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for Bank Accounting Professionals

IAS 1 - PRESENTATION OF FINANCIAL STATEMENTS

This Project is funded by EU

http://www.accountingreform.ru/

http://www.accountingreform.ru/



IAS 1 - PRESENTATION OF FINANCIAL STATEMENTS

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Presentation of Financial Statements

PREFACE

These workbooks are an update of those originally written by the project team of the European Union funded project Accounting Reform II in the RussianFederation and revised by the project team of the European Union fundedproject, Implementation of Accounting Reform in the Russian Federation.This version has been produced by the European Union funded project

Transition to IFRS in the Banking Sector.

The workbooks cover various concepts of IFRS based accounting. They areintended to be practical self-instruction aids that professional accountants canuse to upgrade their knowledge, understanding and skills.

The purpose of this version is to help bank accountants in the use of IFRS.

Each workbook is a self-standing short course designed for approximately of three hours of study.

The members of the project team were contributed by PwC Moscow, FBKMoscow, and European Savings Bank Group Brussels. Although the workbooks

are part of a series, each one is independent of the others.

A basic knowledge of accounting is assumed but if any additional knowledge isrequired this is mentioned at the beginning of the section.

Each workbook is a combination of Information, Examples, Self-Test Questionsand Answers.

The volumes within each series are described in detail and available for download from the project web site.

The copyright of the material contained in each workbook belongs to theEuropean Union and according to its policy may be used free of charge for any

non-commercial purpose.

The project team would like to express thanks to those who have contributedtheir time and thoughts to the content of the workbooks. In particular:

The European Union Delegation, Moscow

The Bank of Russia, Moscow

Note: Material from the following PricewaterhouseCoopers publications has beenused in this workbook:

-Applying IFRS-IFRS News-Accounting Solutions

Contact:

Moscow, Russia, June 2008 (Updated)

www.banks2ifrs.ru

e-mail [email protected] www.banks2ifrs.ru

Tel. Fax.

+ 7 495 772-7091 + 7 495 772-7094

3

mailto:[email protected]

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CONTENTS

1. PRESENTATION OF FINANCIAL STATEMENTS -INTRODUCTION 5

2. DEFINITIONS 7

3.FAIR PRESENTATION AND COMPLIANCE WITH IFRSS 8

4. GOING CONCERN 9

5. ACCRUAL BASIS OF ACCOUNTING 10

6. CONSISTENCY OF PRESENTATION 11

7. MATERIALITY AND AGGREGATION 12

8. OFFSETTING 13

9. COMPARATIVE INFORMATION 15

10. GENERAL REVIEW 16

11. IDENTIFICATION OF THE FINANCIAL STATEMENTS 17

12. FREQUENCY OF REPORTING 18

13. STATEMENT OF FINANCIAL POSITION 18

15. INFORMATION TO BE PRESENTED ON THE FACE OF THESTATEMENT OF FINANCIAL POSITION (BALANCESHEET) 25

16. INFORMATION TO BE PRESENTED EITHER ON THE FACEOF THE STATEMENT OF FINANCIAL POSITION, OR IN

THE NOTES 26

17. STATEMENT OF COMPREHENSIVE INCOME 27

18. INFORMATION TO BE PRESENTED EITHER ON THE FACEOF THE INCOME STATEMENT, OR IN THE NOTES 32

19. STATEMENT OF CHANGES IN EQUITY 35

20. STATEMENT OF CASH FLOWS 37

21. NOTES 38

22. CAPITAL 41

23. OTHER DISCLOSURES 42

24. ANNEX- AMENDMENTS TO IAS 1 - IFRS NEWSNOVEMBER 2007 42

25. MULTIPLE CHOICE QUESTIONS 43

26. ANSWERS TO MULTIPLE CHOICE QUESTIONS 48

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1. Presentation of Financial Statements -Introduction

OVERVIEW

AIM

The aim of this workbook is to assist the individual in understanding the IFRSPresentation of Financial Statements. This is the subject of IAS 1.

IAS 1 was updated in 2007. The changes are listed in the Annex to thisworkbook. One of the changes is the retitling of the balance sheet as thestatement of financial position.

The Board decided to rename a new statement a ‘statement of comprehensiveincome’. The term ‘comprehensive income’ is not defined in the Framework but isused in IAS 1 to describe the change in equity of an undertaking during a periodfrom transactions, events and circumstances other than those resulting from

transactions with owners in their capacity as owners.

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 areincluded in comprehensive income but excluded from profit or loss.

The Board decided that an undertaking should have the choice of presenting allincome and expenses recognised in a period in one statement or in twostatements. An undertaking is prohibited from presenting components of incomeand expense (ie non-owner changes in equity) in the statement of changes inequity.

The Board acknowledged that the titles ‘income statement’ and ‘statementof profit or loss’ are similar in meaning and could be used interchangeably,and decided to retain the title ‘income statement’ as this is morecommonly used.

This workbook is complemented by the Illustrative Corporate FinancialStatements and the IFRS Disclosure Checklist which appear on the projectwebsite.

OBJECTIVEThe objective of IAS 1 is to prescribe the presentation of financial statements, toensure comparability both with financial statements of previous periods, and withthe financial statements of other undertakings.

IAS 1 sets out requirements for the presentation of financial statements,

guidelines for their structure, and minimum requirements for their content.

(The recognition, measurement and disclosure of specific transactions and other events are dealt with in other Standards and in Interpretations).

SCOPE

IAS 1 shall be applied to all general purpose financial statements presented inaccordance with IFRS.

IAS 1 does not apply to interim financial statements, (see IAS 34 InterimFinancial Reporting). IAS 1 applies equally to all undertakings, whether they needto 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, includingpublic-sector business undertakings.

Similarly, undertakings that do not have equity as defined in IAS 32: some mutualfunds, and undertakings whose share capital is not equity: some co-operativeundertakings may need to adapt the of members’ (or unitholders’) interests.

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Financial statements

Financial statements are a structured representation of the financial position, andfinancial performance, of an undertaking.

The objective of financial statements is to provide information about the financialposition, 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 aboutan 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; an d

(vi) cash flows.

This information, with other information in the notes, assists users of financialstatements in predicting the undertaking’s future cash flows and, their timing andcertainty.

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;

(iii) a statement of changes in equity for the period;

(iv) a statement of cash f lows for the period;

(v) notes, comprising a summary of significant accounting policiesand other explanatory information; and

(vi) a statement of financial position as at the beginning of the earliest

comparative period when an undertaking applies an accountingpolicy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in itsfinancial statements.

An undertaking may use titles for the statements other than those used inIAS 1.

An undertaking shall present with equal prominence all of thefinancial statements in a complete set of financial statements.

An undertaking may present the components of profit or loss either aspart of a single statement of comprehensive income or in a separateincome statement.

When an income statement is presented it is part of a complete set of financial statements and shall be displayed immediately before thestatement 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 reviewby management, that describes the main features of the undertaking’s financialperformance, and financial position, and the uncertainties it faces.

Such a report may include a review of :

(i) the main factors determining financial performance, including changes in theenvironment, the undertaking’s response to those changes and their impact, andthe policy for investment to maintain (and enhance) performance, including itsdividend policy;

(ii) sources of funding and targeted ratio of liabilities to equity; and(iii) resources not recorded in the statement of financial position in accordancewith IFRSs.

Many undertakings also present reports, such as environmental reports andvalue added statements, particularly in industries in which environmental factorsare significant, and when staff are regarded as an important user group.

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Reports and statements presented outside financial statements are outside thescope of IFRSs.

2. Definitions

General purpose financial statements (referred to as ‘financial statements’) arethose intended to meet the needs of users who are not in a position to requirean undertaking to prepare reports tailored to their particular informationneeds.

Impracticable Applying a requirement is impracticable when the undertakingcannot apply it, after making every reasonable effort to do so.

Material Omissions (or misstatements of items) are material if they couldinfluence 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 acombination of both, could be the determining factor.

Notes contain information in addition to that presented in the statement of financial position, statement of comprehensive income, separate incomestatement (if presented), statement of changes in equity, and statement of cashflows. Notes provide narrative descriptions, or disaggregations of items in thosestatements, and information about items that do not qualify for recognition inthose statements.

Assessing whether an omission, or misstatement, could influence decisions of users, and so be material, requires consideration of the characteristics of thoseusers.

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, areinfluenced in making decisions.

Other compre hensive income comprises items of income and expense(including reclassification adjustments) that are not recognised in profit or loss asrequired or permitted by other IFRSs.

The components of other comprehensive income include:

(i) changes in revaluation surplus (see IAS 16 Property, Plant andEquipment and IAS 38 Intangible Assets);

(ii) actuarial gains and losses on defined benefit plans recognised inaccordance IAS 19 Employee Benefits;

(iii) gains and losses arising from translating the financial statements of aforeign operation (see IAS 21);

(iv) gains and losses on remeasuring available-for-sale financial assets(see IAS 39 Financial Instruments);

(v) the effective portion of gains and losses on hedging instruments in a cashflow hedge (see IAS 39).

Owners ar e holders of instruments classif ied as equi ty.

Profit or loss is the total of income less expenses, excluding thecomponents o f other comprehensi ve inco me.

Reclassification adju stments are amounts r eclassified to prof it or loss inthe curren t peri od that were recognis ed in other comprehensi veincome in the cur r ent o r previous p eriods.

