Going Concern
9
5. Accrual Basis of Accounting
11
24. Annex- Amendments to IAS 1 - IFRS News November 2007
51
6. Consistency of Presentation
11
25. Multiple choice questions
7. Materiality and Aggregation
12
26. Answers to multiple choice questions ................................ 59
8. Offsetting
14
9. Comparative Information
16
10. General Review
18
6
11. Identification of the Financial Statements 19
12. Frequency of Reporting
20
53
Note: Material from the following PricewaterhouseCoopers publications has been
used in this workbook:
-Applying IFRS
-IFRS News
-Accounting Solutions
13. Statement of financial position ............................................ 21
14. Information to be Presented on the Face of the Statement
of financial position (balance
sheet) .................................. 29
15. Information to be Presented either on the Face of the
Statement of Financial
Position, or in the Notes .... 31
16. Statement of comprehensive income.................................. 32
17. Information to be Presented either on the Face of the
Income Statement, or in the
Notes ................................... 37
18. Statement of Changes in Equity ......................................... 42
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Presentation of Financial Statements
Presentation of Financial Statements - Introduction
OVERVIEW
Aim
The objective of IAS 1 is to prescribe the presentation of financial
statements, to ensure comparability both with financial statements
of previous periods, and with the financial statements of other
undertakings.
The aim of this workbook is to assist the individual in understanding
the IFRS Presentation of Financial Statements. This is the subject
of IAS 1.
IAS 1 sets out requirements for the presentation of financial
statements, guidelines for their structure, and minimum
requirements for their content.
IAS 1 was updated in 2007. The changes are listed in the Annex to
this workbook. One of the changes is the retitling of the balance
sheet as the statement of financial position.
(The recognition, measurement and disclosure of specific
transactions and other events are dealt with in other Standards and
in Interpretations).
The Board decided to rename a new statement a ‘statement of
comprehensive income’. The term ‘comprehensive income’ is not
defined in the Framework but is used in IAS 1 to describe the
change in equity of an undertaking during a period from
transactions, events and circumstances other than those resulting
from transactions with owners in their capacity as owners.
SCOPE
Although the term ‘comprehensive income’ is used to describe the
aggregate of all components of comprehensive income, including
profit or loss, the term ‘other comprehensive income’ refers to
income and expenses that under IFRSs are included in
comprehensive income, but excluded from profit or loss.
The Board decided that an undertaking should have the choice of
presenting all income and expenses recognised in a period in one
statement, or in two statements.
The Board acknowledged that the titles ‘income statement’
and ‘statement of profit or loss’ are similar in meaning and
could be used interchangeably, and decided to retain the title
‘income statement’ as this is more commonly used.
OBJECTIVE
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IAS 1 shall be applied to all general purpose financial statements
presented in accordance with IFRS.
IAS 1 does not apply to interim financial statements, (see IAS 34
Interim Financial Reporting). IAS 1 applies equally to all
undertakings, whether they need to prepare consolidated, or
separate financial statements.
IFRS 7 specifies additional requirements for banks and similar
financial institutions, which are consistent with the
requirements of IAS 1.
IAS 1 uses terminology that is suitable for profit-oriented
undertakings, including public-sector business undertakings.
Similarly, undertakings that do not have equity as defined in IAS 32:
some mutual funds, and undertakings whose share capital is not
equity: some co-operative undertakings may need to adapt the of
members’ (or ‘unitholders’) interests.
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Presentation of Financial Statements
(iii)
a statement of changes in equity for the period;
Financial statements
(iv)
a statement of cash flows for the period;
Financial statements are a structured representation of the financial
position, and financial performance, of an undertaking.
(v)
notes, comprising a summary of significant accounting
policies and other explanatory information; and
(vi)
a statement of financial position as at the beginning of
the earliest comparative period when an undertaking
applies an accounting policy retrospectively, or makes
a retrospective restatement of items in its financial
statements, or
when it reclassifies items in its
financial statements.
The objective of financial statements is to provide information about
the financial position, financial performance, and cash flows, which
is useful to a wide range of users in making decisions.
Financial statements also show the results of management’s
stewardship of resources.
To meet this objective, financial
statements provide information about an undertaking’s:
(i)
assets;
(ii)
liabilities;
(iii)
equity;
(iv)
income and expenses, including gains and
losses;
(v)
contributions by, and distributions to
owners in their capacity as owners; and
(vi)
cash flows.
This information, with other information in the notes, assists users
of financial statements in predicting the undertaking’s future cash
flows and, their timing and certainty.
A complete set of financial statements comprises:
(i)
a statement of financial position as at the end of the
period;
(ii)
a statement of comprehensive income for the period;
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An undertaking may use titles for the statements other than
those used in IAS 1.
An undertaking shall present with equal prominence all
of the financial statements in a complete set of financial
statements.
An undertaking may present the components of profit or
loss
either as
part of a single statement of
comprehensive income, or in a separate income statement.
When an income statement is presented it is part of a
complete set of financial statements and shall be displayed
immediately before the
statement of comprehensive
income.
An audit report is not compulsory, but it will provide readers with
independent assurance of the figures.
Many undertakings present, outside the financial statements, a
financial review by management, that describes the main
features of the undertaking’s financial performance, and
financial position, and the uncertainties it faces.
Such a report may include a review of:
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Presentation of Financial Statements
(i) the main factors determining financial performance, including
changes in the environment, the undertaking’s response to those
changes and their impact, and the policy for investment to maintain
(and enhance) performance, including its dividend policy;
(ii) sources of funding and targeted ratio of liabilities to equity; and
(iii) resources not recorded in the statement of financial position in
accordance with IFRSs.
Many undertakings also present reports, such as environmental
reports and value added statements, particularly in industries in
which environmental factors are significant, and when staff is
regarded as an important user group.
Reports and statements presented outside financial statements are
outside the scope of IFRSs.
2. Definitions
General purpose financial statements (referred to as ‘financial
statements’) are those intended to meet the needs of users who are
not in a position to require an undertaking to prepare reports
tailored to their particular information needs.
Impracticable Applying a requirement is impracticable when the
undertaking cannot apply it, after making every reasonable effort to
do so.
Notes contain information in addition to that presented in the
statement of financial position, statement of comprehensive
income, separate income statement (if presented), statement of
changes in equity, and statement of cash flows.
Notes provide narrative descriptions, or disaggregations of items in
those statements, and information about items that do not qualify
for recognition in those statements.
Assessing whether an omission, or misstatement, could
influence decisions of users, and so be material, requires
consideration of the characteristics of those users.
Users are assumed to have a reasonable knowledge of
business and accounting, and a willingness to study the
information with reasonable diligence.
The assessment needs to take into account how users, with
such attributes, are influenced in making decisions.
Other comprehensive income comprises items of income
and expense (including reclassification adjustments) that are
not recognised in profit or loss as required or permitted by
other IFRSs.
The components of other comprehensive income include:
Material Omissions (or misstatements of items) are material if they
could influence the decisions of users, taken on the basis of the
financial statements.
Materiality depends on the size, and nature, of the omission or
misstatement judged in the surrounding circumstances. The size or
nature of the item, or a combination of both, could be the
determining factor.
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(i)
changes in revaluation surplus (see IAS 16 Property,
Plant and Equipment and IAS 38 Intangible Assets);
(ii)
actuarial gains and losses on defined benefit plans
recognised in accordance IAS 19 Employee Benefits;
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Presentation of Financial Statements
(iii)
gains and losses arising from translating the financial
statements of a foreign operation (see IAS 21);
(iv)
gains and losses on remeasuring available-for-sale
financial assets (see IAS 39 Financial Instruments – these
will disappear in IFRS 9);
(v)
the effective portion of gains and losses on hedging
instruments in a cash flow hedge (see IAS 39).
Owners are holders of instruments classified as equity.
Profit or loss is the total of income less expenses,
excluding the components of other comprehensive income.
Reclassification adjustments are amounts reclassified to
profit or loss in the current period that were recognised in
other comprehensive income in the current or previous
periods.
Total comprehensive income is the change in equity
during a period resulting from transactions and other
events, other than those changes resulting from
transactions with owners in their capacity as owners.
Total comprehensive income comprises all components of
‘profit or loss’
and of ‘other comprehensive income’.
Although IAS 1 uses the terms ‘other comprehensive
income’, ‘profit or loss’ and ‘total comprehensive income’, an
undertaking may use other terms to describe the totals as
long as the meaning is clear. For example, an undertaking
may use the term ‘net income’ to describe profit or loss.
Profit or loss is the total of income less expenses,
excluding the components of other comprehensive income.
Reclassification adjustments are amounts reclassified to
profit or loss in the current period that were recognised in
other comprehensive income in the current or previous
periods.
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Total comprehensive income is the change in equity
during a period resulting from transactions and other
events, other than those changes resulting from transactions
with owners in their capacity as owners.
Total comprehensive income comprises all components of
‘profit or loss’
and of ‘other comprehensive income’.
Although IAS 1 uses the terms ‘other comprehensive income’,
‘profit or loss’ and ‘total comprehensive income’, an
undertaking may use other terms to describe the totals as long
as the meaning is clear.
For example, an undertaking may use the term ‘net income’ to
describe profit or loss.
3. Fair Presentation and Compliance with IFRSs
Financial statements shall present fairly the financial position,
financial performance and cash flows of an undertaking.
Fair presentation requires the faithful representation of the impacts
of transactions, in accordance with the definitions (and recognition
criteria) for assets, liabilities, income and expenses set out in the
Framework (see Framework workbook).
The application of IFRSs (with additional disclosure when
necessary) is presumed to result in financial statements that
achieve a fair presentation.
Financial statements that comply with IFRSs shall make an explicit
and unreserved statement of such compliance in the notes.
Financial statements shall not be described as complying with
IFRSs, unless they comply with all the requirements of IFRSs.
A fair presentation also requires an undertaking:
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Presentation of Financial Statements
(i) to select and apply accounting policies in accordance with IAS 8
Accounting Policies. IAS 8 sets out a hierarchy of guidance that
management considers (in the absence of a Standard) that
specifically applies to an item.
(ii) to present information, including policies, in a manner that
provides relevant, reliable, comparable and understandable
information.
(iii) to provide additional disclosures, when compliance with the
specific requirements in IFRSs is insufficient to enable users to
understand the impact of particular transactions, on the
undertaking’s financial position, and performance.
EXAMPLE-Additional disclosure to enhance fair presentation
Issue
A fair presentation of an undertaking’s financial position may
require, in rare situations, additional disclosures to those that IFRS
require.
When it is appropriate to provide additional disclosure about the
reconciliation of the opening deferred tax balance to the closing
deferred tax balance?
Background
An undertaking has material unused tax losses and its
management has no expectation that future taxable profit will be
available before they expire.
Solution
IAS 12’s required disclosures may not in this case provide enough
information to understand the current period’s financial statements.
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Management should present additional notes.
Inappropriate accounting policies are not rectified either by
disclosure of the accounting policies used, nor by notes or
explanatory material.
EXAMPLE- warranties unbooked
You know that you will have to pay warranty claims for goods that
you have sold. You have not included a warranty provision in your
accounts. It is not sufficient to mention in the notes that this has not
been done. The warranty provision should be made in the accounts
themselves.
There is a strong presumption that there will not be any need to
depart from the requirements of the Standards.
When an undertaking departs from a requirement of a Standard, it
shall disclose:
(i) that management has concluded that the financial statements
present fairly the financial position, financial performance and cash
flows;
(ii) that it has complied with applicable Standards, except that it has
departed from a particular requirement, to achieve a fair
presentation;
(iii) -the title of the Standard from which the undertaking has
departed,
-the nature of the departure, including the treatment that the
Standard would require,
-the reason why that treatment would be so misleading that it would
conflict with the objective of financial statements set out in the
Framework, and
-the treatment adopted; and
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Presentation of Financial Statements
(iv) for each period presented, the financial impact of the departure
on each item in the financial statements, that would have been
reported in complying with the requirement.
EXAMPLE-departure from Standard – continuing impact
When an undertaking departed, in a prior period, from a
requirement in a Standard for the measurement of assets (or
liabilities) and that departure affects the measurement of changes
in assets (and liabilities) recorded in the current period’s financial
statements, this needs to be disclosed.
When management concludes that compliance with a requirement
in a Standard would be so misleading that it would conflict with the
objective of financial statements, but the relevant regulatory
framework prohibits departure from the requirement, the
undertaking shall disclose:
(i) the title of the Standard, the nature of the requirement, and the
reason why management has concluded that complying with that
requirement is so misleading that it conflicts with the objective of
financial statements; and
(ii) for each period presented, the adjustments to each item, that
management has concluded would be necessary to achieve a fair
presentation.
reasonably be expected to represent and it would influence
decisions made by users.
When assessing whether complying with a requirement in a
Standard would be so misleading that it would conflict with the
objective of financial statements, management considers:
(i) why the objective of financial statements is not achieved in the
particular circumstances; and
(ii) how the undertaking’s circumstances differ from those of others
that comply with the requirement.
If others, in similar circumstances, comply with the requirement,
there is a rebuttable presumption that the undertaking’s compliance
would not be so misleading that it would conflict with the objective
of financial statements.
4. Going Concern
When preparing financial statements, management shall make
an assessment of an undertaking’s ability to continue as a
going concern. Financial statements shall be prepared on a
going-concern basis, unless management either intends to
liquidate the undertaking or to cease trading, or has no
realistic alternative but to do so.
EXAMPLE- departure from Standard –prohibition
You believe that you must depart from the requirements of a
Standard as your legal system insists that specific procedures that
do not comply with IFRS must be applied at all times. You provide
the disclosures listed above.
