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Lesson 3

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Lesson 3

  1. 1. International Accounting Lesson 3 
  2. 2. Contents Section 1: Overview Section 2: Reporting Performance Section 3: Statement of Financial Position (Balance Sheet) Section 4: Statement of Changes in Equity Section 5: Disclosures
  3. 3. Section One – Overview
  4. 4. IAS 1, ‘Presentation of financial statements’ <ul><li>A complete set of financial statements </li></ul><ul><li>The primary statements </li></ul><ul><ul><ul><li>Statement of financial position (balance sheet) - period end </li></ul></ul></ul><ul><ul><ul><li>Statement of comprehensive income for the period </li></ul></ul></ul><ul><ul><ul><li>Statement of changes in equity for the period </li></ul></ul></ul><ul><ul><ul><li>Statement of cash flows for the period </li></ul></ul></ul><ul><ul><li>All primary statements of equal prominence </li></ul></ul><ul><ul><li>Notes, including summary of accounting policies </li></ul></ul>Section One - Overview
  5. 5. Comparative information <ul><ul><li>Comparatives required for all numerical information </li></ul></ul><ul><ul><li>Comparatives required for narrative info when still relevant </li></ul></ul><ul><ul><li>Additional statement of financial position </li></ul></ul><ul><ul><ul><li>When retrospective application of accounting policies, restatements or reclassifications are made </li></ul></ul></ul><ul><ul><ul><li>As at beginning of earliest comparative period </li></ul></ul></ul><ul><ul><ul><li>Not required IF not impacted and this is disclosed </li></ul></ul></ul>Section One - Overview
  6. 6. Section Two – Reporting Performance
  7. 7. Statement of comprehensive income <ul><li>Single statement or two statement approach </li></ul><ul><ul><ul><li>Items of profit or loss (income statement) </li></ul></ul></ul><ul><ul><ul><li>Components of other comprehensive income (OCI) </li></ul></ul></ul><ul><ul><ul><li>Income statement displayed immediately before </li></ul></ul></ul><ul><ul><li>If two statements: </li></ul></ul><ul><ul><ul><li>Income statement displayed immediately before statement of OCI </li></ul></ul></ul><ul><ul><ul><li>Statement of OCI begins with net profit or loss </li></ul></ul></ul><ul><ul><li>Minimum line items </li></ul></ul><ul><ul><li>Presentation of items as “extraordinary” is prohibited </li></ul></ul>Section Two –Reporting Performance
  8. 8. Presentation of minority interest <ul><li>Minority interest should NOT be presented as if it is an expense. </li></ul>Section Two- Reporting Performance CORRECT presentation Profit for the year 100 Attributable to: Owners of the parent 90 Minority interest 10 100 INCORRECT presentation Profit before minority interests 100 Less: Minority interest (10) Net Profit 90
  9. 9. Statement of comprehensive income Minimum line items <ul><li>Revenue </li></ul><ul><li>Finance costs </li></ul><ul><li>Share of profit or loss of associates and joint ventures </li></ul><ul><li>Tax expense </li></ul><ul><li>Discontinued operations </li></ul><ul><li>Profit or loss </li></ul><ul><li>Profit or loss attributable to: </li></ul><ul><ul><ul><li>Minority interest </li></ul></ul></ul><ul><ul><ul><li>Owners of the parent </li></ul></ul></ul><ul><li>Each component of other comprehensive income by nature </li></ul><ul><li>Share of other comprehensive income of associates and joint ventures </li></ul><ul><li>Total comprehensive income attributable to: </li></ul><ul><ul><ul><li>Minority interest </li></ul></ul></ul><ul><ul><ul><li>Owners of the parent </li></ul></ul></ul>Section Two – Reporting Performance
  10. 10. Additional line items, headings and sub-totals <ul><ul><li>Required when relevant to an understanding of performance </li></ul></ul><ul><ul><li>Description and order of line items amended where necessary to explain elements of performance </li></ul></ul><ul><ul><li>Framework qualitative characteristics of financial statements </li></ul></ul><ul><ul><ul><li>Understandability </li></ul></ul></ul><ul><ul><ul><li>Relevance </li></ul></ul></ul><ul><ul><ul><li>Reliability </li></ul></ul></ul><ul><ul><ul><li>Comparability </li></ul></ul></ul><ul><ul><li>Undefined terms may be used where relevant to an understanding (subject to meeting qualitative characteristics) </li></ul></ul>Section Two – Reporting Performance
  11. 11. Additional line items, headings and sub-totals <ul><ul><li>Operating profit not a required sub-total, although often presented </li></ul></ul><ul><ul><li>If operating profit is presented </li></ul></ul><ul><ul><ul><li>must include all operating items </li></ul></ul></ul><ul><ul><ul><li>whether or not they occur frequently </li></ul></ul></ul><ul><ul><ul><li>whether or not they involve cash flows </li></ul></ul></ul><ul><ul><li>Other sub-totals and line items – follow common understanding of terms used </li></ul></ul>Section Two – Reporting Performance
