6. reporting financial performance

8/13/2019 6. Reporting Financial Performance

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International Financial Reporting Standards

The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Reporting financialperformance

Joint World Bank and IFRS Foundation train

the trainers workshop hosted by the ECCB

30 April to 4 May 2012


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presenter, not necessarily those of the IASB or IFRS Foundation

The concepts


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IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

33Objective of financial reporting

Provide financial information about the reporting entitythat is useful to existing and potential investors, lenders

and other creditorsin making decisions about providing

resources to the entity.

The information provided about financial

performance helps existing and potential investors,

lenders and other creditorsto understand the return

the entity has produced on its economic resources.


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44Objective of financial reporting continued

Decisions by investors about buying, selling or holdingequity and debt instruments depend on the returns that

they expectfrom an investment in those instruments, eg

dividends, principal and interest payments or market

price increases.

Decisions by lenders about providing or settling loans

and other forms of credit depend on the principal and

interest paymentsor other returns that they expect.

Information must reflect the effect on performance of

changesin market prices and/or interest rates.


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5Objective of financial reporting continued 5

Information about an entitys financial performance in aperiod, reflected by changes in economic resources (other

than by obtaining additional resources directly from

investors or creditors) is useful in assessing the entitys

past and future ability to generate net cash inflows (seeCF.OB18)


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6Elements

Asset

resource controlled by the

entity

result of past event

expected inflow of

economic benefits

Liability

present obligation arising from past event

expected outflow of

economic benefits

Income recognised increase in

asset/decrease in liabilityin current reporting period

that result in increasedequity except

Expense

recognised decrease in

asset/increase in liabilityin current reporting period

that result in decreasedequity except

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IAS 1provides guidance on the presentationof financialstatements.

Financial performanceis presented in the form of the

statement of profit or loss and other comprehensive

income One statement or two statements

9Introduction



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Concepts for income and expenses

no concepts for other comprehensive income (OCI)

IAS 1 defines profit or loss as the total of income less

expenses, excluding the components of OCI

OCI includes itemsof income or expense (including

reclassification adjustments) that are not recognised in

profit or loss as required or permitted by other IFRSs

10Income and expenses



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IAS1.82 prescribes line-items for profit or loss (egrevenue and finance costs)

In addition, items required by other IFRSs must also be

presented

Additional line items, headings and sub-totals should beused only when relevant to an understanding of

financial performance

no extraordinary items

Expensesmay be classified by nature or function (IAS

1.102105)

11Profit or loss



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Items to be classified by nature

Grouped based on those that will:

not be reclassified subsequently to profit or loss;

and

be reclassifiedto profit or loss when specified

conditions are met

Income tax effects must be disclosed (net versus

aggregate)

Reclassification adjustments must be disclosed

12Other comprehensive income



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Items included in OCI include:

gains on property revaluation

remeasurementsof defined benefit pension plans

exchange differences on translating foreignoperations

cash flow hedges

13Other comprehensive income continued



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IAS 18Revenue



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Financial information must be relevant

Relevant financial information is capable of making a

difference in decisionsabout providing resources to the

entity, ie the information has

predictivevalue

confirmatoryvalue

both predictive and confirmatory value (these

concepts are interrelated)

For example, current year revenue information can be

used as a basis for predicting future revenue and can

be compared to revenue predictions made in previous

years (CF.QC10)

15Conceptual context



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IAS 18 does not deal with revenue from: Leaseagreements;

Dividends accounted for in accordance with the

equity method;

Insurancecontracts;

Changes in the fair value of financial instruments

and biological assets;

Initial recognition of agriculturalproduce; and Extraction of mineral ores

17Scope exclusions



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In general, revenue is recognised when it is probable

that economic benefitsfrom the transaction will flow tothe entityand those benefits can be measured reliably.

Revenue from the sale of goods is recognised when:

significant risks and rewards of ownership have

been transferredto the buyer; and the entity has neithercontinuing managerial

involvement in, noreffective controlover, the

goods.