Information would conflict with the objective of financial
statements when it does not represent faithfully the
transactions that it either purports to represent, or could
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EXAMPLE-going concern
Banks provide loans under specific conditions, including the
financial performance of clients. A breach of these conditions may
enable the bank to liquidate the client’s business. In these
circumstances, unless the client can secure an alternative source of
finance, financial statements should not be prepared on a going
concern basis.
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Presentation of Financial Statements
When management is aware of material uncertainties that may
cast significant doubt upon the undertaking’s ability to
continue as a going concern, those uncertainties shall be
disclosed.
When financial statements are not prepared on a going
concern basis, that fact shall be disclosed, together with the
basis on which the financial statements are prepared, and the
reason why the undertaking is not regarded as a going
concern.
In assessing whether the going-concern assumption is appropriate,
management takes into account all available information about the
future, which is at least twelve months from the end of the reporting
period.
EXAMPLE-going concern
Management reviews its budgets to identify times when cash flows
will be under pressure. It reviews its credit lines to ensure that
sufficient funds will be available to cover any anticipated shortfalls.
It arranges further lines of credit, if necessary. Having done this, it
can produce accounts on a going-concern basis.
When an undertaking has a history of profitable operations, and
ready access to financial resources, a conclusion that the goingconcern basis is appropriate may be reached without detailed
analysis.
In other cases, management may need to consider a wide range of
factors, relating to current and expected profitability, debt
repayment schedules and potential sources of replacement
financing, before it can satisfy itself that the going-concern basis is
appropriate.
EXAMPLE-Uncertainties regarding going concern assumption
Issue
Management should disclose any uncertainties that may cast
significant doubt on the undertaking’s ability to continue as a going
concern.
How should management disclose uncertainties that affect the
undertaking’s ability to continue as a going concern?
Background
An undertaking has incurred losses during the last four years, and
its current liabilities exceed its total assets.
The undertaking was in breach of its loan covenants and has been
negotiating with the related financial institutions in order to keep
them supporting its business.
These factors raise substantial doubt that the undertaking will be
able to continue as a going concern.
Solution
Management should disclose details of the uncertainty, preferably
in the same note where the basis for preparation of the financial
statements is described.
The note should include an explanation of the uncertainties as well
as the actions proposed to address the situation. Management
should also disclose the possible effects on the financial position, or
that it is impracticable to measure them.
Additionally, management should state whether or not the financial
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Presentation of Financial Statements
statements include any adjustments that might result from the
outcome of these uncertainties.
In particular, if bank borrowings have been disclosed as non-current
in the assumption that discussions with the bank will result in an
extension of the loan facilities, details of this fact should be
disclosed.
5. Accrual Basis of Accounting
6. Consistency of Presentation
The presentation, and classification, of items in the financial
statements shall be retained from one period to the next unless:
(i) it is apparent, following a significant change in the nature of the
undertaking’s operations, or a review of its financial statements,
that another presentation would be more appropriate, having regard
to the criteria for the application of policies in IAS 8; or
(ii) a Standard requires a change in presentation.
An undertaking shall prepare its financial statements, except
for cash flow information, using the accrual basis of
accounting.
When the accrual basis of accounting is used, items are recorded
as assets, liabilities, equity, income and expenses (the elements of
financial statements) when they satisfy the definitions (and
recognition criteria) for those elements in the Framework.
EXAMPLES - the accrual basis of accounting
In December, you sell some goods on credit. You receive cash from
your client in February. You record the sale in December, not when
you receive the cash.
In November, you pay office rent relating to November, December
and January. The rent cost is spread over these 3 months, not just
expensed in full in the month that it was paid.
This is the accrual basis of accounting.
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EXAMPLE-consistent policies
Using different measurement systems of inventory (FIFO and
weighted-average cost are permitted by IFRS) generates different
results. Consistent use of one method is essential to allow users to
compare one period with another.
There should be no change of method, unless a Standard decrees
it, or it would help users.
If other undertakings, in the same industry, use particular
accounting policies, users will benefit if yours are consistent with
theirs, to enable comparison.
A significant acquisition (or disposal), or a review of the
presentation of the financial statements, might suggest that
the financial statements need to be presented differently.
An undertaking changes the presentation of its financial
statements only if the new presentation provides information
that is reliable, and is more relevant to users, and the revised
structure is likely to continue, so that comparability is not
impaired.
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Presentation of Financial Statements
EXAMPLE- Consistency of preparation - Comparatives
Solution
Issue
A change in presentation and classification of items from one
period to the next is permitted only when it is a result of :
No, the current year information should be presented on the old
basis of presentation for consistency with the comparative
information.
a) a significant change in the nature of the undertaking’s
operations;
b) identification of a more appropriate presentation; or
c) the requirements of a new IFRS, or IFRIC.
This will avoid the confusion that would be caused if different bases
of presentation were used for the current year results and the
comparative results.
Should an undertaking disclose information that results in a more
appropriate presentation, yet detracts from the presentation of
comparatives?
Wherever possible, management should present the more useful
and relevant information. Additional information concerning the new
analyses available can be included in the financial statements
where this provides additional information and does not contradict
the information in the primary statement.
Background
An undertaking operates in a number of different countries,
undertaking a range of different activities.
Management has installed a new computer information system
throughout the undertaking that enables better allocation of costs,
including overheads, to activities.
Consequently, management is able to provide a more accurate and
more detailed functional analysis of costs in its income statement
for the current year.
The new analysis is significantly different from the old analysis that
the undertaking used. However, the new analysis is not available
for the comparative information, although the current year
information could be presented on the old, less informative, basis if
required.
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The new analysis should be used in full in the following year
when the new basis of presentation will be available for both
years presented.
7. Materiality and Aggregation
Each material class of similar items shall be presented
separately in the financial statements. Items of a dissimilar
nature (or function) shall be presented separately, unless they
are immaterial.
EXAMPLE-materiality
A competitor has filed a lawsuit against you for a large amount of
money. Your lawyers are concerned, but you believe the lawsuit to
be frivolous. You should disclose this information as a contingent
liability, with expression of your views, and those of the lawyers.
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Presentation of Financial Statements
Financial statements result from processing large numbers of
transactions, which are aggregated into classes, according to their
nature, or function.
EXAMPLE-assets categorised by function
You lease photocopiers and drinks machines. Identifying the results
and
net assets (assets and liabilities) employed by each function of the
business helps users.
The final stage in the process of aggregation, and classification, is
the presentation of condensed and classified data, which form line
items in the financial statements.
If a line item is not individually material, it is aggregated with other
items, either on the face of those statements, or in the notes. An
item, that is not sufficiently material to warrant separate
presentation on the face of those statements, may be sufficiently
material for it to be presented separately in the notes.
EXAMPLE- Information is material if its omission or
misstatement could, individually or collectively, influence the
users economic decisions that are based on the financial
statements.
Should management disclose a change in the classification of an
expense that is not material in relation to the equity and net
income?
Background
An undertaking reclassifies certain items of PPE, from PPE used for
industrial purposes to PPE used for administrative purposes. The
related depreciation expense was previously part of cost of sales
and has subsequently been reclassified to administrative expenses.
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Management has decided not to disclose this change in
classification because the asset’s carrying value and depreciation
expense for the period is not material. Presented below is an
extract from the income statement.
Revenue
200,000
Cost of sales
199,000
Gross profit
1,000
Loss for the year
45,000
Depreciation reclassified from cost of sales
to administrative expenses
1,200
Shareholders’ equity
130,000
Total assets
270,000
Solution
Yes the undertaking should disclose the change in classification.
The undertaking has reported a ‘gross profit’ as a result of the
reclassification rather than a ‘gross loss’. The presentation of a
gross loss rather than a gross profit might alter the users’
perception of the undertaking’s performance.
A specific disclosure requirement in a Standard need not be
satisfied, if the information is not material.
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Presentation of Financial Statements
8. Offsetting
Assets and liabilities, and income and expenses, shall not be
offset unless required (or permitted) by a Standard.
It is important that assets and liabilities, and income and expenses,
are reported separately.
Offsetting in the statements of
comprehensive income or financial position or in the separate
income statement (if presented),except when this reflects the
substance of the transaction, detracts from the ability of users both
to understand the transactions that have occurred, and to assess
future cash flows.
Undertaking A retains the primary responsibility for the lease
payments and repairs and maintenance costs; however, C has
agreed to reimburse all costs in full.
Solution
Sub-lease arrangements are common, and the appropriate
presentation of expenses reimbursed will depend on the facts and
circumstances.
Issue
Where the lessee retains the primary responsibility for meeting the
conditions of the lease, then in substance it will have the risks
associated with the lease contract and should recognise the lease
payments to the lessee and the reimbursement from the sub-lessee
as separate transactions.
Items of income and expenses should be offset only when an IFRS
requires or allows it, or they refer to gains or losses arising from the
same or similar transactions, and events are not material.
Measuring assets, net of valuation allowances - obsolescence
allowances on inventories, and doubtful debts allowances on
receivables - is not offsetting.
When is it appropriate to offset revenue and expenses?
EXAMPLE- obsolescence allowances on inventories
You know that some of your inventory is obsolete. Any benefit will
be limited to its scrap value. You make an obsolescence provision
to reduce this inventory’s carrying value.
EXAMPLE- Offsetting revenue and expenses
Background
Undertaking A enters into an agreement to lease a building from
undertaking B for a 10-year period. A restructures its operations
shortly after entering into the lease and the leased space becomes
surplus to its requirements.
A is unable to cancel the lease agreement without significant
penalty and, as a result, enters into a sublease arrangement with
undertaking C for a 5-year period with an option to renew for a
further 5 years.
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IAS 18 defines revenue, and requires it to be measured at the fair
value of the consideration received (or receivable), taking into
account any trade discounts, and volume rebates, allowed by the
undertaking.
EXAMPLE- Offset of loss leaders with profitable transactions
Issue
Items of income and expense shall not be offset unless required by
another Standard or an Interpretation. Offsetting in the income
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Presentation of Financial Statements
statement except when offsetting reflects the substance of the
transaction or other event, detracts from the ability of users to
understand the financial statements.
Can management offset the losses incurred on a "loss-leader"
product with the profits earned on the connected profitable sales
transaction?
Background
Undertaking A sells electrical goods. The goods come with a
manufacturer’s 1-year warranty. Undertaking A also offers
customers the option of purchasing an extended warranty to cover
years 2 to 5.
Undertaking A’s marketing plan is to sell the electrical goods at a
loss, but set the sales price of the extended warranty to
compensate.
The compensation incorporated into the warranty price is calculated
to allow for the expected take up of the extended warranty as some
customers choose to buy the goods without the warranty.
The normal accounting for this arrangement results in the loss on
the sale of the goods being recognised in year 1 and the revenue
(and profit) on sale of the extended warranty being recognised over
years 2 to 5.
Management proposes that part of the revenue on the sale of the
extended warranties be recognised in year 1 so as to obtain an
even profit margin over the sale of the goods and the warranties.
Management argues that this reflects the commercial substance of
the total arrangements.
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Solution
No. Management cannot offset the loss on sale of the goods with
the profit on sale of the warranties. The sale of the goods is not
linked to the sale of the warranties because customers can, and do,
purchase the goods without the warranty.
There are other transactions that do not generate revenue, but are
incidental to the main revenue-generating activities.
The results of such transactions are presented by netting any
income with related expenses arising on the same transaction. For
example:
(i) gains (and losses) on the disposal of non-current assets,
including investments and operating assets, are reported by
deducting from the proceeds: the carrying amount of the asset, and
related selling expenses; and
EXAMPLE- Offsetting - Gain on sale of a building presented
net
Issue
The results of transactions that are incidental to the main revenuegenerating activities should be presented by netting any income
with related expenses arising on the same transaction.
How should management present gain on sale of a building in the
income statement?
Background
Undertaking A is involved in manufacturing. During the period it
sells one of its buildings and recognises a gain on the sale.
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Presentation of Financial Statements
Solution
EXAMPLE -reimbursement
Management should present the gain by netting the income on the
sale with the cost of the building and other related expenses. The
gain on this transaction is presented within operating profit.
In 2XX5, the local government informs you that a new road will be
built in 2XX7. This will cause the destruction of your head office.
Assets of $5 million will have to be written off. By the end of
2XX5, the government agreed to pay $4 million in compensation.
Management should aggregate the gain, if appropriate, with
amounts of a similar nature or function, for instance other gains or
losses on sale of other PPE.
In 2XX5, a provision and the compensation should be recorded.
The income statement should reflect the provision net of the
compensation
($1 million).
The gain or loss should be presented separately when the size,
nature or incidence is such that separate disclosure is required.
(ii) expenditure related to a provision, that is recorded under IAS 37
Provisions, and reimbursed under a contractual arrangement with a
third party (for example, a supplier’s warranty agreement) may be
netted against the related reimbursement.
Asset sequestration (Net)
Provision
Accounts receivable
Recording
provision
in
compensation in 2XX5
I/B
I
B
B
DR
1m
CR
5m
4m
and
In addition, gains (and losses) arising from a group of similar
transactions are reported on a net basis, for example, foreign
exchange gains (and losses) or gains (and losses) on financial
instruments held for trading. Such gains and losses are reported
separately, if they are material.
9. Comparative Information
EXAMPLE- gains on foreign currencies
You are an importer. You make currency gains (and losses) as a
result of foreign trading transactions. These are shown as a
separate line in your income statement. These are shown net of
bank (currency) transaction charges.
When an undertaking applies an accounting policy retrospectively
or makes a retrospective restatement of items in its financial
statements or when it reclassifies items in its financial statements, it
shall present, as a minimum, three statements of financial position,
two of each of the other statements, and related notes.
An undertaking disclosing comparative information shall present, as
a minimum, two statements of financial position, two of each of the
other statements, and related notes.
