1 International Financial Reporting Standards IFRS for SMEs IFRS Foundation-World Bank 18–20 October 2011 Sarajevo, Bosnia and Herzegovina Copyright © 2010 IFRS Foundation. All rights reserved.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 2 The IFRS for SMEs Topic 1.7(a) Quiz and Discussion Sections 3-8 Financial Statement Presentation Michael Wells

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 3 Questions about Sections 3 to 8 Financial Statement Presentation. Questions are based on the illustrative financial statements published along with the IFRS for SMEs (in separate printed booklet).

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 4 Financial Statement Presentation Case Question (a): Consolidated statement of comprehensive income and retained earnings Could the group present two statements (separate consolidated statement of comprehensive income and consolidated statement of changes in equity) instead of presenting a single consolidated statement of income and retained earnings?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 5 Financial Statement Presentation Case Question (a): Consolidated statement of comprehensive income and retained earnings Could the group present two statements (separate consolidated statement of comprehensive income and consolidated statement of changes in equity) instead of presenting a single consolidated statement of income and retained earnings? YES Para

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 6 Financial Statement Presentation Case Question (b): Consolidated statement of comprehensive income and retained earnings How would the presentation of the consolidated statement of income and retained earnings change if the XYZ Group had a discontinued operation in the year ended 31 December 20X2?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 7 Financial Statement Presentation Case Question (b): Separate line item in income statement disclosing total of: –the post-tax P&L of discontinued op, plus –the post-tax gain or loss on disposal or write-down of the net assets of the discontinued operation Presented above total P&L for year Separately from profit from continuing operations

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 8 Financial Statement Presentation Case Question (c):Consolidated statement of comprehensive income and retained earnings How would the presentation of the consolidated statement of income and retained earnings change if the XYZ Group had a partly owned subsidiary?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 9 Financial Statement Presentation Case Question (c):Consolidated statement of comprehensive income and retained earnings Disclose separately in the statement of income and retained earnings allocations of P&L attributable to: –non-controlling interest –owners of the parent

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 10 Financial Statement Presentation Case Illustration for Question (c): Profit before tax654,956457,147 Income tax expense(270,250)(189,559) Profit for the year384,706267,588 Retained earnings start of year2,171,3532,003,765 Dividends(150,000)(100,000) Retained earnings end of year2,406,0592,171,353 Allocation of profit for year: Owners of parent339,673239,476 Non-controlling interest 45,033 28,112 Profit for the year 384, ,588

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 11 Financial Statement Presentation Case Question (d):Consolidated statement of comprehensive income and retained earnings Could the XYZ Group choose to present an analysis of expenses by function instead of an analysis of expenses by nature? What are examples of expenses by function?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 12 Financial Statement Presentation Case Question (d): Yes. But once it has presented an analysis of expenses by nature under IFRS for SMEs, can change only if it concludes ‘by function’ is better information’ (see Section 10). Examples of expenses by function: –Cost of goods sold –Selling expense –Shipping expense –Administrative expense

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 13 Financial Statement Presentation Case Question (e):Consolidated statement of comprehensive income and retained earnings Is the group required to disclose this line item ‘Profit before tax’?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 14 Financial Statement Presentation Case Question (e):Consolidated statement of comprehensive income and retained earnings Is the group required to disclose this line item ‘Profit before tax’? Not required by ¶5.5. Note, however, that ¶5.9 requires an entity to present additional line items when relevant to understanding performance. Management must make a judgement here.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 15 Financial Statement Presentation Case Question (f): Consolidated statement of financial position Could this statement have been called ‘Balance Sheet’ instead of ‘Statement of Financial Position’? What about ‘Statement of Asset and Liability Values’?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 16 Financial Statement Presentation Case Question (f): Consolidated statement of financial position ‘Balance Sheet’ instead of ‘Statement of Financial Position’? ‘Balance Sheet’ is ok: ¶3.22. ‘Statement of Asset and Liability Values’? Not ok. The amounts are not values. ¶3.22 allows other titles as long as they are not misleading.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 17 Financial Statement Presentation Case Question (g):Consolidated statement of financial position Does the IFRS for SMEs prohibit presenting the statement of financial position before the statement of income and retained earnings?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 18 Financial Statement Presentation Case Question (g):Consolidated statement of financial position Does IFRS for SMEs prohibit presenting the statement of financial position before the statement of income and retained earnings? No. ¶3.22 only requires that all financial statements be presented with equal prominence. Sequence is not prescribed.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 19 Financial Statement Presentation Case Question (h):Consolidated statement of financial position Does the IFRS for SMEs require a statement of financial position at the beginning of the earliest comparative period?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 20 Financial Statement Presentation Case Question (h):Consolidated statement of financial position Does the IFRS for SMEs require a statement of financial position at the beginning of the earliest comparative period? No. ¶3.14 requires comparative information for the previous period only (so, statement of financial position at end of each period).