Total compre hensive income is the change in equity dur ing aper iod resulting f r om tr ansactions and other events, other than thosechanges result ing from t r ansactions w ith owners in their capacity asowners.

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 o r loss.

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Profit or loss is the total of income less expenses, excluding thecomponents o f other comprehensi ve inco me.

Reclassification adju stments are amounts r eclassified to prof it or loss inthe curren t peri od that were recognis ed in other comprehensi veincome in the cur r ent o r previous p eriods.

Total compre hensive income is the change in equity dur ing aper iod resulting f r om tr ansactions and other events, other than thosechanges resulting from transactions with owners in their capacity asowners.

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 describeprofit or loss.

3.Fair Presentation and Compliance with IFRSs

Financial statements shall present fairly the financial position, financialperformance 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 (seeFramework 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 andunreserved statement of such compliance in the notes. Financial statementsshall not be described as complying with IFRSs, unless they comply with all therequirements of IFRSs.

A fair presentation also requires an undertaking:

(i) to select and apply accounting policies in accordance with IAS 8 AccountingPolicies. IAS 8 sets out a hierarchy of guidance that management considers (inthe 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 raresituations, 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 noexpectation that future taxable profit will be available before they expire.

Solution

IAS 12’s required disclosures may not in this case provide enough information tounderstand the current period’s financial statements. Management shouldpresent additional notes.

Inappropriate accounting policies are not rectified either by disclosure of theaccounting 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 tomention in the notes that this has not been done. The warranty provision shouldbe made in the accounts themselves.

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There is a strong presumption that there will not be any need to depart from therequirements 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 fairlythe financial position, financial performance and cash flows;

(ii) that it has complied with applicable Standards, except that it has departedfrom 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 wouldrequire,

-the reason why that treatment would be so misleading that it would conflict withthe objective of financial statements set out in the Framework, and

-the treatment adopted; and

(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 therequirement.

EXAMPLE-departure from Standard – continuing impact

When an undertaking departed, in a prior period, from a requirement in aStandard for the measurement of assets (or liabilities) and that departure affectsthe measurement of changes in assets (and liabilities) recorded in the currentperiod’s financial statements, this needs to be disclosed.

When management concludes that compliance with a requirement in a Standardwould be so misleading that it would conflict with the objective of financialstatements, 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 whymanagement has concluded that complying with that requirement is somisleading that it conflicts with the objective of financial statements; and

(ii) for each period presented, the adjustments to each item, that managementhas concluded would be necessary to achieve a fair presentation.

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 mustbe applied at all times. You provide the disclosures listed above.

Information would conflict with the objective of financial statements when it doesnot represent faithfully the transactions that it either purports to represent, or could reasonably be expected to represent and it would influence decisions madeby users.

When assessing whether complying with a requirement in a Standard would beso 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 complywith the requirement.

If others, in similar circumstances, comply with the requirement, there is arebuttable presumption that the undertaking’s compliance would not be somisleading 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 statementsshall be prepared on a going-concern basis, unless management either intendsto liquidate the undertaking or to cease trading, or has no realistic alternative butto do so.

EXAMPLE-going concernBanks provide loans under specific conditions, including the financialperformance of clients. A breach of these conditions may enable the bank toliquidate the client’s business. In these circumstances, unless the client cansecure an alternative source of finance, financial statements should not beprepared on a going concern basis.

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When management is aware of material uncertainties that may cast significantdoubt upon the undertaking’s ability to continue as a going concern, thoseuncertainties shall be disclosed.

When financial statements are not prepared on a going concern basis, that factshall be disclosed, together with the basis on which the financial statements areprepared, and the reason why the undertaking is not regarded as a goingconcern.

In assessing whether the going-concern assumption is appropriate, managementtakes into account all available information about the future, which is at leasttwelve 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 availableto 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 tofinancial resources, a conclusion that the going-concern basis is appropriate maybe 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 andpotential sources of replacement financing, before it can satisfy itself that thegoing-concern basis is appropriate.

EXAMPLE-Uncertainties regarding going concern assumption

Issue

Management should disclose any uncertainties that may cast significant doubt onthe undertaking’s ability to continue as a going concern.

How should management disclose uncertainties that affect the undertaking’sability to continue as a going concern?

Background

An undertaking has incurred losses during the last four years, and its currentliabilities exceed its total assets.

The undertaking was in breach of its loan covenants and has been negotiatingwith the related financial institutions in order to keep them supporting itsbusiness.

These factors raise substantial doubt that the undertaking will be able to continueas a going concern.

Solution

Management should disclose details of the uncertainty, preferably in the samenote where the basis for preparation of the financial statements is described.

The note should include an explanation of the uncertainties as well as the actionsproposed to address the situation. Management should also disclose the possibleeffects on the financial position, or that it is impracticable to measure them.

Additionally, management should state whether or not the financial statementsinclude any adjustments that might result from the outcome of theseuncertainties.

In particular, if bank borrowings have been disclosed as non-current in theassumption that discussions with the bank will result in an extension of the loanfacilities, details of this fact should be disclosed.

5. Accrual Basis of Accounting

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 inthe Framework.

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EXAMPLES - the accrual basis of accounting

In December, you sell some goods on credit. You receive cash from your client inFebruary. 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 themonth that it was paid.

This is the accrual basis of accounting.

6. Consistency of Presentation

The presentation, and classification, of items in the financial statements shall beretained from one period to the next unless:

(i) it is apparent, following a significant change in the nature of the undertaking’soperations, 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.

EXAMPLE-consistent policies

Using different measurement systems of inventory (FIFO and weighted-averagecost are permitted by IFRS) generates different results. Consistent use of onemethod 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 wouldhelp 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 thefinancial statements, might suggest that the financial statements need to bepresented differently.

An undertaking changes the presentation of its financial statements only if thenew presentation provides information that is reliable, and is more relevant tousers, and the revised structure is likely to continue, so that comparability is notimpaired.

EXAMPLE- Consistency of preparation - Comparatives

Issue

A change in presentation and classification of items from one period to the next ispermitted only when it is a result of :

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.

Should an undertaking disclose information that results in a more appropriatepresentation, yet detracts from the presentation of comparatives?

Background

An undertaking operates in a number of different countries, undertaking a rangeof different activities.

Management has installed a new computer information system throughout theundertaking that enables better allocation of costs, including overheads, toactivities.

Consequently, management is able to provide a more accurate and moredetailed 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 thecomparative information, although the current year information could bepresented on the old, less informative, basis if required.

Solution

No, the current year information should be presented on the old basis of presentation for consistency with the comparative information.





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.

Wherever possible, management should present the more useful and relevantinformation. Additional information concerning the new analyses available can beincluded in the financial statements where this provides additional information

and does not contradict the information in the primary statement.

The new analysis should be used in full in the following year when the new basisof presentation will be available for both years presented.

7. Materiality and Aggregation

Each material class of similar items shall be presented separately in the financialstatements. Items of a dissimilar nature (or function) shall be presentedseparately, 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 shoulddisclose this information as a contingent liability, with expression of your views,and those of the lawyers.

Financial statements result from processing large numbers of transactions, whichare aggregated into classes, according to their nature, or function.

EXAMPLE-assets categorised by function

You lease photocopiers and drinks machines. Identifying the results andnet assets (assets and liabilities) employed by each function of the businesshelps users.

The final stage in the process of aggregation, and classification, is thepresentation of condensed and classified data, which form line items in thefinancial 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, maybe 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 isnot material in relation to the equity and net income?

Background

An undertaking reclassifies certain items of PPE, from PPE used for industrialpurposes to PPE used for administrative purposes. The related depreciationexpense was previously part of cost of sales and has subsequently beenreclassified to administrative expenses.

Management has decided not to disclose this change in classification becausethe asset’s carrying value and depreciation expense for the period is not material.Presented below is an extract from the income statement.

Revenue200,000

Cost of sales199,000

Gross profit1,000

Loss for the year 45,000

Depreciation reclassified from cost of sales toadministrative expenses

1,200

Shareholders’ equity130,000

Total assets270,000

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 ‘grossloss’. The presentation of a gross loss rather than a gross profit might alter theusers’ perception of the undertaking’s performance.

A specific disclosure requirement in a Standard need not be satisfied, if theinformation is not material.

8. Offsetting

Assets and liabilities, and income and expenses, shall not be offset unlessrequired (or permitted) by a Standard.

It is important that assets and liabilities, and income and expenses, are reportedseparately. Offsetting in the statements of comprehensive income or financialposition or in the separate income statement (if presented),except when thisreflects the substance of the transaction, detracts from the ability of users both tounderstand the transactions that have occurred, and to assess future cash flows.

EXAMPLE- Offsetting revenue and expenses

Issue

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.

When is it appropriate to offset 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 thelease and the leased space becomes surplus to its requirements.

A is unable to cancel the lease agreement without significant penalty and, as aresult, enters into a sublease arrangement with undertaking C for a 5-year periodwith an option to renew for a further 5 years.

Undertaking A retains the primary responsibility for the lease payments and

repairs and maintenance costs; however, C has agreed to reimburse all costs infull.

Solution

Sub-lease arrangements are common, and the appropriate presentation of expenses reimbursed will depend on the facts and circumstances.

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 leasecontract and should recognise the lease payments to the lessee and thereimbursement from the sub-lessee as separate transactions.

