ESTP Course Desk Profiling – Hands-on Accounting and IFRS for profilers Basic accounting and reporting concepts Introduction to IFRS IAS 1 – Presentation of financial statements Levente Szekely Eurostat

Basic concepts Accounting (A) recording, classifying and summarizing of transactions, other events and circumstances having effect on an entity’s economic resources; the production of information; Reporting (R) preparing formal reports on an entity’s economic situation and performance; stand-alone – for one entity consolidated – for two or more entities acting as one (a group) the presentation of information;

Basic concepts (continued) Financial accounting/reporting requirements IFRS (issued by the IASB) – standards for both (A) and (R) specified in legal acts at EU level – "new" Accounting Directive 2013/34/EU (superseded the 4 th and 7 th Directives) – rules for (R) only at national level (called National Accounting Standards or National GAAPs) Reporting entities / undertakings generic term used in accounting standards usually defined in specific law (see above + IAS Regulation 1606/2002) in general foreseen for legal persons having limited liability

Basic concepts (continued) Qualitative characteristics of information – to be useful, information must be: first and foremost (fundamental characteristics) relevant (capable of making a difference in the decisions made by users) faithfully representing what it should (complete, neutral, free from error) in addition (enhancing characteristics) comparable verifiable timely understandable Materiality – same as "significance" presented before information is significant if its omission or misstatement could influence decisions that are based on it

Basic concepts (continued) Accrual basis of accounting Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period. Going concern (underlying assumption) The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

Basic concepts (continued) The 5 elements of financial statements financial position (stock) Assets – resource controlled from past events; future inflow of benefits expected Liabilities – present obligation from past events; future outflow of benefits exp. Equity – net assets (residual interest in assets after deducting all liabilities) financial performance (flow) Income – increases in economic benefits (increase of assets, decrease of liab.) Expenses – opposite of income For each of these there are specific criteria on: recognition/de-recognition recording valuation presentation (disclosure)

IAS 1 – Presentation of financial statements fundamental principles to be abided by when preparing financial statements based on IFRS (laid out in IAS 1): accrual accounting (except for the cash flows) going concern consistency in presentation and classification materiality unless allowed or required by any of the standards, no offsetting of assets with liabilities, or income with expenses should be done reporting period should be annual (otherwise additional disclosures required) specifies the minimum amount of information to be presented in the financial statements

IAS 1 – Presentation of financial statements (continued) A complete set of financial statements (both stand alone (“separate”) and consolidated) contains: Statement of Financial Position (Balance Sheet – BS) assets (current/non-current; short-term/long-term; order of liquidity) liabilities (same as above) equity Income Statement (Profit and Loss Account – PL) income expenses (nature(WIP)/function(CoS)) result (profit/loss) Statement of Cash Flows (CF) cash in/outflows from operating/financing/investing Statement of Changes in Equity {See examples for BS/PL presentation.}

IAS 1 – Presentation of financial statements (continued) A complete set of financial statements (both stand alone (“separate”) and consolidated) contains: Explanatory Notes significant accounting policies used detailed information on several elements from the BS and PL information on changes in equity, operations and main management decisions key indicators on profitability, liquidity, gearing and investor’s interest disclosure of contingencies, events after the reporting date and other information

Potential sources for SBS variables VariablePotential source Turnoverfrom PL (to exclude duties and taxes; not based on invoicing – cutoff issue; to clarify treatment of discounts and rebates) Gross margin on goods for resalefrom PL and Notes (depending on certain factors, like: the method used to present expenses in PL; GAAP) Personnel costsfrom PL (or Notes) Wages and salariesfrom PL (if Acc. Directive), from Notes (if IFRS) Social security costsfrom PL (if Acc. Directive) Gross investment in tangible goodsfrom Notes Gross investment in landfrom Notes Gross investment in construction and alteration of buildings from Notes Gross investment in machinery and equipment from Notes Gross investment in concessions, patents, licences, trade marks and similar rights from Notes

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