An undertaking presents statements of financial position as at:
In the following examples, I/B refers to Income Statement and
Statement of financial position.
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(a)
the end of the current period,
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Presentation of Financial Statements
(b)
the end of the previous period (which is the same as the
beginning of the current period), and
c) the likely outcome and the expected timing of a resolution.
The following is an example of an appropriate disclosure:
(c)
the beginning of the earliest comparative period.
Narrative information provided in the financial statements for the
previous period may be relevant in the current period.
Note 10 Domestic mobile phone licence - dispute with government
EXAMPLE- Comparative narrative information
In 20X1 the government granted the company a 3-year licence to
operate the domestic mobile phone service. The company derives
25% of its revenue from domestic phone service.
Issue
Undertakings should include comparative information for narrative
and descriptive information when it is relevant to an understanding
of the current period’s financial statements.
When should management include comparative narrative
information in the financial statements?
Background
An undertaking has an exclusive 3-year licence to operate the
domestic mobile phone service; the government had granted the
licence. The government sued the undertaking in 20X2, alleging
that it has been providing service below the quality limits of the
concession agreement. The government has indicated its intention
to cancel the agreement that gives the undertaking the exclusivity
to operate the service. The dispute is to be settled legally and at the
balance date is yet to be resolved.
Solution
The undertaking should disclosure information about the dispute
that is useful to the users of the financial statements. The
information should not necessarily be limited to the events of the
current period. The disclosure should focus on:
a) summary of the dispute;
b) the actual and potential financial effect; and
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The conditions of the licence included seven performance targets.
The company is currently in dispute with the government over
whether it has met a specific target.
The dispute has not impacted on the undertaking’s financial
performance in 20X1
or 20X2. Withdrawal of the licence could potentially reduce the
undertaking’s revenue in 20X3.
Management is confident however that it has met all performance
targets, and the company’s legal advisers have confirmed this view.
Details of a legal dispute, the outcome of which was uncertain at
the last end of the reporting period, and is yet to be resolved, are
disclosed in the current period.
Users benefit from information that the uncertainty existed at the
last end of the reporting period, and about the steps that have been
taken during the period, to resolve the uncertainty.
EXAMPLE- lawsuit
At the start of a lawsuit, the result may be difficult to estimate, and
only a contingent liability can be noted.
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Presentation of Financial Statements
As a lawsuit nears conclusion, the result may be estimable, and a
provision or asset may be recorded. Narrative should also be
provided to enable users to understand the progress of the case.
IAS 8 deals with the adjustments to comparative information
required when an undertaking changes an accounting policy, or
corrects an error.
When the presentation of items in the financial statements is
amended, comparative amounts shall be reclassified, unless
the reclassification is impracticable (see IAS 8).
10. General Review
When comparative amounts are reclassified, an undertaking
shall disclose:
(i) the nature of the reclassification;
(ii) the amount of each item (or class of items) that is reclassified;
and
(iii) the reason for the reclassification.
When it is impracticable to reclassify comparative amounts, an
undertaking shall disclose:
The business and accounting knowledge of users is assumed to be
reasonable, but they are not assumed to have a comprehensive of
your business. This guides the level of detail and explanation that
will be provided in the financial statements.
IAS 1 requires particular disclosures on the face of the statement of
financial position, income statement, and statement of changes in
equity, and requires disclosure of other line items either on the face
of those statements, or in the notes. IAS 7 sets out requirements
for the presentation of a cash flow statement.
(i) the reason for not reclassifying the amounts; and
Disclosures are made either on the face of the statement of
financial position, income statement, statement of changes in equity
or cash flow statement (whichever is relevant), or in the notes.
(ii) the nature of the adjustments, that would have been made, if the
amounts had been reclassified.
Structure and Content
The inter-period comparability of information assists users,
especially for predictive purposes. It may be impracticable to
reclassify comparative information for a particular period, to achieve
comparability with the current period.
Data may not have been collected (in the prior period) in a way that
allows reclassification, and it may not be practicable to recreate the
information.
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Introduction
IAS 1 requires particular disclosures in the statement of financial
position or of comprehensive income, in the separate income
statement (if presented), or in the statement of changes in equity
and requires disclosure of other line items either in those
statements or in the notes.
IAS 7 Statement of Cash Flows sets out requirements for the
presentation of cash flow information.
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Presentation of Financial Statements
11. Identification of the Financial Statements
The financial statements shall be identified clearly, and
distinguished from other information in the same document. Users
must be able to distinguish information that is prepared using
IFRSs, from other information that is not the subject of those
requirements.
Companies have aligned their choice and presentation of nonGAAP measures under IFRS as much as possible with what they
reported under national GAAP.
This has allowed users to compare non-GAAP measures calculated
using IFRS recognition and measurement principles with the
measures calculated on the previous basis.
Survey of income statements IFRS News
April 2007
No evidence of cherry-picking
The financial statements of 2,800 companies were surveyed,
specifically looking at the additional income measures companies
included in their financial statements beyond the minimum required
by IFRS.
Companies do not appear to have cherry-picked additional income
measures to show their results in a more positive light; the overall
trends (rise or fall) for the alternative income measures reported
were similar to the trends for net profit under IFRS.
The survey also examined how companies present these nonGAAP measures in their income statements.
Companies generally met IFRS presentation requirements for the
income statement.
“Investors tell us that additional income measures are useful and
that they take
them into account when making investment decisions,” says
Leandro van
Dam, PwC partner in the Netherlands and co-sponsor of the
survey.
Industry variations
“They are also looking for non-GAAP measures that management
uses to run the business. They want consistency of information
over time and comparability among companies.” Debate on the use
of non-GAAP measures is gathering interest.
National trends are still strong
Some highlights from the report are summarised below.
A bridge from old to IFRS
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Industry variations in EBITDA and similar measures are consistent
between 2004 reporting under national GAAP and 2005 IFRS
reporting. Companies already appear to be responding to investor
demands for international comparability within industry sectors.
Countries that have historically reported certain non-GAAP
measures still do so under IFRS; those that did not report specific
non-GAAP measures did not start to do so.
International comparability of non-GAAP reporting in the first year of
application was unlikely to arise spontaneously. Management had
little opportunity to
compare reporting practices with their peers and limited experience
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Presentation of Financial Statements
of IFRS-related discussions with investors, regulators and other
parties.
(v) the level of rounding used in presenting amounts in the financial
statements.
Many conferences and industry sessions focused on recognition
and measurement and paid little attention to format requirements
and options for additional line items in the income statement.
These requirements are normally met by presenting page
headings, and abbreviated column headings, on each page of
the financial statements.
Judgement is required in
determining the best presentation.
There was therefore was no real platform for development of
market norms.
Companies may find the research useful in deciding what to
communicate to the
market in next year’s IFRS financial statements.
When the financial statements are presented electronically,
separate pages are not always used; the above items are then
presented frequently enough to ensure a proper
understanding of the information.
“This research should enable management to look at what peers
are doing,” says Leandro, “and consider whether current diversity of
non-GAAP measurement and presentation holds any clues for
better ways of communicating with investors in future.”
Financial statements are often made more understandable by
presenting information in thousands (or millions) of units of the
presentation currency. This is acceptable if the level of rounding in
presentation is disclosed, and material information is not omitted.
Download the PDF from pwc.com/ifrs
12. Frequency of Reporting
Each component of the financial statements shall be identified
clearly. In addition, the following information shall be displayed
prominently (and repeated when it is necessary), for a proper
understanding of the information presented:
Financial statements shall be presented at least annually.
(i) the name of the reporting undertaking, and any change from the
preceding end of the reporting period;
(ii) whether the financial
undertaking, or a group;
statements
cover
the
individual
(iii) the date of the end of the reporting period, or the period covered
by the financial statements, whichever is appropriate to that
component of the financial statements;
(iv) the presentation currency,
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When the end of the reporting period changes, and the annual
financial statements are presented for a period longer (or shorter)
than one year, an undertaking shall disclose, (in addition to the
period covered):
(i) the reason for using a longer (or shorter) period; and
(ii) the fact that comparative amounts for the financial statements
are not entirely comparable.
EXAMPLE- change of end of the reporting period
Your firm has just been purchased by an investor, who wishes to
change your year-end from June to December. Your first set of
financial statements (under the new regime) will be for a 6 month
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Presentation of Financial Statements
period, and will not be comparable with prior periods. The above
disclosures will need to be made.
Normally, financial statements are consistently prepared
covering a one-year period. Some undertakings prefer to
report for a 52-week period. IAS 1 does not preclude this
practice, because the financial statements are unlikely to be
materially different from those that would be presented for one
year.
EXAMPLE-52-week period
You operate department stores. Your period is 52 weeks, so that
you can end the period on a Sunday, and count inventory on a
Monday.
For each asset and liability line item that combines amounts
expected to be recovered (or settled)
(i)
no more than twelve months after the end of the
reporting period, and
(ii)
more than twelve months after the end of the
reporting period,
an undertaking shall disclose the amount expected to be
recovered (or settled) after more than twelve months.
When an undertaking supplies goods (or services) within a clearly
identifiable operating cycle, separate classification of current and
non-current assets (and liabilities) provides useful information, by
distinguishing the net assets that are continuously circulating as
working capital, from those used in long-term operations.
13. Statement of financial position
Current/Non-current Distinction
EXAMPLE-Current and non-current distinction based on
operating cycle
Issue
An undertaking shall present current and non-current assets, and
current and non-current liabilities, as separate classifications on the
face of its statement of financial position, except when a
presentation based on liquidity provides information that is more
relevant.
When that exception applies, all assets and liabilities shall be
presented broadly in order of liquidity.
EXAMPLE-Financial Institutions
Your firm is a financial institution, and you present your statement
of financial position items broadly in order of liquidity (see IFRS 7
workbook).
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An asset that satisfies any of the following criteria shall be classified
as a current asset:
a) its realisation, sale or consumption is expected to occur in the
undertaking’s normal operating cycle;
b) it is held for sale;
c) its realisation is expected to occur within twelve months after the
date of the end of the reporting period; or
d) it is unrestricted cash, or a cash equivalent.
Can an undertaking classify a receivable that it does not expect to
realise within twelve months as a current asset in its statement of
financial position?
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Presentation of Financial Statements
Background
Undertaking A builds airplanes for national airlines. The average
operating cycle is 15 months, based on the length of time it takes to
build a plane. A’s management presents a classified balance sheet
to distinguish its current and non-current assets and liabilities. The
undertaking carries accounts receivable that it expects to realise in
15 months.
Solution
Yes, A should classify the receivable as a current asset, as it
expects to realise the receivable in the normal course of its 15month operating cycle.
The undertaking’s accounting policy note should describe the policy
on classification of current and non-current items.
It also highlights assets that are expected to be converted into cash
within the current operating cycle, and liabilities that are due for
settlement within the same period.
An undertaking is permitted to present some of its assets and
liabilities using a current/non-current classification, and others in
order of liquidity, when this provides information that is more
relevant.
The need for a mixed basis of presentation might arise when an
undertaking has diverse operations.
Financial assets include trade and other receivables, and financial
liabilities include trade and other payables.
Information on the expected date of recovery and settlement of
non-monetary assets and liabilities, such as inventories and
provisions, is also useful, whether or not assets and liabilities are
classified as current or non-current.
An undertaking discloses the amount of inventories that are
expected to be sold more than twelve months after the end of the
reporting period.
Current Assets
An asset shall be classified as current, when it satisfies any of the
following criteria:
(i) it is expected to be converted to cash (or is intended for sale, or
consumption) in the normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is expected to be converted to cash within twelve months,
after the end of the reporting period; or
(iv) it is cash (or a cash equivalent, as defined in IAS 7), unless it is
restricted from being exchanged (or used to settle a liability),
for at least twelve months after the end of the reporting period.
EXAMPLE - Presentation of cash subject to restrictions over use
Issue
Information about expected dates of conversion into cash of assets
and liabilities is useful in assessing the liquidity, and solvency, of an
undertaking. IFRS 7 requires disclosure of the maturity dates of
financial assets, and financial liabilities.
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Should an undertaking include in its consolidated financial
statements cash and cash equivalents, held by a subsidiary that is
not available for use by other group undertakings?
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Presentation of Financial Statements
Background
A subsidiary holds cash and cash equivalent balances with
domestic banks. It operates in a country where there are exchange
controls and the subsidiary is restricted from sending cash abroad
to fellow subsidiaries and to the parent.
The amount of cash held is neither excessive nor short of the
subsidiary’s operating needs.
Solution
The existence of currency restrictions in a foreign jurisdiction would
not preclude the classification of the subsidiary’s cash and cash
equivalent balance as a current asset in the consolidated financial
statements.
The subsidiary needs the cash to meet its operating requirements,
and will therefore use it freely.
The undertaking should, however, disclose the amount of cash and
cash equivalents that is not available for use by the group [IAS7].
Current Liabilities
A liability shall be classified as current, when it satisfies any of the
following criteria:
(i) it is expected to be settled in normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the end of the
reporting period; or
(iv) the undertaking does not have an unconditional right to defer
settlement of the liability, for at least twelve months after the end
of the reporting period.
All other liabilities shall be classified as non-current.
Some current liabilities, such as trade payables and some accruals
for staff and other operating costs, are part of the working capital
used in the normal operating cycle.
The disclosure should include a commentary that will help users
understand the impact of these restrictions in the undertaking’s
financial position and liquidity.
TRADE AND OTHER PAYABLES summary
All other assets shall be classified as non-current.
Trade and other payables are current liabilities for which the
amount to be settled is usually known rather than uncertain (as for
provisions). Undertakings, almost without exception, carry some
type of trade and other payables on their statement of financial
position.