Measuring assets, net of valuation allowances - obsolescence allowances oninventories, and doubtful debts allowances on receivables - is not offsetting.

EXAMPLE- obsolescence allowances on inventories

You know that some of your inventory is obsolete. Any benefit will be limited to itsscrap value. You make an obsolescence provision to reduce this inventory’s

carrying value.

IAS 18 defines revenue, and requires it to be measured at the fair value of theconsideration received (or receivable), taking into account any trade discounts,and volume rebates, allowed by the undertaking.

EXAMPLE- Offset of loss leaders with profitable transactionsIssueItems of income and expense shall not be offset unless required by another Standard or an Interpretation. Offsetting in the income statement except whenoffsetting reflects the substance of the transaction or other event, detracts fromthe ability of users to understand the financial statements.

Can management offset the losses incurred on a "loss-leader" product with theprofits earned on the connected profitable sales transaction?

BackgroundUndertaking A sells electrical goods. The goods come with a manufacturer’s 1-year warranty. Undertaking A also offers customers the option of purchasing anextended warranty to cover years 2 to 5.





Undertaking A’s marketing plan is to sell the electrical goods at a loss, but set thesales 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 buythe goods without the warranty.

The normal accounting for this arrangement results in the loss on the sale of thegoods being recognised in year 1 and the revenue (and profit) on sale of theextended warranty being recognised over years 2 to 5.

Management proposes that part of the revenue on the sale of the extendedwarranties be recognised in year 1 so as to obtain an even profit margin over thesale of the goods and the warranties.

Management argues that this reflects the commercial substance of the totalarrangements.

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 thewarranties because customers can, and do, purchase the goods without thewarranty.

There are other transactions that do not generate revenue, but are incidental tothe main revenue-generating activities.The results of such transactions are presented by netting any income with relatedexpenses arising on the same transaction. For example:

(i) gains (and losses) on the disposal of non-current assets, including investmentsand operating assets, are reported by deducting from the proceeds: the carryingamount 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 revenue-generatingactivities should be presented by netting any income with related expensesarising on the same transaction.

How should management present gain on sale of a building in the incomestatement?

Background

Undertaking A is involved in manufacturing. During the period it sells one of itsbuildings and recognises a gain on the sale.

Solution

Management should present the gain by netting the income on the sale with thecost of the building and other related expenses. The gain on this transaction ispresented within operating profit.

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.

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 relatedreimbursement.

In addition, gains (and losses) arising from a group of similar transactions arereported on a net basis, for example, foreign exchange gains (and losses) or gains (and losses) on financial instruments held for trading. Such gains andlosses are reported separately, if they are material.

EXAMPLE- gains on foreign currencies

You are an importer. You make currency gains (and losses) as a result of foreigntrading transactions. These are shown as a separate line in your incomestatement. These are shown net of bank (currency) transaction charges.





In the following examples, I/B refers to Income Statement and Statement of financial position.

EXAMPLE -reimbursement

In 2XX5, the local government informs you that a new road will be built in2XX7. This will cause the destruction of your head office. Assets of $5 millionwill have to be written off. By the end of 2XX5, the government agreed to pay$4 million in compensation.

In 2XX5, a provision and the compensation should be recorded.

The income statement should reflect the provision net of the compensation

($1 million).I/B DR CR

Asset sequestration (Net) I 1mProvision B 5mAccounts receivable B 4mRecording provision in and compensationin 2XX5

9. Comparative Information

An undertaking disclosing comparative information shall present, as a minimum,two statements of financial position, two of each of the other statements, andrelated notes.

When an undertaking applies an accounting policy retrospectively or makes aretrospective restatement of items in its financial statements or when itreclassifies items in its financial statements, it shall present, as a minimum, threestatements of financial position, two of each of the other statements, and relatednotes.

An undertaking presents statements of financial position as at:

(a) the end of the current period,

(b) the end of the previous period (which is the same as the beginning of thecurrent period), and

(c) the beginning of the earliest comparative period.

Narrative information provided in the financial statements for the previous periodmay be relevant in the current period.

EXAMPLE- Comparative narrative information

Issue

Undertakings should include comparative information for narrative anddescriptive information when it is relevant to an understanding of the currentperiod’s financial statements.

When should management include comparative narrative information in thefinancial statements?

BackgroundAn undertaking has an exclusive 3-year licence to operate the domestic mobilephone service; the government had granted the licence. The government suedthe undertaking in 20X2, alleging that it has been providing service below thequality limits of the concession agreement. The government has indicated itsintention 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 isyet to be resolved.

SolutionThe undertaking should disclosure information about the dispute that is useful tothe users of the financial statements. The information should not necessarily belimited to the events of the current period. The disclosure should focus on:

a) summary of the dispute;b) the actual and potential financial effect; andc) the likely outcome and the expected timing of a resolution. The following is an example of an appropriate disclosure:

Note 10 Domestic mobile phone licence - dispute with government

In 20X1 the government granted the company a 3-year licence to operate thedomestic mobile phone service. The company derives 25% of its revenue fromdomestic phone service.





The conditions of the licence included seven performance targets. The companyis currently in dispute with the government over whether it has met a specifictarget.

The dispute has not impacted on the undertaking’s financial performance in 20X1or 20X2. Withdrawal of the licence could potentially reduce the undertaking’srevenue in 20X3.

Management is confident however that it has met all performance targets, andthe 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 thereporting period, and about the steps that have been taken during the period, toresolve 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.

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 tounderstand the progress of the case.

When the presentation of items in the financial statements is amended,comparative amounts shall be reclassified, unless the reclassification isimpracticable (see IAS 8).

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 shalldisclose:

(i) the reason for not reclassifying the amounts; and

(ii) the nature of the adjustments, that would have been made, if the amounts hadbeen reclassified.

The inter-period comparability of information assists users, especially for predictive purposes. It may be impracticable to reclassify comparative informationfor a particular period, to achieve comparability with the current period.

Data may not have been collected (in the prior period) in a way that allowsreclassification, and it may not be practicable to recreate the information.

IAS 8 deals with the adjustments to comparative information required when anundertaking changes an accounting policy, or corrects an error.

10. General Review

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 guidesthe 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 financialposition, income statement, and statement of changes in equity, and requiresdisclosure of other line items either on the face of those statements, or in thenotes. IAS 7 sets out requirements for the presentation of a cash flow statement.

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.

Structure and Content

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 thestatement 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.





11. Identification of the Financial StatementsThe financial statements shall be identified clearly, and distinguished from other information in the same document. Users must be able to distinguish informationthat is prepared using IFRSs, from other information that is not the subject of those requirements.

Survey of income statements IFRS NewsApril 2007

The financial statements of 2,800 companies were surveyed, specifically lookingat the additional income measures companies included in their financialstatements beyond the minimum required by IFRS.

The survey also examined how companies present these non-GAAP measures intheir income statements.

“Investors tell us that additional income measures are useful and that they takethem into account when making investment decisions,” says Leandro vanDam, PwC partner in the Netherlands and co-sponsor of the survey.

“They are also looking for non-GAAP measures that management uses to run thebusiness. They want consistency of information over time and comparabilityamong companies.” Debate on the use of non-GAAP measures is gatheringinterest.

Some highlights from the report are summarised below.

A bridge from old to IFRS

Companies have aligned their choice and presentation of non-GAAP measuresunder IFRS as much as possible with what they reported under national GAAP.

This has allowed users to compare non-GAAP measures calculated using IFRSrecognition and measurement principles with the measures calculated on theprevious basis.

No evidence of cherry-picking

Companies do not appear to have cherry-picked additional income measures toshow 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 profitunder IFRS.

Companies generally met IFRS presentation requirements for the incomestatement.

Industry variations

Industry variations in EBITDA and similar measures are consistent between 2004reporting under national GAAP and 2005 IFRS reporting. Companies alreadyappear to be responding to investor demands for international comparabilitywithin industry sectors.

National trends are still strong

Countries that have historically reported certain non-GAAP measures still do sounder IFRS; those that did not report specific non-GAAP measures did not startto do so.

International comparability of non-GAAP reporting in the first year of applicationwas unlikely to arise spontaneously. Management had little opportunity tocompare reporting practices with their peers and limited experience of IFRS-related discussions with investors, regulators and other parties.

Many conferences and industry sessions focused on recognition andmeasurement and paid little attention to format requirements and options for additional line items in the income statement.

There was therefore was no real platform for development of market norms.Companies may find the research useful in deciding what to communicate to themarket in next year’s IFRS financial statements.

“This research should enable management to look at what peers are doing,” says

Leandro, “and consider whether current diversity of non-GAAP measurement andpresentation holds any clues for better ways of communicating with investors infuture.”

Download the PDF from pwc.com/ifrs





Each component of the financial statements shall be identified clearly. Inaddition, the following information shall be displayed prominently (and repeatedwhen it is necessary), for a proper understanding of the information presented:

(i) the name of the reporting undertaking, and any change from the preceding endof the reporting period;

(ii) whether the financial statements cover the individual undertaking, or a group;

(iii) the date of the end of the reporting period, or the period covered by thefinancial statements, whichever is appropriate to that component of the financialstatements;

(iv) the presentation currency,

(v) the level of rounding used in presenting amounts in the financial statements.

These requirements are normally met by presenting page headings, andabbreviated column headings, on each page of the financial statements.Judgement is required in determining the best presentation.