18Revenue recognition



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For the rendering of services, revenue is recognised aswork is performed(percentage of completion method).

However, when the outcome of a service contract

cannot be estimated reliably, revenue is recognised

only to the extent of expenses recognised that arerecoverable.

19Revenue recognition continued



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Interestis recognised over time, computed on theeffective yield on the asset.

Royaltiesare recognised in accordance with the

substanceof the agreement.

Dividendsare recognised when the shareholder has theright to receive payment.

20Revenue recognition continued



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Revenue is measured at the fair value of theconsideration received or receivable by the entity on its

own account.

revenue does not include amounts collected on

behalf of third parties. when receipt of cash is deferred, the nominal

consideration is split between sales revenue and

interestrevenue.

21Measurement



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Example:cash d iscou nt

Goods sold for 500, due in 60 days. Customer can take10% discount if paid in 30 days.

If customer gets the discount, revenue is 450.

Would be wrong to have revenue 500 and interest

or some other expense of 50.



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Example:sale to agent

We sell goods for 100 through an intermediary (agent)who gets a commission of 10. We own goods until sold

to end users. We are responsible for defects and

returns from end users.

We have revenue of 100 and commission expenseof 10 only when agent sells goods to end user.

Would be wrong to recognise revenue when goods

are shipped to agent.



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Example

deferred paymentcontinued

Interest income year 1 = 1,652,893 x 10% =165,289, unpaid, bringing receivable up to

1,818,182.

Interest income year 2 = 1,818,182 x 10% =

181,818, bringing receivable up to 2,000,000, which

is then repaid.


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1 Jan 01 Account receivable 1,652,893Revenue 1,652,893

31 Dec 01 Account receivable 165,289

Interest revenue 165,289

31 Dec 02 Account receivable 181,818

Interest revenue 181,818

31 Dec 02 Cash 2,000,000

Account receivable 2,000,000

Example

deferred paymentcontinued


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An exchange for dissimilar items generatesrevenue measured at the fair value of the goods

or services received.

An exchange of goods or services for similar

items does not generate revenue.

27Measurementcontinued



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IAS 18 and Section 23 Revenueof the IFRS forSMEsshare the same principles. However, the

IFRS for SMEsis written in simplified language.

28Comparison with the IFRS for SMEs



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The primary issue in accounting for revenue isdetermining when to recognise revenue.

whether the risks and rewards have been

transferredto the buyer (sale of goods or financing

arrangement?) measuring the fair value of consideration received

or receivable.

bifurcatingmultiple element sales (ie determining

different elements).

servicesestimating the stage of completion.

29Judgements and estimates



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Examples of circumstances in which the timing of

recognition of revenue requires careful considerationinclude:

sales with delayed delivery

sales subject to conditions, eg installation,

inspection and right of returnsale and repurchase agreements

consignmentsales

sales to others for resale

multiple element contracts.

30Judgements and estimates continued



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IAS 33 deals with the calculation and presentation ofearnings per share (EPS).

It applies to entities whose ordinary shares or potential

ordinary shares (for example, convertibles, options and

warrants) are publicly traded. An entity must present basic EPS and diluted EPS with

equal prominence in the statement of comprehensive

income.

32Introduction



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Dilution is a notional reduction in Earnings (losses) pershare resulting from the assumption that

convertible instruments are converted,

options or warrants are exercised,

or ordinary shares are issued

upon the satisfaction of specified conditions.

33Dilution



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The earnings of two entities subject to identicaltransactions and events could differ because they have

adopted different accounting policies.

These differences are not adjusted for when calculating

EPS. The numerators used in the calculation of basic and

diluted EPS must be reconciled to profit or loss

attributable to the ordinary equity holders of the parent.