IAS 1 uses the term ‘non-current’ to include tangible,
intangible and financial assets of a long-term nature. It does
not prohibit the use of alternative descriptions, if the meaning
is clear.
The operating cycle is the time between the acquisition of assets for
processing, and their conversion in cash. When the normal
operating cycle is not clearly identifiable, it is assumed to be twelve
months.
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What are trade and other payables?
Items generally included in trade and other payables are: trade
payables; amounts payable under statutory obligations such as
social security obligations and payroll taxes.
23
Presentation of Financial Statements
These items are presented within the "Trade and other payables"
line item on the face of the statement of financial position.
Current liabilities are those expected to be settled in the normal
course of the undertaking’s operating cycle; due to be settled within
twelve months of the date of the end of the reporting period; held
primarily for the purpose of being traded; or those for which the
undertaking does not have an unconditional right to defer
settlement for at least twelve months after the date of the end of the
reporting period.
Most trade and other payables fall within the definition of financial
liabilities and are subject to the recognition and measurement rules
that apply to those liabilities.
Initial recognition
An undertaking should recognise trade and other payables when it
becomes a party to the contractual provisions of the instrument.
An undertaking’s obligations concerning trade and other payables
are usually easily identified and the point of recognition is clear.
Most obligations are legally enforceable and arise under contractual
arrangements. These include amounts owed for assets purchased
or services obtained (trade creditors), and obligations to provide
goods and services where an external party has paid in advance.
Obligations are often imposed by statute. An undertaking should
recognise these obligations on the basis of notices and requests for
payment from the relevant authority. Constructive obligations
should be recognised on the basis of amounts promised to third
parties.
An undertaking often incurs obligations in the form of financial and
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performance guarantees. For example, an undertaking may sell its
receivables yet retain a portion of the credit risk in these
receivables through guarantees.
The recognition of guarantees depends on their nature. Financial
guarantees that provide for payments to be made if the debtor fails
to make a payment when due should be recognised as part of
provisions or, when the recognition criteria are not met, disclosed
as contingent liabilities.
Financial guarantees that provide for payments to be made in
response to changes in a specified index such as a credit rating
should be recognised as financial instruments.
Accrued expenses are liabilities to pay for goods or services that
have been received or supplied but have not been paid, invoiced or
formally agreed with the supplier.
The recognition of accrued expenses results directly from the
recognition of expenses for items of goods and services consumed
during the period. Although it is sometimes necessary to estimate
the amount or timing of accruals, the uncertainty is generally much
less than for provisions.
Initial measurement
Initial measurement of trade and other payables is usually at fair
value. The initial measurement of financial liabilities not at fair value
through profit or loss includes transaction costs directly attributable
to the acquisition or issue of the financial liability.
Initial fair value is established by reference to amounts agreed
between the undertaking and the supplier and amounts invoiced
from statutory authorities. Accrued expenses are measured at
management’s estimate of the fair value of the goods and services
24
Presentation of Financial Statements
received but not yet invoiced.
Financial guarantees that provide for payments to be made if the
debtor fails to make a payment when due should initially be
recognised at fair value.
Subsequent measurement
The same normal operating cycle applies to the classification of
assets and liabilities. When the undertaking’s normal operating
cycle is not identifiable, it is assumed to be twelve months.
Examples of current liabilities are financial liabilities, classified as
‘held for trading’, bank overdrafts, and the current portion of noncurrent financial liabilities, dividends payable, income taxes and
other non-trade payables.
Items classified within trade and other payables are not usually remeasured, as the obligation is usually known with a high degree of
certainty and its settlement is short-term.
EXAMPLE- Presentation of loan from parent
Financial guarantees that provide for payments to be made if the
debtor fails to make a payment when due should be re-measured at
the higher of (i) the amount recognised under IAS 37 and (ii) the
amount initially recognised (that is, fair value) less, where
appropriate, cumulative amortisation recognised in accordance with
IAS 18.
An undertaking shall present further sub-classifications of the line
items presented in the statement of financial position. Those subclassifications may be presented either on the face of the statement
of financial position or in the notes, classified in a manner
appropriate to the undertaking’s operations.
Derecognition
Derecognition occurs when the contractual obligation is cancelled,
expired or discharged, for example through payment of the amount
due, or through the counterparty forgiving the debt.
Presentation and disclosure
Trade and other payables should be presented as a separate line
item on the face of the statement of financial position.
Issue
Should a parent, in its single-undertaking financial statements,
present amounts due from a subsidiary on the face of its statement
of financial position as an asset, and if so how should it be
classified?
Background
A parent provides a loan to a subsidiary. Interest of 8% is paid
annually. There is no specified repayment date; however, the loan
is payable on demand.
Solution
Such items are classified as current liabilities, even if they are due
to be settled more than twelve months after the end of the reporting
period.
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Disclosure on the face of the statement of financial position is not
mandatory, but it is best practice. IFRS require separate disclosure
of amounts due from subsidiaries, but allow this to be presented in
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Presentation of Financial Statements
the notes rather than on the face of the statement of financial
position.
accruals (for example, accruals for audit fees
payable); and
The liability is current because the subsidiary does not have
unconditional right to defer settlement of the liability. The parent, in
its separate financial statements, should also classify the amount
due from the subsidiary as a current asset.
social security taxes and other amounts, such as
payroll taxes payable in respect of wages and
salaries.
Financial liabilities that provide financing on a long-term basis (not
part of the working capital) and are not due for settlement within
twelve months after the end of the reporting period, are non-current
liabilities.
b)
Provisions
Provisions for litigation, claims and assessments; and
Current portion of provisions for long term employee
benefits such as jubilee payments.
c)
Financial liabilities
EXAMPLE- Classification and presentation of current liabilities
Current portion of fixed term interest-bearing loans;
and
Issue
Loans repayable on demand.
The following current liabilities should be disclosed on the face of
the statement of financial position:
a) trade and other payables;
b) provisions;
c) financial liabilities (excluding trade and other payables and
provisions); and
d) current income tax liabilities.
The following example highlights specific classes of current
liabilities to be disclosed on the face of the statement of financial
position, together with examples of items to be included under the
headings.
Solution
a)
Trade and other payables, including:
trade creditors;
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d)
Current income tax liabilities, including:
corporate income taxes; and income taxes payable on
dividends.
Presentation of provisions and other liabilities with current
and non-current portion
Issue
How should management present the current and non-current
portions of different types of provisions and liabilities in the
undertaking’s statement of financial position?
Background
An undertaking has recognised the following liabilities in its
statement of financial position:
26
Presentation of Financial Statements
a)
b)
c)
d)
warranty provisions;
provisions for environmental liabilities;
pension liabilities; and
deferred tax liabilities.
Solution
a) Warranty provisions - current or non-current liabilities
The classification will depend on the terms of the warranty.
Warranties that guarantee product performance for a twelvemonth period are classified as current liabilities. Conversely,
warranties that guarantee product performance for an extended
period are classified as non-current liabilities.
b) Provisions for environmental liabilities - non-current liabilities
This type of provision is unlikely to be part of an undertaking’s
working capital. Management should therefore classify
environmental provisions as non-current liabilities.
c) Pension liabilities - non-current liabilities
Considering the nature of these liabilities, management is often
not able to reasonably determine the current and non-current
portion reliably. It should therefore classify these liabilities as
non-current liabilities.
The treatment of financial liabilities, such as bank loans is
strict. The end of the reporting period is the key day by which
everything must be in place. If refinancing is to take place, the
end of the reporting period is the benchmark.
Failure to refinance by this date may require the undertaking to
record a finance liability as current, even if it is being
renegotiated to be repaid over a longer period.
This may have severe consequences, even prohibiting the
financial statements to be prepared on a going-concern basis.
An undertaking classifies its financial liabilities as current, when
they are due to be settled within twelve months after the end of the
reporting period, even if:
(i) the original term was for a period longer than twelve months;
and
(ii) an agreement to refinance, or to reschedule payments, on a
long-term basis is completed after the end of the reporting
period, and before the financial statements are approved for
issue.
EXAMPLE- refinancing after the end of the reporting period
You need to refinance your long-term loan. Your end of the
reporting period is December, you sign the refinancing in January
and approve your financial statements in February.
d) Deferred tax liabilities - non-current liabilities
Management should present any deferred tax liabilities as noncurrent liabilities, even if the temporary differences giving rise to
the liabilities are expected to reverse within 12 months.
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The long-term loan is shown as a current liability, as it was not
refinanced by the end of the reporting period.
If an undertaking has the discretion to refinance (or roll over) an
obligation for at least twelve months after the end of the reporting
period, under an existing loan facility, it classifies the obligation as
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Presentation of Financial Statements
non-current, even if it would otherwise be due within a shorter
period.
EXAMPLE- refinancing after the end of the reporting period,
but with an option
You need to refinance your long-term loan. You have an option to
renew your facility. Your end of the reporting period is December,
you sign the refinancing in January and approve your financial
statements in February.
A’s bank financing over the long term.
The committed facility has a scheduled maturity and the lender is
not able to cancel unilaterally. This facility does not expire within the
next 12 months.
Solution
Undertaking A should classify the borrowing as a non-current
liability.
The long-term loan is shown as a non-current liability, as you had
the refinancing option.
The borrowing can be rolled over at the undertaking’s discretion
and is not therefore part of its working capital.
EXAMPLE- Classification of liability with roll-over facilities
Conversely, where an undertaking does not have the discretion to
refinance its borrowings, amounts due should be classified as
current liabilities.
Issue
If an obligation can be refinanced or rolled over at the discretion of
the undertaking for at least twelve months after the date of the end
of the reporting period under an existing loan facility, it shall be
classified as non-current.
This rule applies even if the obligation would otherwise be due
within a shorter period. However, when the undertaking has not the
discretion to refinance or roll over the obligation (for example, there
is no agreement to refinance), the potential to refinance is not
considered and the obligation is classified as current.
What are the conditions under which an undertaking might classify
borrowings to be repaid within the operating cycle as non-current
liabilities?
Background
Undertaking A’s management has entered into a facility
arrangement with a financial institution to ensure the availability of
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When refinancing (or rolling over) the obligation is not at the
discretion of the undertaking (there is no agreement to refinance),
the obligation is classified as current.
When an undertaking breaches a covenant of a long-term loan
agreement on, or before, the end of the reporting period, with the
impact that the liability becomes payable on demand, the liability is
classified as current.
This applies even if the lender has agreed, after the end of the
reporting period, and before the approval of the financial statements
for issue, not to demand payment, as a consequence of the breach.
EXAMPLE- amending a breach of covenant, after the end of the
reporting period
You breach the terms of your long-term loan. It becomes payable
on demand.
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Presentation of Financial Statements
Your end of the reporting period is December, the lender agrees not
to demand payment as a consequence of the breach in January,
and you approve your financial statements in February.
The long-term loan is shown as a current liability: you were in
breach at the end of the reporting period.
The liability is classified as current because, at the end of the
reporting period, the undertaking does not have an unconditional
right to defer its settlement for at least twelve months, after that
date.
However, the liability is classified as non-current, if the lender
agreed by the end of the reporting period to provide a period of
grace ending at least twelve months after the end of the reporting
period, within which the undertaking can rectify the breach, and
during which, the lender cannot demand immediate repayment.
EXAMPLE- amending a breach of covenant, with a period of
grace
You breach the terms of your long-term loan. It becomes payable
on demand. Your end of the reporting period is December 31. The
lender agrees not to demand payment as a consequence of the
breach prior to December 31, giving you at least 12 months grace
to rectify the breach.
The long-term loan is shown as a non-current liability, due to the
period of grace.
In respect of loans classified as current liabilities, if the following
events occur between the end of the reporting period, and the date
the financial statements are approved for issue, those events
qualify for disclosure as non-adjusting events in accordance with
IAS 10:
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(i) refinancing on a long-term basis;
(ii) rectification of a breach of a long-term loan agreement; and
(iii) the receipt from the lender of a period of grace, to rectify a
breach of a long-term loan agreement, ending at least twelve
months after the end of the reporting period.
A non-adjusting event means that you note the new information, but
do not update your accounts to reflect it. Thus, current liabilities
remain as current liabilities.
14. Information to be Presented on the Face of the Statement
of financial position (balance sheet)
As a minimum, the face of the statement of financial position shall
include line items that present the following amounts:
(i) property, plant and equipment;
(ii) investment property;
(iii) intangible assets;
(iv) financial assets (excluding amounts shown under (v), (viii) and
(ix));
(v) investments, accounted for using the equity method;
(vi) biological assets;
(vii) inventories;
(viii) trade and other receivables;
(ix) cash and cash equivalents;
(x) the total of assets classified as held for sale and assets
included in
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Presentation of Financial Statements
disposal groups classified as held for sale in accordance
with IFRS 5 (see below)
(xi) trade and other payables;
(xii) provisions;
(xiii) financial liabilities (excluding amounts shown under (x) and
(xi));
(xiv) liabilities and assets for current tax (as defined in IAS 12
Income Taxes);
You have large tax losses carried forward in your home country, but
tax liabilities abroad. You chose to expand the tax liability lines to
show both local tax (none) and foreign tax to clarify the position.
Deferred tax assets (and liabilities) are always non-current assets
(liabilities).
Line items are included when the size, nature or function of an item
(or aggregation of similar items) is such that separate presentation
is relevant to an understanding of the financial position.
(xvi) minority interest, presented within equity; and
The descriptions used, and the ordering of items (or aggregation of
similar items) may be amended according to the nature of the
undertaking, and its transactions, to provide information that is
relevant to an understanding of the financial position.
(xvii) issued capital, and reserves attributable to equity holders of
the parent.
For example, a bank amends the above descriptions to apply
the requirements in IFRS 7.
