financial statement presentation accounting changes subsequent events statement of cash flows...
TRANSCRIPT
Financial Statement Presentation
Accounting Changes
Subsequent Events
Statement of Cash Flows
Chapters 18 and 19
Objectives
1. Describe the main components of financial statements
2. General features of financial statements
3. Classification and presentation requirements for the statement of financial position
4. Presentation requirements for the statement of profit or loss and other comprehensive income
Objectives
5.Presentation requirements for the statement of changes in equity6.Describe differences in IFRS Statement of Cash Flows7.Overview other disclosures required by IAS 1
in the notes of the financial statements8. Apply the requirements of IAS 89. Events after reporting date (IAS 10)
Components of Financial Statements
A complete set of financial statements comprises:
Statement of Financial Position Statement of Profit or Loss and Other Comprehensive
Income Statement of Changes in Equity Statement of Cash flows Notes
(IAS 1 para 10)
General Features of Financial Statements
As per IAS 1, the following considerations must be followed in the presentation of a financial report:
1. Fair presentation and compliance with IFRSs2. Going concern3. Accrual basis of accounting4. Materiality and aggregation 5. Offsetting6. Frequency of reporting7. Comparative information8. Consistency of presentation
General Features of Financial Statements
Fair presentation & compliance with IFRSs
A set of financial statements are required to present fairly an entity’s financial performance, financial position and cash flows
Applying IFRSs (with additional disclosures where necessary) is presumed to result in a fair presentation
(IAS 1 para 15-19)
General Features of Financial Statements
Going concern
There is an assumption that all entities adopt the going concern basis of accounting
Exception applies where management intends to liquidate or cease trading
(IAS 1 Para 25)
Accrual basis of accounting
Except for cash flow information, the financial statements are required to be presented using the accruals basis of accounting
General Features of Financial Statements
Materiality and aggregation Each material class of similar items must be presented
separately Items of a dissimilar nature or function must be presented
separately, unless they are immaterial(IAS 1 para 7)
Offsetting Assets & liabilities and income & expenses are not to be
offset, unless required or permitted by another accounting standard
Offsetting detracts from the ability of the users to understand the entity’s transactions
Offsetting is appropriate when netting any income with related expenses arising from the same transaction
(IAS 1 para 32, 34-35)
Frequency of reporting
Financial statements should normally be presented at least annually.
An entity which presents statements for a different period must disclose the reasons and state that its statements are not comparative.
General Features of Financial Statements
Comparative information
Comparative information for the immediately preceding reporting period must be disclosed for all amounts
(IAS 1 para 38)
Consistency of presentation
Financial information must be consistently presented from one period to the next unless:
There has been a significant change in the entity’s operations A change in presentation or classification will provide more
relevant information An IFRS requires a change in presentation
(IAS 1 para 45)
1) Statement of Financial Position
Summarizes the elements directly related to the measurement of financial position
Provides the basic information for evaluating an entity’s capital structure and analyzing its liquidity, solvency and financial flexibility
Provides a basis for computing rates of return
Statement of Financial Position Classifications
No prescribed format in IAS 1, but assets and liabilities to be classified on basis of:
Current/non-current OR
In order of their liquidity Whichever is more relevant
Assets are classified as current or non-current depending on whether they are expected to be sold, consumed or realized as part of the normal operating cycle within 12 months of balance dateLiabilities are current/noncurrent based on settlement date.
Statement of financial position presentation
Debt classification under default for covenant violation
IFRS
► Requires that a lender must waive or modify a debt covenant violation prior to or at the balance sheet date in order for the related debt to be classified as non-current at the balance sheet date.
US GAAP
► Allows debt to retain non-current classification as of the balance sheet date if a lender waives or modifies the related debt covenant violation on or after the balance sheet date but prior to the issuance of the financial statements.
Debt classification under default for covenant violation example
Example 1:
Riley’s Roosters, Inc. (RRI) has a December 31 year-end. As of June 30, 2012, RRI obtains a $100,000 loan from a bank for a new chicken coop facility. The loan is due in 24 months. In December 2012, RRI spends too much of its cash on its holiday party and incurs a debt covenant violation as of December 31, 2012. As a result of the violation, the loan becomes due within 30 days. At this time, RRI asks the bank to waive the violation. RRI tells the bank it will recoup some of the cash by selling the leftover holiday party favors on eBay. On January 5, 2013, the bank agrees to waive the violation. RRI issues its financial statements on January 25, 2013.
► How should this loan be classified (current or non-current) on RRI’s balance sheet as of December 31, 2012 using IFRS and US GAAP?
Debt classification under default for covenant violation example
Solution:
As the bank modified the debt covenant violation subsequent to RRI’s balance sheet date of December 31, 2012 but prior to the financial statement issuance date of January 25, 2013, the debt is classified as current as of the balance sheet date using IFRS but non-current for US GAAP.