When the financial statements are presented electronically, separate pages are

not always used; the above items are then presented frequently enough toensure a proper understanding of the information.

Financial statements are often made more understandable by presentinginformation in thousands (or millions) of units of the presentation currency. Thisis acceptable if the level of rounding in presentation is disclosed, and materialinformation is not omitted.

12. Frequency of Reporting

Financial statements shall be presented at least annually.

When the end of the reporting period changes, and the annual financialstatements are presented for a period longer (or shorter) than one year, anundertaking 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 entirelycomparable.

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 thenew regime) will be for a 6 month 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 notpreclude this practice, because the financial statements are unlikely to bematerially 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 theperiod on a Sunday, and count inventory on a Monday.

13. Statement of financial position

Current/Non-current Distinction

An undertaking shall present current and non-current assets, and current andnon-current liabilities, as separate classifications on the face of its statement of financial position, except when a presentation based on liquidity providesinformation that is more relevant.

When that exception applies, all assets and liabilities shall be presented broadlyin order of liquidity.

EXAMPLE-Financial Institutions

Your firm is a financial institution, and you present your statement of financialposition items broadly in order of liquidity (see IFRS 7 workbook).

For each asset and liability line item that combines amounts expected to berecovered (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 thereporting 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 identifiableoperating cycle, separate classification of current and non-current assets (andliabilities) provides useful information, by distinguishing the net assets that arecontinuously circulating as working capital, from those used in long-term

operations.

EXAMPLE-Current and non-current distinction based on operating cycle

Issue

An asset that satisfies any of the following criteria shall be classified as a currentasset:

a) its realisation, sale or consumption is expected to occur in the undertaking’snormal 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 withintwelve months as a current asset in its statement of financial position?

Background

Undertaking A builds airplanes for national airlines. The average operating cycleis 15 months, based on the length of time it takes to build a plane. A’smanagement presents a classified balance sheet to distinguish its current andnon-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 realisethe receivable in the normal course of its 15-month operating cycle.

The undertaking’s accounting policy note should describe the policy onclassification of current and non-current items.

It also highlights assets that are expected to be converted into cash within thecurrent operating cycle, and liabilities that are due for settlement within the sameperiod.

An undertaking is permitted to present some of its assets and liabilities using acurrent/non-current classification, and others in order of liquidity, when thisprovides information that is more relevant.

The need for a mixed basis of presentation might arise when an undertaking hasdiverse operations.

Information about expected dates of conversion into cash of assets and liabilitiesis useful in assessing the liquidity, and solvency, of an undertaking. IFRS 7requires disclosure of the maturity dates of financial assets, and financialliabilities.

Financial assets include trade and other receivables, and financial liabilitiesinclude trade and other payables.

Information on the expected date of recovery and settlement of non-monetaryassets 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 soldmore 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 restrictedfrom being exchanged (or used to settle a liability), for at least twelvemonths after the end of the reporting period.

EXAMPLE - Presentation of cash subject to restrictions over use

Issue

Should an undertaking include in its consolidated financial statements cash andcash equivalents, held by a subsidiary that is not available for use by other groupundertakings?

BackgroundA subsidiary holds cash and cash equivalent balances with domestic banks. Itoperates in a country where there are exchange controls and the subsidiary isrestricted from sending cash abroad to fellow subsidiaries and to the parent.

The amount of cash held is neither excessive nor short of the subsidiary’soperating needs.

SolutionThe existence of currency restrictions in a foreign jurisdiction would not precludethe classification of the subsidiary’s cash and cash equivalent balance as acurrent asset in the consolidated financial statements.

The subsidiary needs the cash to meet its operating requirements, and willtherefore use it freely.

The undertaking should, however, disclose the amount of cash and cashequivalents that is not available for use by the group [IAS7].

The disclosure should include a commentary that will help users understand theimpact of these restrictions in the undertaking’s financial position and liquidity.

All other assets shall be classified as non-current.

IAS 1 uses the term ‘non-current’ to include tangible, intangible and financialassets of a long-term nature. It does not prohibit the use of alternativedescriptions, 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 clearlyidentifiable, it is assumed to be twelve months.

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 reportingperiod; 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 operatingcycle.

TRADE AND OTHER PAYABLES summary

What are trade and other payables?

Trade and other payables are current liabilities for which the amount to be settledis usually known rather than uncertain (as for provisions). Undertakings, almostwithout exception, carry some type of trade and other payables on their statement of financial position.

Items generally included in trade and other payables are: trade payables;amounts payable under statutory obligations such as social security obligationsand payroll taxes.

These items are presented within the "Trade and other payables" line item on theface 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 dateof 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 reportingperiod.

Most trade and other payables fall within the definition of financial liabilities and

are subject to the recognition and measurement rules that apply to thoseliabilities.

Initial recognition

An undertaking should recognise trade and other payables when it becomes aparty to the contractual provisions of the instrument.

An undertaking’s obligations concerning trade and other payables are usuallyeasily identified and the point of recognition is clear.

Most obligations are legally enforceable and arise under contractualarrangements. These include amounts owed for assets purchased or servicesobtained (trade creditors), and obligations to provide goods and services wherean external party has paid in advance.

Obligations are often imposed by statute. An undertaking should recognise theseobligations on the basis of notices and requests for payment from the relevantauthority. Constructive obligations should be recognised on the basis of amountspromised to third parties.

An undertaking often incurs obligations in the form of financial and performanceguarantees. For example, an undertaking may sell its receivables yet retain aportion of the credit risk in these receivables through guarantees.

The recognition of guarantees depends on their nature. Financial guarantees thatprovide for payments to be made if the debtor fails to make a payment when dueshould be recognised as part of provisions or, when the recognition criteria arenot met, disclosed as contingent liabilities.

Financial guarantees that provide for payments to be made in response tochanges in a specified index such as a credit rating should be recognised asfinancial instruments.

Accrued expenses are liabilities to pay for goods or services that have beenreceived or supplied but have not been paid, invoiced or formally agreed with thesupplier.

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, theuncertainty is generally much less than for provisions.

Initial measurement

Initial measurement of trade and other payables is usually at fair value. The initialmeasurement of financial liabilities not at fair value through profit or loss includestransaction costs directly attributable to the acquisition or issue of the financialliability.

Initial fair value is established by reference to amounts agreed between theundertaking 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 received but not yet invoiced.

Financial guarantees that provide for payments to be made if the debtor fails tomake a payment when due should initially be recognised at fair value.

Subsequent measurement

Items classified within trade and other payables are not usually re-measured, asthe obligation is usually known with a high degree of certainty and its settlementis short-term.

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 amountrecognised under IAS 37 and (ii) the amount initially recognised (that is, fair value) less, where appropriate, cumulative amortisation recognised inaccordance with IAS 18.

Derecognition

Derecognition occurs when the contractual obligation is cancelled, expired or





discharged, for example through payment of the amount due, or through thecounterparty 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.

Such items are classified as current liabilities, even if they are due to be settledmore than twelve months after the end of the reporting period.

The same normal operating cycle applies to the classification of assets andliabilities. When the undertaking’s normal operating cycle is not identifiable, it isassumed to be twelve months.

Examples of current liabilities are financial liabilities, classified as ‘held for trading’, bank overdrafts, and the current portion of non-current financialliabilities, dividends payable, income taxes and other non-trade payables.

EXAMPLE- Presentation of loan from parent

Issue

An undertaking shall present further sub-classifications of the line itemspresented in the statement of financial position. Those sub-classifications may bepresented either on the face of the statement of financial position or in the notes,classified in a manner appropriate to the undertaking’s operations.

Should a parent, in its single-undertaking financial statements, present amountsdue from a subsidiary on the face of its statement of financial position as anasset, and if so how should it be classified?

Background

A parent provides a loan to a subsidiary. Interest of 8% is paid annually. There isno specified repayment date; however, the loan is payable on demand.

Solution

Disclosure on the face of the statement of financial position is not mandatory, butit is best practice. IFRS require separate disclosure of amounts due fromsubsidiaries, but allow this to be presented in the notes rather than on the face of the statement of financial position.

The liability is current because the subsidiary does not have unconditional right todefer settlement of the liability. The parent, in its separate financial statements,should also classify the amount due from the subsidiary as a current asset.

Financial liabilities that provide financing on a long-term basis (not part of theworking capital) and are not due for settlement within twelve months after the endof the reporting period, are non-current liabilities.

EXAMPLE- Classification and presentation of current liabilities

Issue

The following current liabilities should be disclosed on the face of the statementof financial position:

a) trade and other payables;b) provisions;c) financial liabilities (excluding trade and other payables and provisions); andd) current income tax liabilities.

The following example highlights specific classes of current liabilities to bedisclosed 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;

accruals (for example, accruals for audit fees payable); and





social security taxes and other amounts, such as payroll taxespayable in respect of wages and salaries.

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

Current portion of fixed term interest-bearing loans; and

Loans repayable on demand.

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-currentportion

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 financialposition:

a) warranty provisions;

b) provisions for environmental liabilities;c) pension liabilities; andd) 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 twelve-month period are classified ascurrent liabilities. Conversely, warranties that guarantee product performancefor 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 asnon-current liabilities.

c) Pension liabilities - non-current liabilities

Considering the nature of these liabilities, management is often not able toreasonably determine the current and non-current portion reliably. It shouldtherefore classify these liabilities as non-current liabilities.

d) Deferred tax liabilities - non-current liabilities

Management should present any deferred tax liabilities as non-currentliabilities, even if the temporary differences giving rise to the liabilities are

expected to reverse within 12 months.