The face of the statement of financial position shall include line
items that present the following amounts:
The judgement on whether additional items are presented
separately is based on an assessment of:
i.
(i) the nature and liquidity of assets;
(xv) deferred tax liabilities and deferred tax assets (as defined in
IAS 12);
ii.
the total of assets classified as held for sale and assets
included in disposal groups classified as held for sale in
accordance with IFRS 5; and
liabilities included in disposal groups classified as held for
sale in accordance with IFRS 5.
Additional line items, headings and subtotals shall be
presented on the face of the statement of financial position,
when such presentation is relevant to an understanding of the
financial position.
EXAMPLE –tax losses
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(ii) the function of assets; and
(iii) the amounts, nature and timing of liabilities.
EXAMPLE-assets categorised by function
You lease photocopiers and drinks machines. Identifying the results
and
net assets (assets and liabilities) employed by each function of the
business helps users.
The use of different measurement bases, for different classes of
assets, suggests that their nature (or function) differs and,
therefore, that they should be presented as separate line items.
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Presentation of Financial Statements
Different classes of property, plant and equipment can be carried at
cost, or revalued amounts, in accordance with IAS 16.
(iv) provisions are disaggregated into provisions for staff benefits,
and other items; and
15. Information to be Presented either on the Face of the
Statement of Financial Position, or in the Notes
(v) equity capital and reserves are disaggregated into various
classes, such as:
An undertaking shall disclose, either on the face of the statement of
financial
position, or in the notes, further subclassifications of the line items
presented, classified in a manner appropriate to the operations.
The detail provided in subclassifications depends on the
requirements of IFRSs and on the size, nature and function of the
amounts involved.
The disclosures vary for each item, for example:
(i) items of property, plant and equipment are disaggregated into
classes in accordance with IAS 16;
(ii) receivables are disaggregated into amounts receivable from:
-
trade customers,
-
receivables from related parties,
-
prepayments and
-
other amounts;
(iii) inventories are subclassified, into classifications such as:
-
merchandise,
-
production supplies,
-
materials,
-
work in progress and
-
finished goods;
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-
paid-in capital,
-
share premium and
-
reserves.
An undertaking shall disclose the following, either on the face
of the statement of financial position, or in the notes:
(1) for each class of share capital:
(i) the number of shares authorised;
(ii) the number of shares issued and fully paid, and issued but
not fully paid;
(iii) par value per share, or that the shares have no par value;
(iv) a reconciliation of the number of shares outstanding at the
beginning, and end, of the period;
(v) the rights, preferences and restrictions attaching to that
class, including restrictions on the distribution of dividends,
and the repayment of capital;
(vi) shares in the undertaking held by the undertaking, or by its
subsidiaries, or associates; and
(vii) shares reserved for issue under options, and contracts for
the sale of shares, including the terms and amounts; and
(ii) a description of the nature, and purpose, of each reserve within
equity.
EXAMPLE- ‘legal’ reserves
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Presentation of Financial Statements
Some jurisdictions require firms to donate 10% of annual profit to a
reserve, sometimes called a legal reserve, that cannot be
distributed to shareholders (except in liquidation after all creditors
have been paid).
Such regulations may be of concern to investors, as this will limit
dividends.
(c) share of the income statement of associates, and joint ventures
accounted for using the equity method;
(c2) if a financial asset is reclassified so that it is measured at
fair value, any gain or loss arising from a difference between
the previous carrying amount and its fair value at the
reclassification date (as defined in IFRS 9);
An undertaking without share capital, such as a partnership or trust,
shall disclose information equivalent to that required above,
showing changes during the period in each category of equity
interest, and the rights, preferences, and restrictions attaching to
each category of equity interest.
d) tax expense;
16. Statement of comprehensive income
(ii) the post-tax gain or loss recognised on the measurement to fair
value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operation;
An undertaking shall present all items of income and expense
recognised in a period:
(i) in a single statement of comprehensive income, or
(ii) in two statements: a statement displaying components of profit
or loss (separate income statement) and a second statement
beginning with profit or loss and displaying components of other
comprehensive income (statement of comprehensive income).
Information to be presented in the statement of comprehensive
income
As a minimum, the face of the statement of comprehensive income
shall include line items that present the following amounts for the
period:
(a) revenue;
(b) finance costs;
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(e) a single amount comprising the total of:
(i) the post-tax profit or loss of discontinued operations and
(f) profit or loss;
(g) each component of other comprehensive income classified by
nature (excluding amounts in (h));
(h) share of the other comprehensive income of associates and
joint ventures accounted for using the equity method; and
(i) total comprehensive income.
An undertaking shall disclose the following items in the statement of
comprehensive income as allocations of profit or loss for the period:
(a) profit or loss for the period attributable to:
(i) minority interest, and
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Presentation of Financial Statements
(ii) owners of the parent.
(b) total comprehensive income for the period attributable to:
(i) minority interest, and
(ii) owners of the parent.
Additional line items, headings and subtotals shall be presented on
the face of the statement of comprehensive income and the
separate income statement (if presented), when such presentation
is relevant to understanding the financial performance.
As the impacts of various transactions differ in frequency, potential
for gain (or loss) and predictability, disclosing the components of
financial performance assists in an understanding of the
performance achieved, and in making projections.
Background
Undertaking A’s management wishes to present the results of the
undertaking’s share of profits and losses of associates accounted
for using equity method before the line of finance costs.
Presented below is an extract from the undertaking’s proposed
income statement
Share of results of associates
XXX
Finance costs
(XX)
Profit before tax
XXX
Additional line items are included on the face of the statement of
comprehensive income and the separate income statement (if
presented), and the descriptions used (and the ordering of items)
are amended, when this is necessary to explain the elements of
financial performance.
Solution
EXAMPLE- Order of presentation of the income statement’s
components
Deviation from this general sequence would be rare, although
permitted when this is necessary to explain the elements of
performance.
There is a suggested ordering of items to be reported on the face of
the income statement: finance costs are presented before the
results of associates.
Issue
The description and ordering of items on the face of the income
statements should be amended when this is necessary to explain
the elements of performance.
Can management present the lines in the income statement in a
different order from that described in IAS 1?
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Additionally, management should present and classify items in the
income statement consistently from one period to the next.
Factors to be considered include materiality, and the nature (and
function) of the components of income, and expenses. For
example, a bank amends the descriptions to apply the requirements
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Presentation of Financial Statements
in IFRS 7. Income and expense items are not offset unless the
criteria above are met.
No item should be described as extraordinary items, either on
the face of the income statement, or in the notes.
(ii) before related tax effects with one amount shown for the
aggregate
amount of income tax relating to those components.
An undertaking shall disclose reclassification adjustments relating
to components of other comprehensive income.
Profit or loss for the period
An undertaking shall recognise all items of income and expense in
a period in profit or loss unless an IFRS requires or permits
otherwise. Dividends are not shown in profit or loss for the period.
Some IFRSs specify circumstances when an undertaking
recognises particular items outside profit or loss in the current
period. IAS 8 specifies two such circumstances: the correction of
errors and the effect of changes in accounting policies.
Other IFRSs specify whether and when amounts previously
recognised in other comprehensive income are reclassified to profit
or loss. Such reclassifications are referred to in IAS 1as
reclassification adjustments.
A reclassification adjustment is included with the related component
of other comprehensive income in the period that the adjustment is
reclassified to profit or loss.
Other comprehensive income for the period
For example, gains realised on the disposal of available-for-sale
financial assets are included in profit or loss of the current period.
These amounts may have been recognised in other comprehensive
income as unrealised gains in the current or previous periods.
Under IFRS 9, available-for-sale financial instruments will
disappear.
An undertaking shall disclose the amount of income tax relating to
each component of other comprehensive income, including
reclassification adjustments, either in the statement of
comprehensive income or in the notes.
Those unrealised gains must be deducted from other
comprehensive income in the period in which the realised gains are
reclassified to profit or loss to avoid including them in total
comprehensive income twice.
An undertaking may present components of other comprehensive
income
either:
An undertaking may present reclassification adjustments in the
statement of comprehensive income or in the notes. An undertaking
presenting reclassification adjustments in the notes presents the
components of other comprehensive income after any related
reclassification adjustments.
Other IFRSs require or permit components of other comprehensive
income that meet the Framework’s definition of income or expense
to be excluded from profit or loss
(i) net of related tax effects, or
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34
Presentation of Financial Statements
Reclassification adjustments arise, for example, on disposal of a
foreign operation (see IAS 21), on derecognition of available-forsale financial assets (see IAS 39) and when a hedged forecast
transaction affects profit or loss (see IAS 39 in relation to cash flow
hedges).
EXAMPLE- Presentation of currency translation differences
Issue
Exchange differences arise from the translation of a foreign
undertaking’s financial statements for incorporation in a reporting
undertaking’s financial statements.
Management should classify such differences as equity until the
disposal of the net investment [IAS21].
How should management present exchange differences in the
undertaking’s statement of changes in equity?
Background
An undertaking has subsidiaries in several different countries. All of
them are consolidated, and management classifies the currency
translation differences arising from the translation of these
subsidiaries’ financial statements as translation reserve in equity.
Solution
Management should present the gain/loss on currency translations
on the face of the statement of changes in equity.
Additionally, management should present, in a note to the financial
statements, a reconciliation of the amount of such exchange
differences at the beginning and end of the period.
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Reclassification adjustments do not arise on changes in revaluation
surplus recognised in accordance with IAS 16 or IAS 38 or on
actuarial gains and losses on defined benefit plans recognised in
accordance with IAS 19.
These components are recognised in other comprehensive income
and are not reclassified to profit or loss in subsequent periods.
Changes in revaluation surplus may be transferred to retained
earnings in subsequent periods as the asset is used or when it is
derecognised (see IAS 16 and IAS 38).
Actuarial gains and losses are reported in retained earnings in the
period that they are recognised as other comprehensive income
(see IAS 19).
Income statement presentation - IFRS News - June 2005
Any group with international operations, whether listed or not,
can benefit from making it easier for its major stakeholders to
understand its financial statements.
Income statement presentation is an essential part of stakeholder
communications and IFRS aims to add transparency and
comparability to this communication. IAS 1, the standard which
deals with the presentation of financial statements, contains broad
guidelines on presentation format. The qualitative characteristics for
the financial statements in the IFRS framework only represent
general guidance.
Stakes are high for companies: broad guidelines offer opportunities
to drive their communication based on financial statement
presentation. The abuse of this flexibility, however, may do more
harm than good in the medium term.
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Presentation of Financial Statements
Analysts may be confused by presentations of ‘results before bad
news and things management didn’t expect’. Regulators will not
endorse such flexibility and will request strict rules to be applied.
Restatements may occur and companies’ reputations will be
tarnished by such behaviour.
How can companies acquire a useful and transparent presentation
of their results?
How presentation format can make a difference
Most users look at the income statement first for information on the
company’s financial performance. The notes may provide useful
additional information but the size and complexity of these often
prevent most users from considering them in detail.
The income statement presentation could influence the user’s
decision-making. IAS 1 allows companies to report income
statements on a functional (costs of sales, selling, marketing, etc...)
or a nature (salaries, rent, depreciation, etc...) basis.
The temptation to combine both presentations is high, but will
transparency and comparability result from doing so?
The first presentation could create confusion for the user and it
would not be comparable between different companies.
‘Industry practice’: slippery slope
Many companies suggest that analysts require certain disclosures
on the face of the income statement, which are not defined or
required under IFRS. ‘Earnings before interest, depreciation and
amortisation’ (EBITDA) is an example, which is used in many
capital intensive industries.
Many different calculation methods exist. Some companies exclude
all amortisation and depreciation from the subtotal; others exclude
all significant non-cash charges such as restructurings and
impairments. This makes ‘EBITDA’ a wide category that is noncomparable.
Analysts must then make
EBITDA figures based on
partial information on the
without an explanation on
users.
various adjustments to the published
information from the notes. Disclosing
face of the income statement (often
its calculation) does not add value for
Transparency
Imagine two similar companies: one excludes depreciation from its
cost-of-sales figure to derive its gross profit figure, while presenting
depreciation as a separate line item; the other includes depreciation
of production equipment in costs of sales to reflect a complete
functional presentation.
It would seem that the company that mixes function and nature
expense categories generates more gross profit. This only reflects
a choice of presentation and not the actual performance of the
company.
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Transparent reporting would result from use of a format similar to
the examples in the application guidance to IAS 1. Subtotals and
further line items only result in clearer presentation if certain criteria
are met (see box below).
Other common reporting issues
The use of the ‘operating profit’ subtotal: many companies disclose
‘operating profit’ even though IFRS no longer requires it. If this
subtotal is presented, IAS 1 states that all activities are presumed
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Presentation of Financial Statements
to be part of operations apart from the results of financing activities,
equity-accounted investments, discontinued operations and
taxation.
‘Non-recurring’ or ‘exceptional’ results: another commonly-used
subtotal is the division of operating profit to ‘recurring’ and ‘nonrecurring’ portions (or similar). Management may wish to make this
separation to exclude ‘difficult debits’ or because the items were
treated as ‘extraordinary’ under local GAAP.
These subtotals do not usually help to achieve clear and consistent
presentation, but may be acceptable if the general criteria for a
mixed presentation are met (see box below).
Restructuring: as restructuring provisions are not separate
‘functions’, it is unlikely that a separate line item for restructuring
can be used in a functional expense presentation.
A potential for bias can exist if the subtotal gets undue prominence
over the line items and the subtotals normally required by IFRS;
The presentation should be applied consistently across all years
and the ‘rules’ should be set out in the accounting policies.