Fiscal yearPost-fiscal year and priorto issuance of financials
Balance sheet date
Fiscal yearPost-fiscal year and priorto issuance of financials
IFRS
US GAAP
Example 1 (solution):
Minimum Accounts
The minimum accounts to be presented on the statement of financial position as defined by IAS 1.54 are:
a) Property, plant and equipment
b) Investment property
c) Intangible assets
d) Financial assets (excluding amounts shown under (e), (h) and (i))
e) Investments accounted for using the equity method
f) Biological assets
g) Inventories
h) Trade and other receivables
i) Cash and cash equivalents
j) Total of assets classified as held for sale and assets included in disposal groups classified as held for sale per IFRS 5
The minimum accounts to be presented on the balance sheet as defined by IAS 1.54 (continued):
a) Trade and other payables
b) Provisions
c) Financial liabilities (excluding amounts shown under (a) and (b))
d) Liabilities and assets for current tax per IAS 12
e) Deferred tax liabilities and deferred tax assets per IAS 12
f) Liabilities included in disposal groups classified as held for sale per IFRS 5
g) Minority interest, presented within equity
h) Issued capital and reserves attributable to equity holders of the parent
Minimum Accounts
Statement of Financial Position Classifications
Requires inclusion of additional items, headings and sub-totals, if relevant, based on assessment of: The nature and liquidity of assets The function of assets
The amounts, nature and timing of liabilities
2) Statement of Profit or Loss & Other Comprehensive
Income
A prime source of information about an entity’s performance
Income, expenses and other comprehensive income are included
Total comprehensive income has two components:
1. Profit or loss (P&L)2. Other comprehensive income (OCI)
Can be provided in one statement or two separate statements
Statement of Profit or Loss & Other Comprehensive
Income
Profit or loss IAS 1 adopts an “all-inclusive” approach to the
determination of a company’s profit or loss
All items of income and expense recognised into period must be included in the company’s profit or loss. The only exclusions relate to Corrections of errors and the effects of changes in
accounting policies Provisions within other standards that require or permit
components of other comprehensive income to be excluded from profit or loss
The minimum information to be presented on the income statement as defined by IAS 1.82:
► Revenue
► Finance costs
► Share of profit or loss of associates and joint ventures accounted for using the equity method
► A single amount comprising the total of:
► The post-tax profit or loss of discontinued operations
► The post-tax gain or loss recognized on the measurement of fair value less costs to sell or on the disposal of assets or disposal group(s) constituting the discontinued operations
► Tax expense
► Profit or loss
Minimum Information
Statement of Profit or Loss & Other Comprehensive
Income Other Comprehensive Income (OCI)
OCI comprises items of income and expense that are not recognized in profit or loss
Components of OCI comprise: Changes in a revaluation surplus Actuarial gains and losses on defined benefit plans Gains and losses arising from the translation of
financial statements of foreign operations Gains and losses on remeasuring available-for-sale
financial assets The effective portion of gains and losses on hedging
instruments in a cash flow hedge
Statement of Profit or Loss & Other Comprehensive
Income
To enhance understandability of the statement IAS 1 requires separate disclosure of the nature and amount of certain material income and expense items including:
Inventory and PPE write-downs Cost of restructuring Disposals of PPE & other investments Profit/(losses) re discontinuing operations Litigation settlements Reversals of provisions
Such disclosures can be made either in the statement or in the notes
Statement of income and statement of comprehensive income presentation
IFRS► For fiscal years beginning July 1, 2012 (with early adoption permitted), IFRS
requires the presentation of items in OCI that ultimately may be reclassified into net income to be presented separately from those that will not be reclassified into net income. The tax effect must be shown separately, either by individual item or in aggregate.
► Reclassification adjustments do not arise on changes in revaluation surplus recognized in accordance with IAS 16 (Property, Plant and Equipment) or on actuarial gains and losses on defined benefit plans recognized in accordance with paragraph 93A of IAS 19 (Employee Benefits).
US GAAP► Generally, US GAAP
considers all items recorded in OCI as subject to reclassification into net income and, therefore, no separate presentation groupings are required.
IFRS and US GAAP require comprehensive income to be presented in one statement of comprehensive income or in two separate consecutive statements comprising of a separate statement of income and a statement of comprehensive income.
Classification of other comprehensive income items
Example 2:
Treadstone International’s controller, Hans Burke, called you yesterday inquiring about the differences for classification of various items in OCI that might be encountered when his company changes from US GAAP to IFRS next year. Hans emailed you a list of potential transactions. Hans would like you to prepare a draft statement of other comprehensive income based on IFRS. The tax rate for all items in OCI is 30%.