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 21 Financial Statement Presentation Case Question (i): Consolidated statement of financial position Instead of presenting its current assets / liabilities separately from its non-current assets / liabilities, could the XYZ Group choose to present its assets and liabilities in order of their liquidity (no current / non-current split)?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 22 Financial Statement Presentation Case Question (i): Consolidated statement of financial position Could the XYZ Group choose to present its assets / liabilities in order of their liquidity? Under IFRS for SMEs it is not free choice. Entity must make a judgement and conclude that a liquidity presentation provides reliable and more relevant info than the current/non- current split. ¶4.4

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 23 Financial Statement Presentation Case Question (j): Consolidated statement of financial position When an entity presents its assets and liabilities in order of their liquidity, is that order ascending or descending?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 24 Financial Statement Presentation Case Question (j): Consolidated statement of financial position When an entity presents its assets and liabilities in order of their liquidity, is that order ascending or descending? Entity may choose either ascending or descending order of liquidity. ¶4.4.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 25 Financial Statement Presentation Case Question (k): Consolidated statement of cash flows This statement has a sub-heading “Cash flow included in investing activities” within “Cash flows from operating activities”. Why is this item there?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 26 Financial Statement Presentation Case Question (k): Consolidated statement of cash flows Sub heading “Cash flow included in investing activities”: Why? T his is neither required nor prohibited. It explains why gain on sale of equipment has been excluded from cash flows from operating activities.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 27 Financial Statement Presentation Case Question (l): Consolidated statement of cash flows Does the IFRS for SMEs require the XYZ Group to separately disclose the amount of finance costs paid in cash?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 28 Financial Statement Presentation Case Question (l): Consolidated statement of cash flows Does the IFRS for SMEs require the XYZ Group to separately disclose the amount of finance costs paid in cash? Yes. ¶7.14 requires separate presentation of cash flows from interest and dividends received and paid.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 29 Financial Statement Presentation Case Question (m):Consolidated statement of cash flows Does the IFRS for SMEs require the group to separately disclose the amount of income taxes paid in cash?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 30 Financial Statement Presentation Case Question (m):Consolidated statement of cash flows Does the IFRS for SMEs require the group to separately disclose the amount of income taxes paid in cash? Yes. ¶7.17 requires separate presentation of cash flows from arising from income taxes.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 31 Financial Statement Presentation Case Question (n): Note 2 Accounting Policies If the presentation currency is different from the functional currency, what additional information, if any, would the XYZ Group disclose?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 32 Financial Statement Presentation Case Question (n): Note 2 Accounting Policies If the presentation currency is different from the functional currency, disclosures: If presentation currency is different from the functional currency, financial statements would state that fact and disclose the functional currency and the reason for using a different presentation currency (see ¶30.26).

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 33 Financial Statement Presentation Case Question (o):Note 2 Accounting Policies – Investments in Associates What other measurement bases, if any, could the XYZ Group adopt as its accounting policy for investments in associates?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 34 Financial Statement Presentation Case Question (o):Note 2 Associates Under ¶14.4 choices are: –the cost model in ¶14.5*; –the equity method in ¶14.8; or –the fair value model in ¶14.9. *Must use FVTPL if quoted market price. Once a policy is adopted, can change only if requirements of Section 10 are met (more relevant information).

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 35 Financial Statement Presentation Case Question (p):Note 2 Accounting Policies – Borrowing costs Could the XYZ Group change its accounting policy for borrowing costs such that borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset (ie can the group account for borrowing costs in accordance with the requirements of IAS 23 Borrowing Costs of full IFRSs)?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 36 Financial Statement Presentation Case Question (p):Note 2 Accounting Policies – Borrowing costs Could the XYZ Group change its accounting policy for borrowing costs to capitalisation? No. IFRS for SMEs requires that all borrowing costs are recognised as an expense in profit or loss in the period in which they are incurred (see ¶25.2). Selective use of full IFRSs not allowed.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 37 Financial Statement Presentation Case Question (q): Note 2 Accounting Policies – Intangible assets If the XYZ Group had purchased a trademark whose useful life management considers to be indefinite, would the group still account for the trademark at cost less accumulated depreciation and any accumulated impairment losses?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 38 Financial Statement Presentation Case Question (q): Note 2 Intangible assets Accounting for a purchased trademark... Yes, all purchased intangible assets accounted for at cost less accumulated amortisation and impairment losses (see ¶18.18). Amortise over estimated life. If cannot make a reliable estimate of life, must use 10 years.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 39 Financial Statement Presentation Case Question (r): Note 2 Accounting Policies – Leases Because of some guarantees made in a lease agreement, the lessee’s management found it difficult to classify the lease as operating or financing. In the end, they concluded it is operating. Is any special disclosure required?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 40 Financial Statement Presentation Case Question (r): Note 2 Accounting Policies – Leases Additional information about leases... Possibly: Explain the judgement on how the lease was classified (see ¶8.6 on disclosure of information about judgements)

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 41 Financial Statement Presentation Case Question (s): Note 2 Accounting Policies – Employee benefits – long-service payment Could XYZ Group have chosen another method to measure its defined benefit obligation rather than the projected unit credit method?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 42 Financial Statement Presentation Case Question (s): Note 2 Accounting Policies – Employee benefits – long-service payment Not use the projected unit credit method? It’s not ‘free choice’. If use of PUC method would require undue cost or effort, entity is permitted to make specified simplifications in measuring its defined benefit obligation (¶28.19).