  12. 12. Application of the requirement to analyse expenses <ul><ul><li>IAS1 encourages analysis on the face of the income statement </li></ul></ul><ul><ul><li>Expenses should be analysed by: </li></ul></ul><ul><ul><ul><li>Nature, or </li></ul></ul></ul><ul><ul><ul><li>Function </li></ul></ul></ul><ul><ul><li>Choose most relevant presentation method, do not mix </li></ul></ul>Section Two – Reporting Performance
  13. 13. Analysis of expenses – types of expense <ul><li>By NATURE : </li></ul><ul><li>Raw materials and consumables </li></ul><ul><li>Employee benefit costs </li></ul><ul><li>Depreciation </li></ul><ul><li>Amortisation </li></ul><ul><li>Rent and utility costs </li></ul><ul><li>By FUNCTION : </li></ul><ul><li>Cost of sales </li></ul><ul><li>Distribution costs </li></ul><ul><li>Administrative expenses </li></ul><ul><li>Research and development </li></ul>Section Two - Reporting Performance
  14. 14. Application of the requirement to analyse expenses <ul><ul><li>Choose most relevant presentation analysis method; by: </li></ul></ul><ul><ul><ul><li>Function - usually used by manufacturers, retailers </li></ul></ul></ul><ul><ul><ul><li>Nature - usually used by financial institutions </li></ul></ul></ul><ul><ul><li>If analysis by function is provided, additional note disclosures analysing the nature of expenses is required </li></ul></ul>Section Two – Reporting Performance
  15. 15. Capitalised expenses – operating items <ul><li>Example: The entity capitalises $15 of its raw materials and employee benefit expense, all of which relate to the ‘cost of sales’ function. </li></ul>Section Two- Reporting Performance Functional analysis Sales 400 Cost of sales: [[Raw materials (100) Employee benefits (50) Less: capitalised costs 15]] ( 135) Operating profit 265 Finance costs ( 25) Profit for the year 240 Natural analysis Sales 400 Raw materials used (100) Employee benefits (50) Work performed by the entity and capitalised 15 Operating profit 265 Finance costs ( 25) Profit for the year 240
  16. 16. Capitalised expenses – finance costs <ul><li>Example: In addition, the entity capitalises $10 of its finance costs. </li></ul>Section Two- Reporting Performance Functional analysis Sales 400 Cost of sales [[Raw materials (100) Employee benefits (50) Less: capitalised costs 15]] ( 135) Operating profit 265 Finance costs [[Interest and other charges (25) Less : capitalised interest 10] (15) Profit for the year 250 Natural analysis Sales 400 Raw materials used (100) Employee benefits (50) Work performed by the entity and capitalised ? Operating profit ? Finance costs ? Profit for the year 250
  17. 17. Capitalised expenses – finance costs <ul><li>Example: In addition, the entity capitalises $10 of its finance costs. </li></ul>Section Two- Reporting Performance Functional analysis Sales 400 Cost of sales: [[Raw materials (100) Employee benefits (50) less; capitalised costs 15] ( 135) Operating profit 265 Finance costs [[Interest & other charges (25) Less capitalise interest 10]] (15) Profit for the year 250 Natural analysis Sales 400 Raw materials used (100) Employee benefits (50) Work performed by the entity and capitalised 15 Operating profit 265 Finance costs, net ( 15) Profit for the year 250
  18. 18. Material items of income and expense <ul><ul><li>Must be separately disclosed </li></ul></ul><ul><ul><li>Examples in IAS 1: </li></ul></ul><ul><ul><ul><li>Inventory write downs </li></ul></ul></ul><ul><ul><ul><li>Restructuring costs </li></ul></ul></ul><ul><ul><ul><li>Profits/losses on disposal of PPE/investments </li></ul></ul></ul><ul><ul><ul><li>Litigation settlements </li></ul></ul></ul><ul><ul><ul><li>Reversals of provisions </li></ul></ul></ul><ul><ul><li>Disclosure on the face of the statement can be problematic in functional analysis (ie where the item also impacts other functional categories). </li></ul></ul>Section Two – Reporting Performance
  19. 19. Finance costs and Derivative gains / losses <ul><ul><li>Finance costs </li></ul></ul><ul><ul><ul><li>Examples: </li></ul></ul></ul><ul><ul><ul><ul><li>Interest payable </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Unwinding of discounts on financial liabilities </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Finance charges on finance leases </li></ul></ul></ul></ul><ul><ul><li>Finance income </li></ul></ul><ul><ul><ul><li>Examples </li></ul></ul></ul><ul><ul><ul><ul><li>Interest income on cash and cash equivalents </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Unwinding of discounts on financial assets </li></ul></ul></ul></ul><ul><ul><li>Finance income should not be netted against finance costs </li></ul></ul><ul><ul><li>Derivative gains and losses </li></ul></ul>Section Two – Reporting Performance