2014 2013
Cash flow hedges $ 40 $ (90)
Foreign currency exchange differences 670 550
Available for sale gains 170 64
Defined benefit plan actuarial (losses) / gains (60) 80
Revaluation of property 300 –
Classification of other comprehensive income items
Example 2 solution (IFRS): 2014 2013
Other comprehensive income:
Items that will not be subsequently reclassified to profit or loss:
Revaluation of property $300
Defined benefit plan actuarial (losses)/gains (60) $ 80
Income tax (72) (24)
168 56
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges 40 (90)
Foreign currency exchange differences 670 550
Available for sale gains 170 64
Income tax (264) (157)
616 367
Other comprehensive income, net of tax $784 $423
Income statement presentation
Extraordinary items
IFRS
► Prohibits extraordinary items, but major revenue and expense items are disclosed in the income statement or notes.
US GAAP
► Extraordinary items are reported separately on the income statement.
Convergence
► On July 15, 2014, the FASB issued a proposed ASU, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This would eliminate the concept of extraordinary items from GAAP; therefore, no items would be presented or disclosed as an extraordinary item. This would converge presentation with IFRS. The due date for comment letters has been set for September 30, 2014.
3) Statement of Changes in Equity
The following is disclosed in this statement:
Total comprehensive income for the period attributable to: Equity holders of parent Non controlling interests
For each component of equity Changes in accounting policies Corrections of errors required by IAS 8
For each component of equity a reconciliation between opening and closing balances showing changes resulting from Profit/(Loss) OCI Transactions with equity holders, showing separately
distributions to equity holders
4) Statement of Cash FlowsSame as US GAAP except:
Cash flow classification
Transaction IFRS US GAAP
Interest paidOperating or financing
Operating
Interest receivedOperating or investing
Operating
Dividends paidOperating or financing
Financing
Dividends received
Operating or investing
Operating
5) Notes
Notes enhance the understandability of the other statements
Each item in the statements is cross-referenced to any related information in the notes
The order of notes is: Summary of accounting policies Supporting information for items in statements Other disclosures:
DividendsCompany detailsAuditor remuneration
Sources Of Estimation Uncertainty
“an entity shall disclose in notes key assumptions about the future of estimation uncertainty that is material” (IAS 1 para 125)
Notes shall include details of: Their nature Their carrying amount as at the reporting date
Examples include: Future interest rates Useful lives of non-current assets
Notes to the Financial Statements
Departure from an accounting standard
IFRSUS GAAP
► Does not allow non-compliance with an accounting standard if, in the opinion of management, that compliance would be misleading.
► Allows non-compliance with an accounting standard if, in the opinion of management, that compliance would be misleading.
► This is called “The True and Fair Override” and is extremely rare. If used, the rationale and effect on the financial statements must be disclosed.
Accounting Policies, Changes in Accounting Estimates &
Errors
IAS 8 deals with: Selecting and changing accounting policies Changes in accounting estimates Correction of errors
Selecting and changing policies The concept of substance over form is particularly
important
IAS 8 requires extensive disclosures when an entity changes its accounting policy
Changes in Accounting Policies
The change is required by an international standard, or
The change results in reliable and more relevant information.
Unless otherwise stated, the change is accounted for retrospectively i.e. comparative figures are adjusted and are presented as if the new policy had always been applied.
An accounting policy may be changed only if:
Accounting Estimates
IAS8 states the following:
Changes in accounting estimates should be accounted for prospectively. Comparative figures for prior periods should not be restated.
Correction of a Prior Period Error
• Restating comparative figures for the prior period(s) in which the error occurred, or
• If the error occurred before the earliest prior period for which comparatives are presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.
Material prior period errors must be correctedretrospectively. This involves:
Events After the Reporting Period – IAS 10
IFRS► Subsequent events are evaluated
through the date that the financial statements are “authorized for issue.” The authorization date is prior to the filing date. Depending on an entity’s corporate governance structure and statutory requirements, authorization may come from management or a board of directors.
► Requires disclosure of the date the financial statements were authorized for issuance.
US GAAP► Subsequent events are evaluated
through the date that the financial statements are issued (for SEC filers) or are available to be issued (in the case of non-SEC filers). For SEC filers, the issuance date is also the date that the financial statements are filed with the SEC.
► SEC filers are not required to disclose the date the financial statements were issued, however, such disclosure is required for a non-public company.
Adjusting Events and Non-adjusting Events
• Adjusting events. Adjusting events are those "that provide evidence of conditions that existed at the end of the reporting period".
• Non-adjusting events. Non-adjusting events are "those that are indicative of conditions that arose after the reporting period".
• Financial statements should be adjusted to reflect adjusting events that occur after the reporting period.
• Material non-adjusting events should be disclosed in the notes to the financial statements.
Homework
Exercises 18.3 and 18.22DUE THURSDAY, OCTOBER 9