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 financialstatements to be prepared on a going-concern basis.

An undertaking classifies its financial liabilities as current, when they are due tobe 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 iscompleted after the end of the reporting period, and before the financialstatements 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 isDecember, you sign the refinancing in January and approve your financial

statements in February.

The long-term loan is shown as a current liability, as it was not refinanced by theend of the reporting period.

If an undertaking has the discretion to refinance (or roll over) an obligation for atleast twelve months after the end of the reporting period, under an existing loanfacility, it classifies the obligation as non-current, even if it would otherwise bedue 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 inJanuary and approve your financial statements in February.

The long-term loan is shown as a non-current liability, as you had the refinancingoption.

EXAMPLE- Classification of liability with roll-over facilities

IssueIf an obligation can be refinanced or rolled over at the discretion of theundertaking 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 rollover the obligation (for example, there is no agreement to refinance), thepotential 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?

BackgroundUndertaking A’s management has entered into a facility arrangement with afinancial institution to ensure the availability of A’s bank financing over the longterm.

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.

SolutionUndertaking A should classify the borrowing as a non-current liability.

The borrowing can be rolled over at the undertaking’s discretion and is nottherefore part of its working capital.

Conversely, where an undertaking does not have the discretion to refinance itsborrowings, amounts due should be classified as current liabilities.

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 ascurrent.

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 becomespayable 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 demandpayment, as a consequence of the breach.

EXAMPLE- amending a breach of covenant, after the end of the reporting

periodYou breach the terms of your long-term loan. It becomes payable on demand.

Your end of the reporting period is December, the lender agrees not to demandpayment 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 endof 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 atleast twelve months, after that date.

However, the liability is classified as non-current, if the lender agreed by the endof the reporting period to provide a period of grace ending at least twelve monthsafter the end of the reporting period, within which the undertaking can rectify thebreach, 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 todemand payment as a consequence of the breach prior to December 31, givingyou 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 areapproved for issue, those events qualify for disclosure as non-adjusting events inaccordance with IAS 10:

(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 reportingperiod.

A non-adjusting event means that you note the new information, but do notupdate your accounts to reflect it. Thus, current liabilities remain as currentliabilities.

15. Information to be Presented on the Face of

the Statement of financial position (balancesheet)

As a minimum, the face of the statement of financial position shall include lineitems 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

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);

(xv) deferred tax liabilities and deferred tax assets (as defined in IAS 12);

(xvi) minority interest, presented within equity; and





(xvii) issued capital, and reserves attributable to equity holders of the parent.

The face of the statement of financial position shall include line itemsthat present the following amounts:

i. the total of assets classified as held for sale and assets includedin disposal groups classified as held for sale in accordance withIFRS 5; and

ii. liabilities included in disposal groups classified as held for salein 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 anunderstanding of the financial position.

EXAMPLE –tax losses

You have large tax losses carried forward in your home country, but tax liabilitiesabroad. 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 anunderstanding of the financial position.

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 financialposition.

For example, a bank amends the above descriptions to apply the

requirements in IFRS 7.

The judgement on whether additional items are presented separately is based onan assessment of:

(i) the nature and liquidity of assets;

(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 andnet assets (assets and liabilities) employed by each function of the businesshelps users.

The use of different measurement bases, for different classes of assets, suggeststhat their nature (or function) differs and, therefore, that they should be presented

as separate line items.

Different classes of property, plant and equipment can be carried at cost, or revalued amounts, in accordance with IAS 16.

16. Information to be Presented either on theFace of the Statement of Financial Position, or in the Notes

An undertaking shall disclose, either on the face of the statement of financialposition, 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 IFRSsand 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 inaccordance 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;

(iv) provisions are disaggregated into provisions for staff benefits, and other items; and

(v) equity capital and reserves are disaggregated into various classes, such as:

- 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, andend, of the period;

(v) the rights, preferences and restrictions attaching to that class, includingrestrictions 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

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.

An undertaking without share capital, such as a partnership or trust, shalldisclose information equivalent to that required above, showing changes duringthe period in each category of equity interest, and the rights, preferences, andrestrictions attaching to each category of equity interest.

17. Statement of comprehensive income

An undertaking shall present all items of income and expense recognised in aperiod:

(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 comprehensiveincome

As a minimum, the face of the statement of comprehensive incomeshall include line items that present the following amounts for the period:

(a) revenue;

(b) finance costs;

(c) share of the income statement of associates, and joint ventures accounted for using the equity method;d) tax expense;

(e) a single amount comprising the total of:

(i) the post-tax profit or loss of discontinued operations and

(ii) the post-tax gain or loss recognised on the measurement to fair value lesscosts to sell or on the disposal of the assets or disposal group(s) constituting thediscontinued operation;





(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 venturesaccounted 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

(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 financialperformance.

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 makingprojections.

Additional line items are included on the face of the statement of comprehensiveincome and the separate income statement (if presented), and the descriptionsused (and the ordering of items) are amended, when this is necessary to explainthe elements of financial performance.

EXAMPLE- Order of presentation of the income statement’s components

Issue

The description and ordering of items on the face of the income statementsshould 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?

Background

Undertaking A’s management wishes to present the results of the undertaking’sshare of profits and losses of associates accounted for using equity methodbefore 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

Solution

There is a suggested ordering of items to be reported on the face of the incomestatement: finance costs are presented before the results of associates.

Deviation from this general sequence would be rare, although permitted whenthis is necessary to explain the elements of performance. Additionally, management should present and classify items in the incomestatement consistently from one period to the next.





Factors to be considered include materiality, and the nature (and function) of thecomponents of income, and expenses. For example, a bank amends thedescriptions to apply the requirements in IFRS 7. Income and expense items arenot offset unless the criteria above are met.

No item should be described as extraordinary items, either on the face of theincome statement, or in the notes.

Profit or loss for the period

An undertaking shall recognise all items of income and expense in a period inprofit or loss unless an IFRS requires or permits otherwise.

Some IFRSs specify circumstances when an undertaking recognises particular items outside profit or loss in the current period. IAS 8 specifies two suchcircumstances: the correction of errors and the effect of changes in accountingpolicies.

Other IFRSs require or permit components of other comprehensive income thatmeet the Framework ’s definition of income or expense to be excluded from profit

or loss

Other comprehensive income for the period

An undertaking shall disclose the amount of income tax relating to eachcomponent of other comprehensive income, including reclassificationadjustments, either in the statement of comprehensive income or in the notes.

An undertaking may present components of other comprehensive incomeeither:

(i) net of related tax effects, or

(ii) before related tax effects with one amount shown for the aggregateamount of income tax relating to those components.

An undertaking shall disclose reclassification adjustments relating to componentsof other comprehensive income.

Other IFRSs specify whether and when amounts previously recognised in other comprehensive income are reclassified to profit or loss. Such reclassifications arereferred 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.

For example, gains realised on the disposal of available-for-sale financial assetsare included in profit or loss of the current period. These amounts may have beenrecognised in other comprehensive income as unrealised gains in the current or previous periods.

Those unrealised gains must be deducted from other comprehensive income inthe period in which the realised gains are reclassified to profit or loss to avoidincluding them in total comprehensive income twice.

An undertaking may present reclassification adjustments in the statement of comprehensive income or in the notes. An undertaking presenting reclassificationadjustments in the notes presents the components of other comprehensiveincome after any related reclassification adjustments.

Reclassification adjustments arise, for example, on disposal of a foreignoperation (see IAS 21), on derecognition of available-for-sale financial assets(see IAS 39) and when a hedged forecast transaction affects profit or loss (seeIAS 39 in relation to cash flow hedges).

EXAMPLE- Presentation of currency translation differences

IssueExchange differences arise from the translation of a foreign undertaking’sfinancial statements for incorporation in a reporting undertaking’s financialstatements.

Management should classify such differences as equity until the disposal of thenet investment [IAS21]. How should management present exchange differences in the undertaking’sstatement of changes in equity?

Background





An undertaking has subsidiaries in several different countries. All of them areconsolidated, and management classifies the currency translation differencesarising from the translation of these subsidiaries’ financial statements astranslation 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, areconciliation of the amount of such exchange differences at the beginning andend of the period.

Reclassification adjustments do not arise on changes in revaluation surplusrecognised in accordance with IAS 16 or IAS 38 or on actuarial gains and losseson defined benefit plans recognised in accordance with IAS 19.

These components are recognised in other comprehensive income and are notreclassified to profit or loss in subsequent periods.

Changes in revaluation surplus may be transferred to retained earnings insubsequent periods as the asset is used or when it is derecognised (see IAS 16and IAS 38).

Actuarial gains and losses are reported in retained earnings in the period thatthey 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 thiscommunication. IAS 1, the standard which deals with the presentation of financialstatements, contains broad guidelines on presentation format. The qualitativecharacteristics for the financial statements in the IFRS framework only representgeneral guidance.

Stakes are high for companies: broad guidelines offer opportunities to drive their communication based on financial statement presentation. The abuse of thisflexibility, however, may do more harm than good in the medium term.