  20. 20. Associates and joint ventures – equity method <ul><ul><li>Usually presented after finance costs </li></ul></ul><ul><ul><li>Net of tax and minority interests </li></ul></ul><ul><ul><li>Major part of business – some flexibility in order of presentation </li></ul></ul><ul><ul><li>Share of associate/joint venture revenue ≠ part of ‘Revenue’ </li></ul></ul>Section Two – Reporting Performance
  21. 21. Other comprehensive income (‘OCI’) <ul><ul><li>Items of income and expense are recognised in profit or loss unless standards prescribe or permit otherwise </li></ul></ul><ul><ul><li>OCI = income & expense items not recognised in profit or loss </li></ul></ul><ul><ul><li>Examples of OCI: </li></ul></ul><ul><ul><ul><li>Revaluation gains/losses on PPE and AFS financial assets </li></ul></ul></ul><ul><ul><ul><li>FX gains/losses on translation of foreign operations </li></ul></ul></ul><ul><ul><ul><li>Gains/losses on effective cash flow hedging instruments </li></ul></ul></ul><ul><ul><li>Components of OCI presented net or gross of related tax </li></ul></ul><ul><ul><ul><li>If Gross, total tax is presented in single line </li></ul></ul></ul><ul><ul><ul><li>Tax related to each component must be disclosed </li></ul></ul></ul>Section Two – Reporting Performance
  22. 22. Other comprehensive income (‘OCI’) <ul><ul><li>Reclassifications (‘recycling’) </li></ul></ul><ul><ul><ul><li>As required by standards </li></ul></ul></ul><ul><ul><ul><li>Previously recognised in OCI </li></ul></ul></ul><ul><ul><ul><li>Transferred to profit or loss </li></ul></ul></ul>Section Two – Reporting Performance
  23. 23. ‘Recycling’ of other comprehensive income Section Two – Reporting Performance Transfer to P&L or include in cost/carrying amount of non-financial asset or liability (basis adjustment) Yes Effective portion of gains/losses from cash flow hedges Transfer to P&L required Yes Gain/losses on revaluation of available-for-sale financial assets Transfer to P&L required Yes FX gains/losses from the translation of foreign operations Immediate recognition in retained earnings No Actuarial gains/losses on defined benefit plans (optional) Decrease can only be recognised in OCI if they reverse previous increments for the same asset No Revaluation of PPE and intangible assets Recycled under IFRS? Item
  24. 24. Summary of Key Learning Points <ul><ul><li>Single or two statement approach </li></ul></ul><ul><ul><li>Minimum line items prescribed </li></ul></ul><ul><ul><li>Additional line items, sub-totals and headings </li></ul></ul><ul><ul><li>Flexibility not to be abused </li></ul></ul><ul><ul><li>Regulatory requirements </li></ul></ul>Section Two- Reporting Performance
  25. 25. Section Three – Statement of Financial Position (Balance Sheet)
  26. 26. Statement of Financial Position <ul><ul><li>Minimum line items prescribed </li></ul></ul><ul><ul><li>Order not prescribed </li></ul></ul><ul><ul><li>May amend descriptions according to the nature of the entity </li></ul></ul><ul><ul><li>May include additional line items where relevant </li></ul></ul><ul><ul><li>Current/non-current classification or liquidity basis </li></ul></ul><ul><ul><li>Classes of assets/liabilities with different measurement bases, would generally warrant presentation as separate line items </li></ul></ul>Section Three – Statement of Financial Position
  27. 27. Statement of financial position Minimum line items <ul><li>Property, plant and equipment </li></ul><ul><li>Investment property </li></ul><ul><li>Intangible assets </li></ul><ul><li>Financial assets (other than those shown on other line items) </li></ul><ul><li>Investments accounted for using the equity method </li></ul><ul><li>Biological assets </li></ul><ul><li>Inventories </li></ul><ul><li>Trade and other receivables </li></ul><ul><li>Cash and cash equivalents </li></ul><ul><li>Held for sale assets and assets included in disposal groups </li></ul><ul><li>Trade and other payables </li></ul><ul><li>Provisions </li></ul><ul><li>Financial liabilities (other than those shown on other line items) </li></ul><ul><li>Current tax assets and liabilities </li></ul><ul><li>Deferred tax assets and liabilities </li></ul><ul><li>Liabilities included in disposal groups </li></ul><ul><li>Minority interest </li></ul><ul><li>Issued capital and reserves attributable to owners of the parent </li></ul>Section Three – Statement of Financial Position
  28. 28. Statement of Financial Position Basis of presentation <ul><ul><li>Liquidity basis if more relevant </li></ul></ul><ul><ul><li>Choice driven by type of business </li></ul></ul><ul><ul><li>Manufacturers and retailers -> current/non-current basis </li></ul></ul><ul><ul><li>Financial institutions -> liquidity basis </li></ul></ul><ul><ul><li>Disclose assets and liabilities to be recovered or settled </li></ul></ul><ul><ul><ul><li>With 12 months of balance sheet date </li></ul></ul></ul><ul><ul><ul><li>More than 12 months from balance sheet date </li></ul></ul></ul>Section Three – Statement of Financial Position