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 43 Financial Statement Presentation Case Question (t): Note 6 Gain on sale of equipment XYZ Group has never before disposed of any PP&E. Could XYZ present this gain as a separate line item in the consolidated statement of income and retained earnings described as ‘Extraordinary item – Gain on Sale of Equipment’?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 44 Financial Statement Presentation Case Question (t): Note 6 Gain on sale of equipment ‘Extraordinary item’? No. Use of term ‘extraordinary item’ is prohibited (¶5.10). But entity may highlight the gain by presenting it as a separate line item with appropriate description.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 45 Financial Statement Presentation Case Question (u): Note 10 Trade and other receivables Instead of presenting a single line ‘Trade and other receivables’ in the balance sheet and then disclosing ‘Trade debtors’ and ‘Prepayments’ separately in the notes, could XYZ present these two items as separate line items in the balance sheet?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 46 Financial Statement Presentation Case Question (u): Note 10 Trade and other receivables Line items in statement of financial position? Yes. ¶4.2 simply lists items that are sufficiently different in nature or function to warrant separate presentation in the statement of financial position. Further subdivision of these line items is not prohibited.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 47 Financial Statement Presentation Case Question (v): Note 15 Deferred tax Note 15 discloses that XYZ has both deferred tax assets and deferred tax liabilities. Yet the statement of financial position shows only a deferred tax asset. Why?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 48 Financial Statement Presentation Case Question (v): Note 15 Deferred tax Offset deferred tax liabilities and deferred tax assets? Under ¶29.29, group must offset deferred tax assets and liabilities if it has a legally enforceable right to set off the amounts and intends either to settle net or simultaneously. In all other circumstances the group would not be permitted to offset these balances (eg different jurisdictions).

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 49 Financial Statement Presentation Case Question (w): Note 15 Deferred tax If a material amount of the deferred tax asset is expected to be received in cash in 20X3, would the XYZ Group present the amount to be received in 20X3 as a current asset in its consolidated statement of financial position at 31 December 20X2?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 50 Financial Statement Presentation Case Question (w): Note 15 Deferred tax Can deferred tax asset expected to be received in 12 months be presented as current asset? No. Under ¶29.28, all deferred tax assets and liabilities are classified as non-current.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 51 Financial Statement Presentation Case Question (x): Note 16 Bank overdraft and loan Instead of presenting cash (current asset) separately from bank overdraft (current liability) could XYZ choose to present the net amount (eg 20X2: 54,900) as a current liability ‘Cash and cash equivalents’ in its consolidated statement of financial position (ie in the same way that it is presented in the consolidated statement of cash flows)?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 52 Financial Statement Presentation Case Question (x): Note 16 Bank overdraft and loan ¶2.52 prohibits offsetting unless explicitly required or permitted by the IFRS for SMEs. In this case the IFRS does not provide exemption. Therefore the group cannot present cash and bank overdrafts net in its consolidated statement of financial position.

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 53 Financial Statement Presentation Case Question (y): Note 18 Provision for warranty obligations If the warranty was for a longer period (eg 3 years) what additional line item, if any, would you expect to see in the disclosure about the changes in the provision for the period?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 54 Financial Statement Presentation Case Question (y): Note 18 Provision for warranty obligations If the warranty was for a longer period (eg 3 years) additional disclosure about the changes in the provision for the period? Unwinding of the discount in the present value calculation would be separately disclosed (¶21.14(ii)).

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 55 Financial Statement Presentation Case Question (z): Note 25 Events after end of reporting period The 16,000 reimbursement from the insurance company was received in cash before the statements were approved on 10 March X3. So it is ‘virtually certain’. Why is it not shown as a receivable in the statement of financial position?

© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 56 Financial Statement Presentation Case Question (z): Note 25 Events after end of reporting period Why no receivable for the ‘virtually certain’ 16,000 reimbursement from the insurance company? The flood loss and related reimbursement are non-adjusting events. They are not accrued (¶32.6), but disclosure is required (¶32.10).

© 2010 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 57 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

© 2011 IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK This presentation may be modified from time to time. The latest version may be downloaded from: The accounting requirements applicable to small and medium ‑ sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.