An undertaking that wishes to present a subtotal for non-recurring
items should have an accounting policy which describes the
classification rules (to avoid the cherry-picking of items to be
classified as non-recurring); and
The breakdown of expenses by nature is presented in the notes to
the financial statements, as required by IAS 1: the breakdown
should be made in a separate note, which could be tied to the total
of expenses presented on the face of the income statement.
17. Information to be Presented either on the Face of the
Income Statement, or in the Notes
Conclusion
The income statement presentation can make a difference between
companies even if the underlying results are similar. A company
that follows IAS 1 will reduce subjectivity and aid comparability
between different undertakings.
When is a mixed presentation acceptable?
The mixture of function and nature, and the use of subtotals, are
only acceptable when all of the following requirements are met:
The proposed presentation is not misleading: the income statement
presentation should be unbiased. The proposed breakdown should
not result in a misleading cost-of-sales figure and overstate gross
profit.
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When items of income and expense are material, their nature
and amount shall be disclosed separately.
Separate disclosure of items of income and expense include:
(i) write-downs of inventories to net realisable value, or of property,
plant and equipment to recoverable amount (as well as reversals of
such write-downs);
(ii) restructurings of the activities of an undertaking (and reversals
of any provisions for the costs of restructuring);
(iii) disposals of items of property, plant and equipment;
(iv) disposals of investments;
(v) discontinuing operations;
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Presentation of Financial Statements
(vi) litigation settlements; and
(vii) other reversals of provisions.
An undertaking shall present an analysis of expenses, using a
classification based on either the nature of expenses, or their
function, whichever provides information that and more relevant.
Undertakings are encouraged to present the analysis in the
statement of comprehensive income or in the separate income
statement (if presented).
EXAMPLE-results categorised by function
You lease photocopiers and drinks machines. Identifying the results
and net assets employed by each function of the business helps
users.
Expenses are subclassified to highlight components of financial
performance that may differ in terms of frequency, potential for gain
(or loss) and predictability. This analysis is provided in one of two
forms.
The first form of analysis is the ‘nature of expense’ method.
Expenses are aggregated in the income statement according to
their nature (for example, depreciation, purchases of materials,
transport costs, employee benefits and advertising costs), and are
not reallocated among various functions within the undertaking.
No allocations of expenses to functional classifications are
necessary. An example of a classification using the nature of
expense method is as follows:
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Revenue
Other income
Changes in inventories of
finished goods and work in
progress
Raw materials and consumables
used
Staff benefits costs
Depreciation and amortisation
expense
Other expenses
Total expenses
Profit
X
X
X
X
X
X
X
(X)
X
The second form of analysis is the function of expense or ‘cost of
sales’ method, and classifies expenses as part of cost of sales, the
costs of distribution, or administrative activities.
At a minimum, an undertaking discloses its cost of sales separately
from other expenses. This method can provide more relevant
information to users than the ‘classification of expenses’, but
allocating costs to functions may require arbitrary allocations, and
involve judgement. An example of a classification using the function
of expense method is as follows:
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Other expenses
Profit
X
(X)
X
X
(X)
(X)
(X)
X
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Presentation of Financial Statements
Undertakings classifying expenses by function shall disclose
additional information on the nature of expenses, including
depreciation, amortisation and staff benefits expense.
The choice of method depends on historical, and industry factors
and the nature of the undertaking. Both methods provide an
indication of those costs that might vary, directly or indirectly, with
the level of sales (or production).
Management should select the most relevant presentation. As
information on the nature of expenses is useful in predicting future
cash flows, additional disclosure is required, when the function of
expense classification is used.
EXAMPLES- Presentation of currency translation differences
Issue
Exchange differences arise from the translation of a foreign
undertaking’s financial statements for incorporation in a reporting
undertaking’s financial statements. Management should classify
such differences as equity until the disposal of the net investment
[IAS21].
How should management present exchange differences in the
undertaking’s statement of changes in equity?
Background
An undertaking has subsidiaries in several different countries. All of
them are consolidated, and management classifies the currency
translation differences arising from the translation of these
subsidiaries’ financial statements as translation reserve in equity.
Solution
Management should present the gain/loss on currency translations
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on the face of the statement of changes in equity. Additionally,
management should present, in a note to the financial statements,
a reconciliation of the amount of such exchange differences at the
beginning and end of the period.
Presentation of capitalised expenses
Issue
When presenting the analysis of expenses by nature, the expenses
are aggregated in the income statement according to their nature,
and are not reallocated among various functions within the
undertaking.
How should management present, in the undertaking’s income
statement, costs that are capitalised during the period?
Background
Undertaking A presents in its income statement the analysis of its
expenses by nature. During the period, the undertaking capitalised
some of the costs related to materials and employees; these costs
were capitalised into property, plant and equipment.
Solution
Management should present the employee benefits costs and the
movement in the inventories on a gross basis. The amounts
capitalised should be shown separately as a deduction from
expenses in the income statement. The level of detail and
prominence of the deduction should be determined according to the
size and significance of the amounts capitalised. An example
disclosure is given below:
39
Presentation of Financial Statements
Revenue
X
Other income
X
Changes in inventories of finished
goods and work in progress
Raw materials and consumables used
Employee benefits costs
Depreciation and amortisation expense
Other expenses
Less: expenses capitalised in
construction of property, plant and
equipment
The undertaking received 3,000,000 from the government as
compensation for loss of income that the undertaking suffered
because the licence agreement was modified.
The original licence granted undertaking A exclusive rights to
operate in country X, and the modification allowed competition from
locally-owned businesses.
X
X
X
X
Receipt of the payment was unconditional. Management therefore
recognised it in the income statement on receipt. The compensation
represents approximately 30% of the current year profit before tax.
X
(X)
Solution
Total expenses
(X)
Profit
X
EXAMPLE- Presentation of revenue related to a government
compensation
Issue
Undertakings shall disclose separately the nature and amount of
items of income and expense when they are material.
Management would ordinarily recognise the compensation from the
government as part of ‘other income’.
However, the nature and size of the revenue is such that
management should disclose it in a separate line on the face of the
income statement. Management should present this line
immediately after or before the line ‘other income’.
The classification of the compensation as income reflects the
reason for the compensation, that is, loss of income. The
compensation would have been included within other expenses if it
had been awarded as compensation for additional costs incurred.
How should management present the revenue related to
government compensation in the undertaking’s income statement?
EXAMPLE- Classification of impairment losses
Background
The presentation of expenses by function classifies expenses
according to their function as part of cost of sales, distribution or
administrative activities.
Undertaking A operates under the terms of a government licence in
a regulated industry in country X.
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Issue
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Presentation of Financial Statements
How should management classify the impairment of goodwill?
Background
Background
Undertaking A has six subsidiaries, the largest of which,
undertaking B, represents 40% of the consolidated group’s results.
B represents a separate business segment.
An undertaking has recognised goodwill on subsidiaries’
acquisitions as well as on associates accounted for using equity
method. One subsidiary and one associate are located in a country
that is experiencing economic crisis.
During the year, management recognised impairment losses on
goodwill related to both the subsidiary and associate.
Solution
Management should classify impairment on the goodwill related to
the subsidiary within other expenses, and the impairment on the
goodwill related to the associate within ‘share of profit/loss on
associate’.
The classification of the impairment losses should follow the
same classification as the expenses related to the underlying
assets.
All undertakings in the group present a functional analysis of
expenses in their single-undertaking IFRS financial statements,
except for undertaking B, which presents an analysis by the nature
of expenses.
As a functional analysis of B’s expenses has not been prepared,
A’s management would like to present the consolidated income
statement on a split-method basis.
B’s results will be presented using a natural analysis, whereas the
rest of the group’s results will be presented on a functional basis.
A’s management argues that because B’s business is from a
different segment and therefore not comparable with the rest of the
group, the use of a different presentation basis should be
acceptable.
Solution
EXAMPLE- Use of different analysis of expenses for parent
financial statements and group financial statements
Issue
The analysis of expenses shall be presented using a classification
based on either the nature of expenses or their function within the
undertaking.
Can management mix different analysis of expenses in the group’s
income statement?
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No, management cannot adopt a mix of the two types of
analysis in the group’s financial statements. Management
must choose which format, functional or natural, is most
appropriate for the consolidated financial statements.
The results of all undertakings within the group must be
prepared on the chosen basis, which will require part of the
group to convert their results from that used in their singleundertaking financial statements to that used in the
consolidated financial statements.
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Presentation of Financial Statements
18. Statement of Changes in Equity
Fair value reserve
This statement is new to many jurisdictions. Most movements on
equity were traditionally shown on the face of the Income
Statement. Dividends would be shown, (but increases in capital
would mostly not be shown).
Unrealised gains/losses (net of tax) on investments classified as
available-for-sale shall be recognised in equity (within a fair value
reserve). These gains/losses are recycled to the income statement
on disposal or when the asset becomes impaired.
The difference between opening and closing equity was detailed in
the Income Statement. Charging (or crediting) directly to equity was
prohibited in many jurisdictions. Foreign currencies (involving
investments) and revaluations have been instrumental in providing
the need for this separate statement.
Hedging reserve
It reconciles the Income Statement with the movements on equity
for the period.
RESERVES summary
What are reserves?
Reserves, together with share capital and own equity instruments,
make up the shareholders’ equity section of an undertaking’s
statement of financial position. Reserves are not specifically
defined in IFRS.
Reserves include fair value reserves, hedging reserves, asset
revaluation reserves, foreign currency translation reserves and
retained earnings. These reserves result from fair value and foreign
currency translation adjustments which IFRS requires to be
reflected in equity rather than income.
Reserves are not re-measured, but they may need to be restated
where an undertaking is reporting in the currency of a
hyperinflationary economy.
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IFRS requires that the effective portion of gains and losses (net of
tax) arising from the revaluation of a financial instrument designated
as a cash flow hedge, be deferred in a separate component of
equity. The reserve is usually described as a hedging reserve.
These deferred gains and losses are subsequently released to the
income statement in the period or periods when the hedged item
affects the income statement.
If the hedged cash flows result in the recognition of a non-financial
asset or liability on the statement of financial position, the
undertaking can choose to adjust the basis of the asset or liability
by the amount deferred in equity.
However, this is not permitted if the hedged cash flows result in the
recognition of a financial asset or liability.
If the hedging relationship ceases because one of the criteria for
hedge accounting is no longer met, the hedge is revoked or the
hedging instrument is expired, sold, terminated or exercised, the
gains/losses accumulated in equity are either:
released in profit and loss if the hedged item is no longer
expected to occur; or
left in equity until the hedged cash flow occurs or is no longer
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Presentation of Financial Statements
expected to occur.
Asset revaluation reserve
Subsequent to initial recognition, an item of property, plant and
equipment may be revalued to fair value.
The revaluation surplus is recognised in equity unless it reverses a
decrease in the fair value of the same asset which was previously
recognised as an expense, in which case it is recognised in profit or
loss.
A subsequent decrease in the fair value must be charged against
this reserve.
The revaluation surplus may be transferred to retained earnings
periodically, net of the tax effect. The amount realised is the
difference between depreciation based on the revalued carrying
amount of the asset and depreciation based on the asset’s original
cost.
When the asset is sold or scrapped, the balance in the reserve may
be transferred to retained earnings as a realised gain, without
passing through the income statement.
Foreign currency translation reserve
Foreign currency translation differences shall be recognised in
equity in a foreign currency reserve.
Translation adjustments must be separately tracked in equity. On
disposal of a foreign undertaking, the cumulative translation
difference relating to the undertaking is transferred to the income
statement and included in the gain or loss on sale.
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Retained earnings
Retained earnings reflect the undertaking’s accumulated earnings
less dividends accrued and paid to shareholders, and transfers
from other reserves as outlined above. The cumulative effect of
changes in accounting policy and the correction of errors is also
reflected as an adjustment in retained earnings.
Presentation and disclosure
Reserves
An undertaking should disclose:
a) movements in the fair value reserve, hedging reserve, asset
revaluation reserve and foreign currency translation reserve in a
separate statement of changes in shareholders’ equity;
b) either on the face of the statement of financial position or in the
notes, a description of the nature and purpose of each reserve
recognised within equity; and
c) any restrictions on the appropriation or distribution of reserves.
If statutes or shareholders’ resolutions restrict the application of
retained earnings and reserves, undertakings should disclose
the specific terms of such restrictions for each item.
If a standard restricts the use of certain reserves, a clear
description of the items makes additional disclosure of their
purpose unnecessary.
Retained earnings and dividends
An undertaking should disclose:
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Presentation of Financial Statements
a) the balance of retained earnings at the start of the period, and at
the end of the reporting period, and the movements in retained
earnings either in the statement of changes in shareholders’
equity, or in a note to the financial statements;
b)
the amount of dividends recognised as distributions to equity
holders during the period, and the related amount per share.
An undertaking shall present a statement of changes in equity
showing on the face of the statement:
(a) total comprehensive income for the period, showing separately
the total amounts attributable to owners of the parent and to
minority interest;
Background
Undertaking A recognised during the period gains and losses
related to changes in the fair value of available-for-sale investments
and PPE.
Management wishes to present the gains and losses in one line in
the statement of changes in equity, and then provide a
reconciliation of the movement in a note to the financial statements.
Solution
No, the undertaking should present each of these items separately
(and a total) in its statement of changes in equity.
(b) for each component of equity, the effects of retrospective
application or retrospective restatement recognised in accordance
with IAS 8; and
The components of equity include, for example, each class of
contributed equity, the accumulated balance of each class of other
comprehensive income and retained earnings.
(c) for each component of equity, a reconciliation between the
carrying amount at the beginning and the end of the period,
separately disclosing each change.
Changes in an undertaking’s equity between the beginning and the
end of the reporting period reflect the increase or decrease in its net
assets during the period.