Analysts may be confused by presentations of ‘results before bad news andthings management didn’t expect’. Regulators will not endorse such flexibility andwill 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’sfinancial performance. The notes may provide useful additional information butthe size and complexity of these often prevent most users from considering themin 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 andcomparability result from doing so?

Imagine two similar companies: one excludes depreciation from its cost-of-salesfigure to derive its gross profit figure, while presenting depreciation as a separateline 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 expensecategories generates more gross profit. This only reflects a choice of presentationand not the actual performance of the company.

The first presentation could create confusion for the user and it would not becomparable 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. ‘Earningsbefore interest, depreciation and amortisation’ (EBITDA) is an example, which isused in many capital intensive industries.

Many different calculation methods exist. Some companies exclude allamortisation and depreciation from the subtotal; others exclude all significantnon-cash charges such as restructurings and impairments. This makes ‘EBITDA’a wide category that is non-comparable.

Analysts must then make various adjustments to the published EBITDA figuresbased on information from the notes. Disclosing partial information on the face of the income statement (often without an explanation on its calculation) does notadd value for users.

Transparency

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 inclearer presentation if certain criteria are met (see box below).

Other common reporting issues

The use of the ‘operating profit’ subtotal: many companies disclose ‘operatingprofit’ even though IFRS no longer requires it. If this subtotal is presented,IAS 1 states that all activities are presumed to be part of operations apartfrom the results of financing activities, equity-accounted investments,discontinued operations and taxation.

‘Non-recurring’ or ‘exceptional’ results: another commonly-used subtotal isthe division of operating profit to ‘recurring’ and ‘non-recurring’ portions (or similar). Management may wish to make this separation to exclude ‘difficultdebits’ or because the items were treated as ‘extraordinary’ under localGAAP.

These subtotals do not usually help to achieve clear and consistentpresentation, 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 isunlikely that a separate line item for restructuring can be used in a functionalexpense presentation.

Conclusion

The income statement presentation can make a difference between companieseven if the underlying results are similar. A company that follows IAS 1 willreduce 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 acceptablewhen all of the following requirements are met:

The proposed presentation is not misleading: the income statementpresentation should be unbiased. The proposed breakdown should not resultin a misleading cost-of-sales figure and overstate gross profit.

A potential for bias can exist if the subtotal gets undue prominence over theline 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 itemsshould have an accounting policy which describes the classification rules (toavoid 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 separatenote, which could be tied to the total of expenses presented on the face of theincome statement.





18. Information to be Presented either on theFace of the Income Statement, or in the Notes

When items of income and expense are material, their nature and amount shallbe disclosed separately.

Separate disclosure of items of income and expense include:(i) write-downs of inventories to net realisable value, or of property, plant andequipment to recoverable amount (as well as reversals of such write-downs);

(ii) restructurings of the activities of an undertaking (and reversals of anyprovisions for the costs of restructuring);

(iii) disposals of items of property, plant and equipment;

(iv) disposals of investments;

(v) discontinuing operations;

(vi) litigation settlements; and

(vii) other reversals of provisions.

An undertaking shall present an analysis of expenses, using a classificationbased on either the nature of expenses, or their function, whichever providesinformation 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 netassets employed by each function of the business helps users.

Expenses are subclassified to highlight components of financial performance thatmay 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 areaggregated 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 theundertaking.

No allocations of expenses to functional classifications are necessary. Anexample of a classification using the nature of expense method is as follows:Revenue XOther income XChanges in inventories of finishedgoods and work in progress

X

Raw materials and consumables used XStaff benefits costs XDepreciation and amortisation expense XOther expenses XTotal expenses (X)Profit 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 arbitraryallocations, and involve judgement. An example of a classification using thefunction of expense method is as follows:

Revenue XCost of sales (X)Gross profit XOther income XDistribution costs (X)Administrative expenses (X)

Other expenses (X)Profit X

Undertakings classifying expenses by function shall disclose additionalinformation on the nature of expenses, including depreciation, amortisation andstaff benefits expense.





The choice of method depends on historical, and industry factors and the natureof the undertaking. Both methods provide an indication of those costs that mightvary, directly or indirectly, with the level of sales (or production).

Management should select the most relevant presentation. As information on thenature of expenses is useful in predicting future cash flows, additional disclosureis required, when the function of expense classification is used.

EXAMPLES- Presentation of currency translation differences

IssueExchange differences arise from the translation of a foreign undertaking’sfinancial statements for incorporation in a reporting undertaking’s financialstatements. Management should classify such differences as equity until thedisposal of the net investment [IAS21]. How should management present exchange differences in the undertaking’sstatement of changes in equity?

Background

An undertaking has subsidiaries in several different countries. All of them areconsolidated, and management classifies the currency translation differencesarising from the translation of these subsidiaries’ financial statements astranslation reserve in equity.

SolutionManagement should present the gain/loss on currency translations on the face of the statement of changes in equity. Additionally, management should present, ina note to the financial statements, a reconciliation of the amount of suchexchange differences at the beginning and end of the period.

Presentation of capitalised expenses

Issue

When presenting the analysis of expenses by nature, the expenses areaggregated in the income statement according to their nature, and are notreallocated 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 bynature. During the period, the undertaking capitalised some of the costs related tomaterials and employees; these costs were capitalised into property, plant and

equipment.

Solution

Management should present the employee benefits costs and the movement inthe inventories on a gross basis. The amounts capitalised should be shownseparately as a deduction from expenses in the income statement. The level of detail and prominence of the deduction should be determined according to thesize and significance of the amounts capitalised. An example disclosure is givenbelow:

Revenue X

Other income X

Changes in inventories of finished goods and

work in progress XRaw materials and consumables used XEmployee benefits costs XDepreciation and amortisation expense XOther expenses XLess: expenses capitalised in construction

of property, plant and equipment (X)





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 incomeand expense when they are material.

How should management present the revenue related to governmentcompensation in the undertaking’s income statement?

Background

Undertaking A operates under the terms of a government licence in a regulatedindustry in country X.

The undertaking received 3,000,000 from the government as compensation for loss of income that the undertaking suffered because the licence agreement wasmodified.

The original licence granted undertaking A exclusive rights to operate in countryX, and the modification allowed competition from locally-owned businesses.

Receipt of the payment was unconditional. Management therefore recognised itin the income statement on receipt. The compensation represents approximately30% of the current year profit before tax.

Solution

Management would ordinarily recognise the compensation from the governmentas part of ‘other income’.

However, the nature and size of the revenue is such that management shoulddisclose it in a separate line on the face of the income statement. Managementshould present this line immediately after or before the line ‘other income’.

The classification of the compensation as income reflects the reason for thecompensation, that is, loss of income. The compensation would have beenincluded within other expenses if it had been awarded as compensation for additional costs incurred.

EXAMPLE- Classification of impairment losses

Issue

The presentation of expenses by function classifies expenses according to their function as part of cost of sales, distribution or administrative activities.

How should management classify the impairment of goodwill?

Background

An undertaking has recognised goodwill on subsidiaries’ acquisitions as well ason associates accounted for using equity method. One subsidiary and oneassociate are located in a country that is experiencing economic crisis.

During the year, management recognised impairment losses on goodwill relatedto both the subsidiary and associate.

Solution

Management should classify impairment on the goodwill related to the subsidiarywithin other expenses, and the impairment on the goodwill related to theassociate within ‘share of profit/loss on associate’.

The classification of the impairment losses should follow the same classificationas the expenses related to the underlying assets.

EXAMPLE- Use of different analysis of expenses for parent financialstatements 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 incomestatement?

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.

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’smanagement 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 thegroup’s results will be presented on a functional basis.

A’s management argues that because B’s business is from a different segmentand therefore not comparable with the rest of the group, the use of a differentpresentation basis should be acceptable.

Solution

No, management cannot adopt a mix of the two types of analysis in the group’sfinancial 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 chosenbasis, which will require part of the group to convert their results from that used intheir single-undertaking financial statements to that used in the consolidatedfinancial statements.

19. Statement of Changes in Equity

This statement is new to many jurisdictions. Most movements on equity weretraditionally shown on the face of the Income Statement. Dividends would beshown, (but increases in capital would mostly not be shown).

The difference between opening and closing equity was detailed in the IncomeStatement. Charging (or crediting) directly to equity was prohibited in many jurisdictions. Foreign currencies (involving investments) and revaluations havebeen instrumental in providing the need for this separate statement.

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.

Fair value reserve

Unrealised gains/losses (net of tax) on investments classified as available-for-sale shall berecognised in equity (within a fair value reserve). These gains/losses are recycled to the

income statement on disposal or when the asset becomes impaired.

Hedging reserve

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 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 revaluedcarrying 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.

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 andforeign 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:

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 totalamounts attributable to owners of the parent and to minority interest;

(b) for each component of equity, the effects of retrospective application or retrospective restatement recognised in accordance with IAS 8;

(c) the amounts of transactions with owners in their capacity as owners, showingseparately contributions by and distributions to owners; and

(d) for each component of equity, a reconciliation between the carrying amount atthe beginning and the end of the period, separately disclosing each change.

An undertaking shall present, either in the statement of changes in equity or inthe notes, the amount of dividends recognised as distributions to owners duringthe period, and the related amount per share.

EXAMPLE- Statement of changes in equity - Netting of gains and losses

IssueUndertakings should present a separate statement showing:

Can management present, as a single line item only the total gain and lossesrecognised directly in equity?