  29. 29. Current vs. Non-current <ul><li>Current asset: </li></ul><ul><li>Expected to be realised, sold or consumed within entity’s normal operating cycle </li></ul><ul><li>Held primarily for trading purposes </li></ul><ul><li>Expected to be realised within 12 months after balance sheet date </li></ul><ul><li>Unrestricted cash or cash equivalent </li></ul><ul><li>Current liability: </li></ul><ul><li>Expected to be settled within entity’s normal operating cycle </li></ul><ul><li>Held primarily for trading purposes </li></ul><ul><li>Expected to be settled within 12 months after balance sheet date </li></ul><ul><li>No unconditional right to defer settlement for at least 12 months after balance sheet date </li></ul>Section Three – Statement of Financial Position
  30. 30. Operating cycle <ul><ul><li>Definition of ‘operating cycle’: </li></ul></ul><ul><li>“ the operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents” </li></ul><ul><ul><li>Items realised, sold or consumed within operating cycle are current items </li></ul></ul><ul><ul><li>Operating cycle may be more than 12 months </li></ul></ul>Section Three – Statement of Financial Position
  31. 31. Breaches of borrowing covenants <ul><ul><li>Current/non-current status based on condition at balance sheet date </li></ul></ul><ul><ul><li>Post year end covenant breaches: </li></ul></ul><ul><ul><ul><li>Classification not affected </li></ul></ul></ul><ul><ul><li>Pre- year end covenant breaches on long term loans: </li></ul></ul><ul><ul><ul><li>Current classification generally required, unless </li></ul></ul></ul><ul><ul><ul><ul><li>lender agrees to period of grace </li></ul></ul></ul></ul><ul><ul><ul><ul><li>agreement occurs before balance sheet date </li></ul></ul></ul></ul><ul><ul><ul><ul><li>agreement postpones required repayment until at least 12 months from balance sheet date </li></ul></ul></ul></ul>Section Three – Statement of Financial Position
  32. 32. Summary of Key Learning Points <ul><ul><li>Minimum line items prescribed </li></ul></ul><ul><ul><li>Additional line items, sub-totals and headings </li></ul></ul><ul><ul><li>Most relevant basis of presentation </li></ul></ul><ul><ul><li>Current/non-current classification based on status at balance sheet date </li></ul></ul>Section Three – Statement of Financial Position
  33. 33. Section Four – Statement of Changes in Equity
  34. 34. Statement of Changes in Equity <ul><ul><li>Presents owner changes in equity </li></ul></ul><ul><ul><li>Arises from transactions with owners in their capacity as owners; Examples include: </li></ul></ul><ul><ul><ul><li>Issuances or repurchases of equity shares </li></ul></ul></ul><ul><ul><ul><li>Dividend distributions </li></ul></ul></ul><ul><ul><li>Reconciles the beginning and ending balances of each component of equity </li></ul></ul><ul><ul><li>Components of equity include: </li></ul></ul><ul><ul><ul><li>Each class of contributed equity </li></ul></ul></ul><ul><ul><ul><li>Accumulated balance of each class of other comprehensive income </li></ul></ul></ul><ul><ul><ul><li>Retained earnings </li></ul></ul></ul>Section Four – Statement of Changes in Equity
  35. 35. Section Five – Disclosures
  36. 36. Key judgements <ul><li>“ An entity shall disclose, in the summary of significant accounting policies or other notes, the judgements…that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.” </li></ul>Section Five – Disclosures
  37. 37. Estimation uncertainty <ul><li>“ An entity shall disclose information about the assumptions it makes about the future, and other sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes shall include details of: </li></ul><ul><ul><ul><ul><li>their nature, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>their carrying amounts as at the end of the reporting period. ” </li></ul></ul></ul></ul>Section Five – Disclosures
  38. 38. Other disclosures - Capital <ul><ul><li>Information that enables users to evaluate the entity’s objectives, policies and processes for managing capital </li></ul></ul><ul><ul><li>Qualitative information regarding objectives, policies, and processes for managing capital (what it manages as capital, externally imposed requirements, and how it meets its objectives) </li></ul></ul><ul><ul><li>Quantitative data and other related disclosures </li></ul></ul>Section Four – Statement of Changes in Equity
  39. 39. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2008 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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