An undertaking shall present, either in the statement of changes in
equity or in the notes, the amount of dividends recognised as
distributions to owners during the period, and the related amount
per share.
Except for changes resulting from transactions with owners in their
capacity as owners (such as equity contributions, reacquisitions of
the undertaking’s own equity instruments and dividends) and
transaction costs directly related to such transactions, the overall
change in equity during a period represents the total amount of
income and expense, including gains and losses, generated by the
undertaking’s activities during that period.
EXAMPLE- Statement of changes in equity - Netting of gains
and losses
Issue
Undertakings should present a separate statement showing:
Can management present, as a single line item only the total gain
and losses recognised directly in equity?
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IAS 8 requires retrospective adjustments to effect changes in
accounting policies, to the extent practicable, except when the
transition provisions in another IFRS require otherwise.
44
Presentation of Financial Statements
IAS 8 also requires restatements to correct errors to be made
retrospectively, to the extent practicable.
changes in accounting policies and, separately, from corrections of
errors.
Retrospective adjustments and retrospective restatements are not
changes in equity but they are adjustments to the opening balance
of retained earnings, except when an IFRS requires retrospective
adjustment of another component of equity.
These adjustments are disclosed for each prior period and the
beginning of the period.
IAS 8 requires disclosure in the statement of changes in equity of
the total adjustment to each component of equity resulting from
Statement of Changes in Equity
Balance as at 1.1.x5
Prior year adjustment (IAS 8)
Restated Balance as at 1.1.x5
Shares issued
Share options issued
Share options exercised
Comprehensive income
Ordinary dividend
Balance as at 31.12.x5
Share
capital
1250
Share
premium
180
Share
options
100
Revaluation
reserve
65
Other
reserves
40
Retained
earnings
1800
Non-controlling
interests
50
1250
100
180
50
100
65
40
1800
50
20
40
455
-90
2165
12
6
35
-18
-15
1362
236
117
50
70
Total
3485
0
3485
150
35
0
460
-90
4040
19. Statement of Cash Flows
20. Notes
Cash flow information provides users with a basis to assess the
ability to generate cash, and the needs of the undertaking to utilise
those cash flows. IAS 7 sets out requirements for the presentation
of the cash flow information and related disclosures.
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Structure
The notes shall:
45
Presentation of Financial Statements
(i) present information about the basis of preparation of the financial
statements, and the specific policies;
(ii) disclose the information required by IFRSs that is not presented
in the financial statements; and
(iii) provide additional information relevant to understanding the
financial statements.
Notes shall be presented in a systematic manner. Each item in the
statements of financial position and of comprehensive income, in
the separate income statement (if presented), statement of changes
in equity, and cash flow statement shall be cross-referenced to any
related information in the notes.
Notes are normally presented in the following order, which assists
users in understanding the financial statements, and comparing
them with those of other undertakings:
(i)
a statement of compliance with IFRSs
(ii)
a summary of significant policies supporting information
for items presented in the statements of financial position
and of comprehensive income, in the separate income
statement (if presented), statement of changes in equity
and cash flow statement, in the order in which each
statement and each line item is presented; and
(iv)
other disclosures, including:
contingent liabilities and unrecorded contractual
commitments; and
- non-financial disclosures, such as the undertaking’s
financial risk management objectives and policies).
It may be necessary, or desirable, to vary the order of items within
the notes.
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Information on changes in ‘fair value’ recorded in income statement
may be combined with information on maturities of financial
instruments, although the former disclosures relate to statement of
comprehensive income or separate
income statement (if presented) and the latter relate to the
statement of
financial position..
A systematic structure for the notes is retained, as far as
practicable.
Notes providing information about the basis of preparation of the
financial statements, and specific accounting policies, may be
presented as a separate component of the financial statements.
21 Disclosure of Accounting Policies
An undertaking shall disclose in the summary of significant
policies:
(i) the measurement bases used in the financial statements; and
(ii) the other policies used, that are relevant to an understanding of
the financial statements.
Users should be informed of the measurement bases (historical
cost, current cost, net realisable value, fair value or recoverable
amount) because the basis on which the financial statements are
prepared affects their analysis. (see Framework workbook ).
When more than one measurement basis is used in the financial
statements, for example when particular classes of assets are
revalued, it is sufficient to provide an indication of the categories of
assets (and liabilities) to which each measurement basis is applied.
46
Presentation of Financial Statements
In deciding whether a particular policy should be disclosed,
management considers whether disclosure would assist users in
understanding how transactions are reflected in the reported
financial performance, and financial position.
EXAMPLE-Group accounts
When business combinations have occurred, the policies used for
measuring goodwill, and minority interest are disclosed.
Disclosure of particular policies is useful when those policies are
selected from alternatives allowed in Standards.
An policy may be significant because of the nature of the
undertaking’s operations, even if amounts for current, and prior
periods are not material.
Some Standards specifically require disclosure of particular
policies, including choices made by management between different
policies they allow.
EXAMPLES-Disclosure of management choices
IAS 16 requires disclosure of the measurement bases used for
classes of property, plant and equipment.
Each undertaking considers the nature of its operations, and the
policies that the users would expect to be disclosed for that type of
undertaking.
EXAMPLE-Tax
An undertaking subject to income taxes would disclose its policies
for income taxes, including those applicable to deferred tax
liabilities (and assets).
EXAMPLE-Foreign operations and currencies
When an undertaking has significant foreign operations, or
transactions in foreign currencies, disclosure of policies for the
recognition of foreign exchange gains (and losses) would be
expected.
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An undertaking shall disclose, in the summary of policies or
other notes, the judgements (apart from those involving
estimations) management has made in the process of applying
the policies that have the most significant impact, on the
amounts recorded in the financial statements.
EXAMPLE-estimate - warranty provision
You have introduced a new product. You create a warranty
provision for client claims, but have to use claims relating to other
products to estimate the amount of the provision. This is an
example of an estimate.
Possible sources of estimation uncertainties:
• Changes in foreign exchange rates and affecting assets or
liabilities denominated in foreign currencies;
• Assumptions to determine amount of provisions;
• Interest rates, affecting pension liabilities and impairment
calculations;
• Useful lives and residual values of fixed assets;
• Technological obsolescence of inventories;
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Presentation of Financial Statements
• Property prices used as the basis for revaluing properties;
• Growth rates and interest used in an impairment calculation for
property, plant and equipment;
• Assessment of the percentage of completion on services or
construction contracts.
Possible areas of critical accounting judgements:
• Classification of held-to-maturity financial assets;
• Revenue recognition: transfer of substantially all significant risk
and rewards;
(iii) whether the substance of the relationship between the
undertaking, and a special purpose vehicle, indicates that the
special purpose vehicle is controlled by the undertaking.
In rare cases, an undertaking owns the majority of a subsidiary but
does not control it, and therefore does not consolidate it. IFRS 12
requires an undertaking to disclose the reasons why the
undertaking’s ownership interest does not constitute control, in
respect of an investee that is not a subsidiary (even though more
than half of its voting, or potential voting power, is owned directly or
indirectly through subsidiaries).
• Classification of complex lease transactions;
IAS 40 requires disclosure of the criteria developed by the
undertaking to distinguish investment property from owner-occupied
property, and from property held for sale in the ordinary course of
business, when classification of the property is difficult.
• Impairment of an available-for-sale investment;
Key Sources of Estimation Uncertainty
• Control over a special purpose undertaking.
An undertaking shall disclose, in the notes, information about
the key assumptions concerning the future, and other key
sources of estimation uncertainty at the end of the reporting
period, that have a significant risk of causing a material
adjustment to the carrying amounts of assets (and liabilities)
within the next financial year.
Source: IFRS News July 05
In the process of applying policies, management makes various
judgements, apart from those involving estimations, which can
significantly affect the amounts recorded in the financial statements.
For example, management makes judgements in determining:
(i) when substantially all the significant risks (and rewards) of
ownership of financial assets, and lease assets, are transferred to
other undertakings;
(ii) whether, in substance, particular sales of goods are financing
arrangements, and therefore do not give rise to revenue; and
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In respect of those assets (and liabilities), the notes shall
include details of:
(i) their nature; and
(ii) their carrying amount, as at the end of the reporting period.
Determining the carrying amounts of some assets (and liabilities)
requires estimation of the impacts of uncertain future events on
those assets (and liabilities) at the end of the reporting period.
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Presentation of Financial Statements
EXAMPLE- estimated provision
You have been sued in court. You have lost the case. Your total
costs are not finalised
When the accounts are prepared, you estimate your provision for
the costs of the liability.
For example, estimates are necessary to measure:
- the recoverable amount of classes of property, plant and
equipment,
- the impact of technological obsolescence on inventories,
- provisions subject to the future outcome of litigation in
progress, and
- long-term staff benefit liabilities such as pension obligations.
These estimates involve assumptions about the risk adjustment to
cash flows (or discount rates used), future changes in salaries, and
future changes in prices affecting other costs.
These disclosures are not required for assets (and liabilities) with a
significant risk that their carrying amounts might change materially
within the next financial year if, at the end of the reporting period,
they are measured at fair value, based on recently-observed market
prices.
These disclosures are presented in a manner that helps users to
understand the judgements management makes about the future
and about other key sources of estimation uncertainty.
The nature, and extent, of the information provided vary according
to the nature of the assumption, and other circumstances.
Examples of the types of disclosures made are:
(i) the nature of the assumption, or other estimation uncertainty;
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(ii) the sensitivity of carrying amounts to the methods, assumptions
and estimates underlying their calculation, including the reasons for
the sensitivity;
(iii) the expected resolution of an uncertainty, and the range of
reasonably possible outcomes within the next financial year, in
respect of the carrying amounts of the assets (and liabilities)
affected; and
(iv) an explanation of changes made to past assumptions,
concerning those assets and liabilities, if the uncertainty remains
unresolved.
EXAMPLE- uncertainty - lawsuit
At the start of a lawsuit, the result may be difficult to estimate, and
only a contingent liability can be noted.
As a lawsuit nears conclusion, the result may be estimable, and a
provision or asset may be recorded.
Narratives should be included in each financial statement to explain
progress and identify what still needs to be resolved.
It is not necessary to disclose budget information, or forecasts, in
making the disclosures.
When it is impracticable to disclose the extent of the possible
impacts of a key assumption, the undertaking discloses that it is
reasonably possible, that outcomes within the next financial year
could require a material adjustment to the carrying amount of the
asset (or liability) affected.
In all cases, the undertaking discloses the nature, and carrying
amount, of the specific asset or liability (or class of assets or
liabilities) affected by the assumption.
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Presentation of Financial Statements
The disclosures of particular judgements management made in the
process of applying the undertaking’s policies do not relate to the
disclosures of key sources of estimation uncertainty.
IAS 37 requires disclosure, in specified circumstances, of major
assumptions concerning future events affecting classes of
provisions.
IFRS 7 requires disclosure of significant assumptions applied in
estimating fair values of financial assets, and financial liabilities,
that are carried at fair value.
IAS 16 requires disclosure of significant assumptions applied in
estimating fair values of revalued items of property, plant and
equipment.
2. summary quantitative data about what comprises its capital.
Some undertakings regard some financial liabilities (eg some forms
of subordinated debt) as part of capital. Other undertakings regard
capital as excluding some components of equity (eg components
arising from cash flow hedges).
3. any changes in (1) and (2) from the previous period.
4. whether during the period it complied with any externally
imposed capital requirements to which it is subject.
5. when the undertaking has not complied with such externally
imposed capital requirements, the consequences of such noncompliance.
22. Capital
These disclosures shall be based on the information provided
internally to the undertaking’s key management personnel.
An undertaking shall disclose information that enables users to
evaluate the undertaking’s objectives, policies and processes for
managing capital.
An undertaking may manage capital in a number of ways and be
subject to a number of different capital requirements and
restrictions.
The undertaking discloses the following:
For example, a conglomerate may include undertakings that
undertake insurance activities and banking activities, and those
undertakings may also operate in several jurisdictions.
1. qualitative information about its objectives, policies and
processes for managing capital, including:
i.
a description of what comprises its capital;
ii.
when an undertaking is subject to externally imposed
capital requirements, the nature of those requirements
and how those requirements are incorporated into the
management of capital; and
The undertaking shall disclose separate information for each capital
requirement (rather than aggregate information) to which the
undertaking is subject where this would be aid the understanding of
users.
23. Other Disclosures
An undertaking shall disclose in the notes:
iii.
how it is meeting its objectives for managing capital.
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50
Presentation of Financial Statements
(i) the amount of dividends proposed (or declared) before the
financial statements were approved for issue, but not recorded as a
distribution to owners during the period, and the related amount per
share; and
(ii) the amount of any cumulative preference dividends not
recorded.
Those undertakings that have previously presented a separate
statement of recognised income and expense (SoRIE) will now be
required to provide in addition a statement of changes in equity.
This will present information that has previously been provided in
the notes.
An undertaking shall disclose the following, if not disclosed
elsewhere in information published with the financial statements:
These undertakings can decide to make no change at all to the
SoRIE or can elect to combine the SoRIE with the income
statement into a single statement of comprehensive income.
(i) the domicile, and legal form, of the undertaking, its country of
incorporation and the address of its registered office (or principal
place of business, if different from the registered office);
Undertakings are no longer allowed to present a statement of
changes in equity that includes items of comprehensive income and
changes due to transactions with owners.
(ii) a description of the nature of the undertaking’s operations, and
its principal activities; and
(iii) the name of the parent and the ultimate parent of the group.
24. Annex- Amendments to IAS 1 - IFRS News November 2007
The IASB published Amendments to IAS 1 in September,
completing Phase A of the Board’s joint project with the FASB.
The changes align some aspects of IAS 1 with SFAS 130,
Reporting Comprehensive Income.