BackgroundUndertaking A recognised during the period gains and losses related to changesin the fair value of available-for-sale investments and PPE.

Management wishes to present the gains and losses in one line in the statementof changes in equity, and then provide a reconciliation of the movement in a noteto the financial statements.

SolutionNo, the undertaking should present each of these items separately (and a total) inits statement of changes in equity.

The components of equity include, for example, each class of contributed equity,the accumulated balance of each class of other comprehensive income andretained earnings.

Changes in an undertaking’s equity between the beginning and the end of thereporting period reflect the increase or decrease in its net assets during theperiod.

Except for changes resulting from transactions with owners in their capacity asowners (such as equity contributions, reacquisitions of the undertaking’s ownequity instruments and dividends) and transaction costs directly related to suchtransactions, the overall change in equity during a period represents the totalamount of income and expense, including gains and losses, generated by theundertaking’s activities during that period.

IAS 8 requires retrospective adjustments to effect changes in accounting policies,

to the extent practicable, except when the transition provisions in another IFRSrequire otherwise.

IAS 8 also requires restatements to correct errors to be made retrospectively, tothe extent practicable.

Retrospective adjustments and retrospective restatements are not changes inequity but they are adjustments to the opening balance of retained earnings,except when an IFRS requires retrospective adjustment of another component of equity.

IAS 8 requires disclosure in the statement of changes in equity of the totaladjustment to each component of equity resulting from changes in accounting

policies and, separately, from corrections of errors.

These adjustments are disclosed for each prior period and the beginning of theperiod.

20. Statement of Cash Flows





Cash flow information provides users with a basis to assess the ability togenerate cash, and the needs of the undertaking to utilise those cash flows. IAS7 sets out requirements for the presentation of the cash flow information andrelated disclosures.

21. Notes

Structure

The notes shall:

(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 thefinancial statements; and

(iii) provide additional information relevant to understanding the financialstatements.

Notes shall be presented in a systematic manner. Each item in the statements of financial position and of comprehensive income, in the separate incomestatement (if presented), statement of changes in equity, and cash flow statementshall be cross-referenced to any related information in the notes.

Notes are normally presented in the following order, which assists users inunderstanding 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 itemspresented 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 riskmanagement objectives and policies).

It may be necessary, or desirable, to vary the order of items within the notes.

Information on changes in ‘fair value’ recorded in income statement may becombined with information on maturities of financial instruments, although theformer 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 financialstatements, and specific accounting policies, may be presented as a separatecomponent of the financial statements.

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 financialstatements.

Users should be informed of the measurement bases (historical cost, currentcost, net realisable value, fair value or recoverable amount) because the basis onwhich the financial statements are prepared affects their analysis. (seeFramework 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 providean indication of the categories of assets (and liabilities) to which eachmeasurement basis is applied.

In deciding whether a particular policy should be disclosed, managementconsiders whether disclosure would assist users in understanding howtransactions are reflected in the reported financial performance, and financialposition.





Disclosure of particular policies is useful when those policies are selected fromalternatives allowed in Standards.

An example is disclosure of whether a venturer recognises its interest in a jointlycontrolled undertaking using proportionate consolidation, or the equity method(see IAS 31 Joint Ventures).

Some Standards specifically require disclosure of particular policies, includingchoices 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 theusers would expect to be disclosed for that type of undertaking.

EXAMPLE-Tax

An undertaking subject to income taxes would disclose its policies for incometaxes, including those applicable to deferred tax liabilities (and assets).

EXAMPLE-Foreign operations and currencies

When an undertaking has significant foreign operations, or transactions in foreigncurrencies, disclosure of policies for the recognition of foreign exchange gains(and losses) would be expected.

EXAMPLE-Group accountsWhen business combinations have occurred, the policies used for measuringgoodwill, and minority interest are disclosed.

An policy may be significant because of the nature of the undertaking’soperations, even if amounts for current, and prior periods are not material.

An undertaking shall disclose, in the summary of policies or other notes, the judgements (apart from those involving estimations) management has made inthe process of applying the policies that have the most significant impact, on theamounts recorded in the financial statements.

EXAMPLE-estimate - warranty provision

You have introduced a new product. You create a warranty provision for clientclaims, 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 liabilitiesdenominated 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;

• Property prices used as the basis for revaluing properties;

• Growth rates and interest used in an impairment calculation for property, plantand equipment;

• Assessment of the percentage of completion on services or constructioncontracts.

Possible areas of critical accounting judgements:

• Classification of held-to-maturity financial assets;

• Revenue recognition: transfer of substantially all significant risk and rewards;

• Classification of complex lease transactions;





• Impairment of an available-for-sale investment;

• Control over a special purpose undertaking.

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 amountsrecorded in the financial statements. For example, management makes judgements in determining:

(i) whether financial assets are held-to-maturity investments;

(ii) when substantially all the significant risks (and rewards) of ownership of financial assets, and lease assets, are transferred to other undertakings;

(iii) whether, in substance, particular sales of goods are financing arrangements,and therefore do not give rise to revenue; and

(iv) whether the substance of the relationship between the undertaking, and aspecial 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 notcontrol it, and therefore does not consolidate it. IAS 27 requires an undertaking todisclose the reasons why the undertaking’s ownership interest does notconstitute control, in respect of an investee that is not a subsidiary (even thoughmore than half of its voting, or potential voting power, is owned directly or indirectly through subsidiaries).

IAS 40 requires disclosure of the criteria developed by the undertaking todistinguish investment property from owner-occupied property, and from propertyheld for sale in the ordinary course of business, when classification of the

property is difficult.

Key Sources of Estimation Uncertainty

An undertaking shall disclose, in the notes, information about the keyassumptions concerning the future, and other key sources of estimationuncertainty 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.

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) requiresestimation of the impacts of uncertain future events on those assets (andliabilities) at the end of the reporting period.

EXAMPLE- estimated provision

You have been sued in court. You have lost the case. Your total costs are notfinalisedWhen the accounts are prepared, you estimate your provision for the costs of theliability.

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 pricesaffecting other costs.

These disclosures are not required for assets (and liabilities) with a significantrisk 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, basedon 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 natureof the assumption, and other circumstances. Examples of the types of disclosures made are:

(i) the nature of the assumption, or other estimation uncertainty;

(ii) the sensitivity of carrying amounts to the methods, assumptions and estimatesunderlying their calculation, including the reasons for the sensitivity;

(iii) the expected resolution of an uncertainty, and the range of reasonablypossible outcomes within the next financial year, in respect of the carryingamounts of the assets (and liabilities) affected; and

(iv) an explanation of changes made to past assumptions, concerning thoseassets 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 acontingent 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 thedisclosures.

When it is impracticable to disclose the extent of the possible impacts of a keyassumption, the undertaking discloses that it is reasonably possible, thatoutcomes within the next financial year could require a material adjustment to thecarrying amount of the asset (or liability) affected.

In all cases, the undertaking discloses the nature, and carrying amount, of thespecific asset or liability (or class of assets or liabilities) affected by the

assumption.

The disclosures of particular judgements management made in the process of applying the undertaking’s policies do not relate to the disclosures of key sourcesof estimation uncertainty.

IAS 37 requires disclosure, in specified circumstances, of major assumptionsconcerning 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.

22. CapitalAn undertaking shall disclose information that enables users to evaluate theundertaking’s objectives, policies and processes for managing capital.

The undertaking discloses the following:

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 capitalrequirements, the nature of those requirements and how thoserequirements are incorporated into the management of capital;and

iii. how it is meeting its objectives for managing capital.

2. summary quantitative data about what comprises its capital. Someundertakings regard some financial liabilities (eg some forms of subordinateddebt) as part of capital. Other undertakings regard capital as excluding somecomponents 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 capitalrequirements to which it is subject.

5. when the undertaking has not complied with such externally imposed capitalrequirements, the consequences of such non-compliance.





These disclosures shall be based on the information provided internally to theundertaking’s key management personnel.

An undertaking may manage capital in a number of ways and be subject to anumber of different capital requirements and restrictions.

For example, a conglomerate may include undertakings that undertake insuranceactivities and banking activities, and those undertakings may also operate in

several jurisdictions.

The undertaking shall disclose separate information for each capital requirement(rather than aggregate information) to which the undertaking is subject where thiswould be aid the understanding of users.

23. Other Disclosures

An undertaking shall disclose in the notes:

(i) the amount of dividends proposed (or declared) before the financial statementswere 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.

An undertaking shall disclose the following, if not disclosed elsewhere ininformation published with the financial statements:

(i) the domicile, and legal form, of the undertaking, its country of incorporationand the address of its registered office (or principal place of business, if differentfrom the registered office);

(ii) a description of the nature of the undertaking’s operations, and its principalactivities; and

(iii) the name of the parent and the ultimate parent of the group.

24. Annex- Amendments to IAS 1 - IFRS NewsNovember 2007

The IASB published Amendments to IAS 1 in September, completing PhaseA of the Board’s joint project with the FASB. The changes align someaspects of IAS 1 with SFAS 130, Reporting Comprehensive Income.

ImplicationsTransactions with owners are analysed separately from those relating to theperformance of the undertaking. The user of the financial information will need tobecome familiar with understanding and explaining this new way of presentation.