34Earnings



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The denominators (weighted average number of

ordinary shares WANOS) used in the calculation of

basic and diluted EPS might be affected by:

share issues during the year

shares to be issued upon conversion of a

convertible instrument

contingently issuable or returnable shares;

bonus issues

share splits and share consolidation

the exercise of options and warrants

contracts that may be settled in shares

written put options

35Shares


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An entity issued 100 ordinary shares at incorporation on 1

January 20X1.

The only change to the issued share capital occurred

on 1 January 20X2 when all ordinary shares were

spliteach ordinary share became two ordinary shares

The entity earned a profit of CU1,000 in each period,

20X1 and 20X2

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Example:share sp l i t


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What is the basic EPS for the entity in 20X1?

Profit: CU1,000

WANOS : 100

Basic EPS: CU10 (CU1,000 100 shares)

What is the basic EPS for the entity in 20X2?

Profit: CU1,000

WANOS : 200Basic EPS: CU5 (CU1,000 200 shares)

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Exampleshare sp l i t continued


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In the 20X2 financial statements, what EPS figures will

be disclosed for each 20X2 and 20X1?

20X2: CU5

20X1: CU5

IAS 33.26the WANOS must be adjusted for allperiods presented that have resulted in a change in

ordinary shares without an increase in resources, ie a

share split

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Exampleshare sp l i t continued

E ample


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An entity issued 100 ordinary shares at incorporation on 1

January 20X1.

The only change to the issued share capital occurred

on 1 January 20X2 when an additional 100 ordinary

shares were issued for CU30 per share

The entity earned a profit of CU1,000 in each period,

20X1 and 20X2

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Exampleshare issue


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The IFRS for SMEs does not specify requirementsfor Earnings per Share.

42Comparison to the IFRS for SMEs

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


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The calculation of EPS includes (as the numerator) aprofit or loss figure. This amount is determined in

accordance with IFRSs and, therefore, the judgements

and estimates made in applying other IFRS will affect

EPS.

Judgements must also be made relating to the extent of

EPS-related explanations provided in management

commentary.




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IAS 20Accounting for Government Grants

and Disclosure of GovernmentAssistance



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Government grants are recognised when there isreasonable assurance that the entity will comply with

any specified conditions and that the grants will be

received.

Non-monetary grants (eg taxi licence, fishing quota) areeither recognised at fair value or both the asset and the

grant are recognised at a nominal amount.

Receipt of a grant is not always conclusive evidence

that conditions will be fulfilled.

46Recognition



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Government grants that relate to assets are initiallyrecognised in the statement of financial position as

deferred income or as a deduction from the related

assets.

The grant is then recognised in profit or loss over thelife of the asset, by reducing deferred income over that

period, or by way of reduced depreciation.

48Recognition continued



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The main differences in the recognition andmeasurement requirements exist between IAS 20 and

Section 24 Government Grants the IFRS for SMEs

include:

IAS 20 contains numerous options for accounting forgovernment grants. The IFRS for SMEs contains only

one option

IAS 20 requires that grants should not be recognised

until there is reasonable assurance that the entity will

comply with the conditions and the grants will bereceived. Under Section 24, a grant is not recognised

until the conditions are actually satisfied.

49Comparison to the IFRS for SMEs



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The main area of judgement is whether the entity willcomply with conditions attached to a government grant.

Measuring the fair value of some non-monetary grants

received (if accounting policy is to recognise at fair

value not nominal amount).




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Questions or comments?

Expressions of individualviews

by members of the IASB and

its staff are encouraged. The

views expressed in this

presentation

are those of the presenter.

Official positions of the IASB

on accounting matters are

determined only after

extensive due process and

deliberation.

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The requirements are set out in International FinancialReporting Standards (IFRSs), as issued by the IASB at1 January 2012 with an effective date after 1 January2012 but not the IFRSs they will replace.

The IFRS Foundation, the authors, the presenters andthe publishers do not accept responsibility for losscaused to any person who acts or refrains from actingin reliance on the material in this PowerPointpresentation, whether such loss is caused by

negligence or otherwise.

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