Implications
Transactions with owners are analysed separately from those
relating to the performance of the undertaking. The user of the
financial information will need to become familiar with
understanding and explaining this new way of presentation.
The amendment defines ‘owners’ as being “the holders of
instruments classified as equity”. This definition also includes
interests and is likely to include holders of compound financial
instruments, such as convertible debt.
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The amendment considers aligning the comprehensive income
concept with FAS 130; however, there are still some differences.
For example, FAS 130 permits a third option of displaying
comprehensive income in a statement of changes in equity. IAS 1
revised does not permit this third option.
There are other items that are required by one standard but not the
other. For example, the amendment to IAS 1 requires an
undertaking to display the share of each item of associates’ other
comprehensive income; FAS 130 does not provide explicit
guidance.
The amendments do not address a number of issues of practical
application of IAS 1, such as the presentation of gains and losses of
financial instruments. These may be dealt with in Phase B of the
project, but the outcomes of Phase B are not expected for a
number of years, and inconsistencies might still appear in the
intervening period.
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Presentation of Financial Statements
It does, however, add some potential practical difficulties in
estimating the tax effects of each item within comprehensive
income.
Phase C will address presentation and display of interim financial
information in US GAAP. The IASB may reconsider the
requirements in IAS 34, Interim Financial Reporting.
The changes are likely to reduce comparability between
undertakings because they allow choices in the presentation of
financial information and in the names of the primary statements.
IAS 1 revised is effective for annual periods beginning on or after 1
January 2009. Early application is permitted. The revised IAS 1
resulted in consequential amendments to five IFRSs, 23 IASs and
10 interpretations.
Next steps
The FASB did not publish a separate document considering Phase
A of the project. It will expose its Phase A decisions along with its
Phase B decisions.
Phase B
The Boards are jointly undertaking Phase B, which considers more
fundamental questions, such as:
• consistent principles for aggregating information in each primary
statement;
• the totals and subtotals that should be reported in each primary
statement;
• whether the direct or the indirect method of presenting operating
cash flows provides more useful information; and
Key changes to IAS 1
- Changes in equity arising from transactions with owners (such as
dividends and
shares repurchases) and the related tax impact are presented in
the statement of
changes in equity;
- ‘Non-owner’ changes in equity and the related tax impact are
presented in
comprehensive income*;
- Comprehensive income is presented in either a single statement
or in two
statements (an income statement and a statement of
comprehensive income);
• whether components of other comprehensive income should be
reclassified to profit or loss and, if so, the characteristics of the
transactions and events that should be reclassified and when
reclassification is made.
- Dividends and per share amounts are presented in the statement
of changes in
equity or in the notes;
The IASB expects to publish a discussion paper early next year.
- A statement of financial position (statement of financial position)
at the beginning of the corresponding period is presented where
restatements have occurred; and
Phase C
- Reclassification adjustments (recycling) and the related income
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52
Presentation of Financial Statements
tax are disclosed in the comprehensive income.
(vii) Employment policies.
* Comprehensive income for a period includes profit or loss for that
period and the components of ‘recognised income and expense’
previously reported in equity such as:
1.
2.
3.
4.
(i)+(iii)+(iv)+(v)
(i) – (iii)
(i) – (vi)
(i) – (vii)
changes in revaluation surplus;
2. A complete set of financial statements comprises:
actuarial gains and losses on defined benefit plans recognised in
equity;
(i) a statement of financial position as at the end of the period;
gains and losses arising from translating the financial statements of
a foreign operation;
(ii) a statement of comprehensive income for the period;
(iii) a statement of changes in equity for the period;
gains and losses on remeasuring available for sale financial assets
and;
(iv) a statement of cash flows for the period;
the effective portion of gains and losses on hedging instruments in
a cash flow hedge.
(v) notes, comprising a summary of significant accounting policies
and other explanatory information; and
25. Multiple choice questions
(vi) a statement of financial position as at the beginning of the
earliest comparative period when an undertaking applies an
accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it
reclassifies items in its financial statements.
1. Financial statements
undertaking’s:
provide
information
about
(i) Assets.
(ii) Liabilities.
(iii) Equity.
(iv) Income and expenses, including gains and losses.
(v) Other changes in equity.
(vi) Cash flows.
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an
1. (i)+(iii)+(iv)+(v)
2. (i) – (iii)
3. (i) – (iv)+(vi)
4. (i) – (vi)
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Presentation of Financial Statements
3. Environmental reports and value added statements are:
1.
An integral part of financial statements.
2.
Outside the scope of IFRS.
3.
Never provide with financial statements.
4. Users knowledge of business and accounting is assumed to
be:
1.
Reasonable.
2.
Negligible.
3.
Comprehensive.
7. When the departure from a Standard creates a continuing
impact:
1.
A return to the Standard is required.
2.
This must be disclosed in each period.
3.
A deferred tax asset is created.
8. Accounts produced on a going-concern basis suggest the
business will continue in operation for:
1.
6 months.
2.
1 Year.
3.
The foreseeable future.
5. A fair presentation also requires an undertaking to:
(i) Select policies in accordance with IAS 8.
(ii) Provides relevant, reliable, comparable and understandable
information.
(iii) Provide additional disclosures.
(iv) Provide an audit report.
1.
2.
3.
(i)+(iii)+(iv)
(i) – (iii)
(ii) – (iv)
4.
(iii) – (iv)
6. Inappropriate accounting policies are rectified by:
1. Disclosure of the accounting policies used.
2. Notes.
3. Explanatory material.
4. None of these.
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9. In June, you pay factory rent relating to October, November,
and December.
You expense rent in:
1.
June.
2.
December.
3.
Spread it over October, November, and December.
10. In June, you buy some goods on credit. You pay cash in
March. Your December accounts will show:
1.
2.
3.
A trade payable.
An account receivable.
A provision.
11. Consistency entails:
1.
2.
3.
The ability to compare the figures of different periods.
No changes in accounting policies.
No new Standards being introduced.
54
Presentation of Financial Statements
12. Gains and losses on foreign currencies are reported:
1.
Within revenue.
2.
On 2 separate lines.
3.
Net, on a separate line.
15. Assets and liabilities must be presented on the statement of
financial position:
1.
Split into current and non-current.
2.
Broadly in order of liquidity.
3.
Either 1 or 2.
13. Reimbursement of provisions should be:
1.
Shown as an asset on the statement of financial position.
2.
Netted against the provision in the income statement.
3.
Shown on separate lines in the income statement.
16. You need to refinance your long-term loan. Your end of the
reporting period is June, you sign the refinancing in July and
approve your financial statements in August. The long-term
loan is shown as:
1.
A current liability.
2.
A non-current liability.
3.
A contingent liability.
14. Each component of the financial statements shall be
identified clearly. In addition, the following information shall
be displayed prominently:
(i)
The name of the reporting undertaking.
(ii)
The author(s).
(iii)
Whether the financial statements cover the individual
undertaking, or a group.
(iv)
The end of the reporting period, or the period covered by the
financial statements, whichever is appropriate to that component of
the financial statements.
17. You breach the terms of your long-term loan. It becomes
payable on demand. Your end of the reporting period is June
30. The lender agrees not to demand payment as a
consequence of the breach prior to June 30, giving you at least
12 months grace to rectify the breach. The long-term loan is
shown as:
1.
A current liability.
2.
A non-current liability.
3.
A contingent liability.
(v) the presentation currency,
(vi) the level of rounding used in presenting amounts in the financial
statements.
1.
2.
3.
(i)+(iii)-(vi)
(i) – (iii)
(i) – (iv)
4.
(i) – (vi)
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18. Deferred tax liabilities are always shown as:
1. A current liability.
2. A non-current liability.
3. A contingent liability.
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Presentation of Financial Statements
19. The judgement on whether additional items are presented
separately is based on an assessment of:
2. (i) – (iii)
(i)The nature and liquidity of assets.
3. (i) – (iv)
(ii)The function of assets.
(iii) The amounts, nature and timing of liabilities.
(iv) The space available in the financial statements.
4. (i) – (vi)
21. The following:
1.(i)+(iii)+(iv)
2. (i) – (iii)
(i) write-downs of inventories to net realisable value, or of property,
plant and equipment to recoverable amount (as well as reversals of
such write-downs);
3. (ii) – (iv)
(ii) restructurings of the activities of an undertaking (and reversals
of any provisions for the costs of restructuring);
4. (iii) – (iv)
(iii) disposals of items of property, plant and equipment;
(iv) disposals of investments;
20. As a minimum, the face of the income statement shall
include line items that present the following amounts for the
period:
(v) discontinuing operations;
(i) Revenue.
(vii) other reversals of provisions.
(ii) Finance costs.;
should be presented:
(iii) Share of the income statement of associates, and joint ventures
accounted for using the equity method.
(iv) Pre-tax gain (or loss) recorded on the disposal of assets, or
settlement of liabilities attributable to discontinuing operations.
(vi) litigation settlements; and
1.
2.
3.
On the face of the income statement.
In the notes.
Either 1 or 2.
(v) Tax expense.
(vi) Profit, or loss.
1 (i)+(iii)-(vi)
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56
Presentation of Financial Statements
22. This presentation is:
Revenue
Other income
Changes in inventories of
finished goods and work in
progress
Raw materials and consumables
used
Employee benefits costs
Depreciation and amortisation
expense
Other expenses
Total expenses
Profit
1.
2.
3.
X
X
X
(iv) For each component of equity, the impacts of changes in
accounting policies, and corrections of errors recorded in
accordance with IAS 8.
(v) The amounts of transactions with equity holders acting in their
capacity as equity holders, showing separately distributions to
equity holders.
(vi) The balance of retained earnings (accumulated profit (or loss))
at the beginning of the period, and at the end of the reporting
period, and the changes during the period.
X
X
X
X
(X)
X
Nature of expense method.
Cost of sales method.
Function of expense method.
(vii) A reconciliation between the carrying amount of each class of
contributed equity, and each reserve at the beginning and end of
the period, separately disclosing each change.
1 (i)+(iii)-(vi)
2. (i) – (iv)
3. (i) – (vi)
23. The Statement of Changes in Equity links:
1.
The cash flow statement to equity movements.
2.
The income statement to equity movements.
3.
The notes to equity movements.
4. (i) – (vii)
24. An undertaking shall present a statement of changes in
equity (plus notes) showing:
(i) Present information about the basis of preparation of the
financial statements, and the specific policies.
(i) Profit (or loss) for the period.
(ii) Disclose the information required by IFRSs that is not presented
on the face of the statement of financial position, income statement,
statement of changes in equity, or cash flow statement. and
(ii) Each item of income and expense that is recorded directly in
equity, and the total of these items.
(iii) Total income and expense (calculated as the sum of (i) and (ii)),
showing separately the total amounts attributable to equity holders
of the parent, and to minority interest. and
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25. The notes shall present, disclose and include:
(iii) Provide additional information relevant to understanding the
financial statements.
(iv) A statement of compliance with IFRSs.
57
Presentation of Financial Statements
(v) A summary of significant policies .
(vi) Supporting information for items presented on the face of the
statement of financial position, income statement, statement of
changes in equity and cash flow statement, in the order in which
each statement and each line item is presented.
2. (i) – (iii)
3. (i) – (iv)
4.
(i) – (v)
(vii) Other disclosures, including:
contingent liabilities and unrecorded contractual commitments.
and
27. Examples of the types of disclosures about uncertainty
are:
- non-financial disclosures, such as the undertaking’s financial risk
management objectives and policies).
(i) The nature of the assumption, or other estimation uncertainty.
1 (i)+(iii)-(vi)
2. (i) – (iv)
3. (i) – (vi)
4. (i) – (vii)
(ii) The sensitivity of carrying amounts to the methods, assumptions
and estimates underlying their calculation, including the reasons for
the sensitivity.
(iii) The expected resolution of an uncertainty, and the range of
reasonably possible outcomes within the next financial year, in
respect of the carrying amounts of the assets (and liabilities)
affected. and
(iv) An explanation of changes made to past assumptions,
concerning those assets and liabilities, if the uncertainty remains
unresolved.
26. Estimates are necessary to measure:
(i)
The recoverable amount of classes of property, plant and
equipment.
(ii)
The impact of technological obsolescence on inventories.
(iii)
Provisions subject to the future outcome of litigation in
progress.
(iv)
Long-term employee benefit liabilities such as pension
obligations.
(v)
Accounts receivable.
(v) The total number of transactions that have previously been
analysed in the same manner.
1 (i)+(iii)-(v)
4. (i) – (v)
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1 (i)+(iii)-(v)
2. (i) – (iii)
3. (i) – (iv)
58
Presentation of Financial Statements
28. An undertaking shall disclose in the notes, if not disclosed
elsewhere:
(i) The amount of dividends proposed (or declared) before the
financial statements were approved for issue, but not recorded as a
distribution to equity holders during the period, and the related
amount per share.
(ii) The amount of any cumulative preference dividends not
recorded.
(iii) The domicile, and legal form, of the undertaking, its country of
incorporation and the address of its registered office (or principal
place of business, if different from the registered office).
(iv) A description of the nature of the undertaking’s operations, and
its principal activities. The name of the parent and the ultimate
parent of the group.
(v) The names of previous directors of the undertaking.
1 (i)+(iii)-(v)
2. (i) – (iii)
3. (i) – (iv)
4. (i) – (v)
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26. Answers to multiple choice questions
Question
Answer
1.
3
2.
4
3.
2
4.
1
5.
2
6.
4
7.
2
8.
3
9.
3
10.
1
11.
1
12.
3
13.
2
14.
1
15.
3
16.
1
17.
2
18.
2
19.
2
20.
4
21.
3
22.
1
23.
2
24.
4
25.
4
26.
3
27.
3
28.
3
59