The amendment defines ‘owners’ as being “the holders of instruments classifiedas equity”. This definition also includes interests and is likely to include holders of compound financial instruments, such as convertible debt.

Those undertakings that have previously presented a separate statement of recognised income and expense (SoRIE) will now be required to provide inaddition a statement of changes in equity. This will present information that haspreviously been provided in the notes.

These undertakings can decide to make no change at all to the SoRIE or canelect to combine the SoRIE with the income statement into a single statement of comprehensive income.

Undertakings are no longer allowed to present a statement of changes in equitythat includes items of comprehensive income and changes due to transactionswith owners.

The amendment considers aligning the comprehensive income concept with FAS130; however, there are still some differences. For example, FAS 130 permits athird option of displaying comprehensive income in a statement of changes inequity. 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 Bare not expected for a number of years, and inconsistencies might still appear inthe intervening period.





It does, however, add some potential practical difficulties in estimating the taxeffects of each item within comprehensive income.

The changes are likely to reduce comparability between undertakings becausethey allow choices in the presentation of financial information and in the names of the primary statements.

Next steps

The FASB did not publish a separate document considering Phase A of theproject. It will expose its Phase A decisions along with its Phase B decisions.

Phase BThe Boards are jointly undertaking Phase B, which considers more fundamentalquestions, 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 flowsprovides more useful information; and

• whether components of other comprehensive income should be reclassified toprofit or loss and, if so, the characteristics of the transactions and events thatshould be reclassified and when reclassification is made.

The IASB expects to publish a discussion paper early next year.

Phase C

Phase C will address presentation and display of interim financial information inUS GAAP. The IASB may reconsider the requirements in IAS 34, InterimFinancial Reporting.

IAS 1 revised is effective for annual periods beginning on or after 1 January2009. Early application is permitted. The revised IAS 1 resulted in consequentialamendments to five IFRSs, 23 IASs and 10 interpretations.

Key changes to IAS 1

- Changes in equity arising from transactions with owners (such as dividends andshares 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 incomprehensive income*;

- Comprehensive income is presented in either a single statement or in twostatements (an income statement and a statement of comprehensive income);

- Dividends and per share amounts are presented in the statement of changes inequity or in the notes;

- A statement of financial position (statement of financial position) at thebeginning of the corresponding period is presented where restatements haveoccurred; and

- Reclassification adjustments (recycling) and the related income tax aredisclosed in the comprehensive income.

* Comprehensive income for a period includes profit or loss for that period andthe components of ‘recognised income and expense’ previously reported inequity such as:

changes in revaluation surplus;

actuarial gains and losses on defined benefit plans recognised in equity;

gains and losses arising from translating the financial statements of a foreignoperation;

gains and losses on remeasuring available for sale financial assets and;

the effective portion of gains and losses on hedging instruments in a cash flowhedge.

25. Multiple choice questions

1. Financial statements provide information about an undertaking’s:

(i) Assets.

(ii) Liabilities.





(iii) Equity.

(iv) Income and expenses, including gains and losses.

(v) Other changes in equity.

(vi) Cash flows.

(vii) Employment policies.

1. (i)+(iii)+(iv)+(v)2. ( i) – ( ii i)3. (i) – (vi)4. ( i) – (vi i)

2. 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;

(iii) a statement of changes in equity for the period;

(iv) a statement of cash flows for the period;

(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 earliestcomparative period when an undertaking applies an accounting policyretrospectively or makes a retrospective restatement of items in its financialstatements, or when it reclassifies items in its financial statements. 1. (i)+(iii)+(iv)+(v)2. (i) – (iii)3. (i) – (iv)+(vi)4. (i) – (vi)

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.

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. (i)+(iii)+(iv)2. ( i) – ( ii i)

3. (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.

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 willcontinue in operation for:

1. 6 months.2. 1 Year.3. The foreseeable future.

9. In June, you pay factory rent relating to October, November, andDecember. 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. A trade payable.2. An account receivable.

3. A provision.

11. Consistency entails:1. The ability to compare the figures of different periods.2. No changes in accounting policies.3. No new Standards being introduced.

12. Gains and losses on foreign currencies are reported:

1. Within revenue.2. On 2 separate lines.3. Net, on a separate line.

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.

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 financialstatements, whichever is appropriate to that component of the financialstatements.

(v) the presentation currency,

(vi) the level of rounding used in presenting amounts in the financial statements.

1. (i)+(iii)-(vi)2. ( i) – ( ii i)

3. (i) – (iv)4. (i) – (vi)

15. Assets and liabilities must be presented on the statement of financialposition:

1.Split into current and non-current.2.Broadly in order of liquidity.3.Either 1 or 2.

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.

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.

18. Deferred tax liabilities are always shown as:

1. A current liability.2. A non-current liability.3. A contingent liability.

19. The judgement on whether additional items are presented separately isbased on an assessment of:

(i)The nature and liquidity of assets.

(ii)The function of assets.

(iii) The amounts, nature and timing of liabilities.





(iv) The space available in the financial statements.

1.(i)+(iii)+(iv)2. (i) – (iii)3. (ii) – (iv)4. (iii) – (iv)

20. As a minimum, the face of the income statement shall include line items

that present the following amounts for the period:

(i) Revenue.

(ii) Finance costs.;

(iii) Share of the income statement of associates, and joint ventures accountedfor using the equity method.

(iv) Pre-tax gain (or loss) recorded on the disposal of assets, or settlement of liabilities attributable to discontinuing operations.

(v) Tax expense.

(vi) Profit, or loss.

1 (i)+(iii)-(vi)2. (i) – (iii)3. (i) – (iv)4. (i) – (vi)

21. The following:

(i) write-downs of inventories to net realisable value, or of property, plant andequipment 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;

(vi) litigation settlements; and

(vii) other reversals of provisions.

should be presented:

1. On the face of the income statement.2. In the notes.3. Either 1 or 2.

22. This presentation is:

Revenue XOther income XChanges in inventories of finishedgoods and work in progress

X

Raw materials and consumables used XEmployee benefits costs XDepreciation and amortisation expense XOther expenses XTotal expenses (X)

Profit X

1. Nature of expense method.2. Cost of sales method.3. Function of expense method.

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.

24. An undertaking shall present a statement of changes in equity (plus

notes) showing:

(i) Profit (or loss) for the period.

(ii) Each item of income and expense that is recorded directly in equity, and thetotal of these items.

(iii) Total income and expense (calculated as the sum of (i) and (ii)), showingseparately the total amounts attributable to equity holders of the parent, and tominority interest. and





(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 asequity holders, showing separately distributions to equity holders.

(vi) The balance of retained earnings (accumulated profit (or loss)) at thebeginning of the period, and at the end of the reporting period, and the changesduring the period.

(vii) A reconciliation between the carrying amount of each class of contributedequity, and each reserve at the beginning and end of the period, separatelydisclosing each change.

1 (i)+(iii)-(vi)2. (i) – (iv)3. (i) – (vi)4. (i) – (vii)

25. The notes shall present, disclose and include:

(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 on the face of the statement of financial position, income statement, statement of changes inequity, or cash flow statement. and

(iii) Provide additional information relevant to understanding the financialstatements.

(iv) A statement of compliance with IFRSs.

(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 ispresented.

(vii) Other disclosures, including:

- contingent liabilities and unrecorded contractual commitments. and

- non-financial disclosures, such as the undertaking’s financial risk managementobjectives and policies).

1 (i)+(iii)-(vi)2. (i) – (iv)3. (i) – (vi)4. (i) – (vii)

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.(ii i) Provisions subject to the future outcome of litigation in

progress.(iv) Long-term employee benefit l iabilities such as pension

obligations.(v) Accounts receivable.

1 (i)+(iii)-(v)2. (i) – (iii)3. (i) – (iv)

4. (i) – (v)

27. Examples of the types of disclosures about uncertainty are:

(i) The nature of the assumption, or other estimation uncertainty.

(ii) The sensitivity of carrying amounts to the methods, assumptions andestimates underlying their calculation, including the reasons for the sensitivity.

(iii) The expected resolution of an uncertainty, and the range of reasonablypossible outcomes within the next financial year, in respect of the carryingamounts of the assets (and liabilities) affected. and

(iv) An explanation of changes made to past assumptions, concerning thoseassets and liabilities, if the uncertainty remains unresolved.

(v) The total number of transactions that have previously been analysed in thesame manner.

1 (i)+(iii)-(v)2. (i) – (iii)3. (i) – (iv)4. (i) – (v)





28. An undertaking shall disclose in the notes, if not disclosed elsewhere:

(i) The amount of dividends proposed (or declared) before the financialstatements were approved for issue, but not recorded as a distribution to equityholders 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 incorporationand the address of its registered office (or principal place of business, if differentfrom the registered office).

(iv) A description of the nature of the undertaking’s operations, and its principalactivities. 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)

26. Answers to multiple choice questionsQuestion Answer 1. 32. 33. 24. 15. 2

6. 47. 28. 39. 310. 111. 112. 313. 214. 115. 316. 117. 218. 219. 220. 421. 322. 123. 224. 425. 4





26. 327. 328. 3

This publication has been produced with the assistance of the European Union.The contents of this publication are the sole responsibility of ZAO

“PricewaterhouseCoopers”, FBK and European Savings Bank Group and can inno way be taken to reflect the views of the European Union.


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