Presentation is loading. Please wait.

Presentation is loading. Please wait.

Agenda Objective of the Standard Components of Financial Statements

Similar presentations


Presentation on theme: "Agenda Objective of the Standard Components of Financial Statements"— Presentation transcript:

0 IAS 1 – Presentation of Financial Statements

1 Agenda Objective of the Standard Components of Financial Statements
Fair Presentation under IFRS Concepts of IAS 1 Minimium Disclosure in a set of Financial Statements Capital Disclosures

2 Overview of the Standard
Objective of IAS 1 Prescribes a basis for presenting general purpose financial statements that is is comparable and consistent period over period With the financial statements of other entities Sets out underlying assumptions that govern the preparation of financial statements and Stipulates minimum guidelines for financial statement structure and disclosure requirements. Prior to starting the teaching module of IAS1, for the junior level training groups, please share with them the set up of IFRS/IAS in general. We may show them the Infobase and indicate that IAS1 is the general standard and other standards in IFRS provides guidance on specific issues or transactions. For example, IAS2 covers recognition, measurement and disclosure requirement for inventory. Stress to the learning group that IAS1 contains ‘first principles’ that are general guidelines and governs the presentation of financial statements. Financial statements require guidelines so that users of financial statements can compare them with prior periods (Consistency) and also can compare financial performance of a company with those of other entities (Comparison with other companies) IAS1 also covers key concepts such as materiality, accrual vs cash accounting which form the foundation of all IAS guidelines. This standard also discusses general requirements of all financial statements.

3 Overview of the Standard
Purpose of financial statements Transparent information about entity’s: Assets and liabilities Equity Income and expenses Cash flows The general purpose of financial statements is to allow transparency on an entity’s financial information. It shows what the entity owns or owes (assets/liabilities), the structure and movement of ownership of the entity (equity), the financial performance, the cost of running the business(income and expenses) and whether or not the entity is liquid (Cashflows).

4 Components of Financial Statements
A complete set of financial statements include at a minimum the following components: Balance sheet/Statement of Financial Position Statement of Income Statement of Comprehensive Income Statement of changes in equity Cash flow statement Accounting policies and explanatory notes Where there are reclassifications and adjustments to prior periods, the entity is required to disclose a Statement of Financial Position as at the beginning of the earliest comparative period. A complete set of financial statements aims to share the concept of transparency in our previous slide: For assets and liabilities => Balance Sheet/Statement of Financial Position For income and expenses => Statement of Income/Comprehensive Income For equity type transactions=> Statement of Change in Equity Determination of the Entity’s cash position => Cash Flow Statement Notes that describe more fully the underlying information about the Entity’s financial position and performance during the period => Accounting policies and explanatory notes. A complete set of financial statements would also include reclassifications/prior period adjustments to be presented and disclosed. Reclassifications examples – a company had included other assets as part of prepaid expenses but in the current period, it will disclose prepaid expenses and other assets separately – this would be reclassification and the entity should reflect the same reclassification in its comparatives.

5 Components of Financial Statements
Question – An entity would like to issue a balance sheet and a statement of income only, it did not believe presentation of cashflows, shareholders’ equity and explanatory notes are necessary – is this correct? Solution – A complete set of financial statement as required by IAS1 requires minimum disclosure that includes schedule on shareholders’ equity, cash flows as well as notes. However, an entity may exclude presentation of a statement of cashflow if and only if it can prove that the information of cashflows is already appropriately disclosed in the other components of the financial statements. Disclosure of this is required in the notes to the financial statements. Ask the group this question on what constitutes a complete set of financial statements. Afterwards, let them know that we will spend more time on what is included in a complete set of financial statements. For now, we will turn our attention to the assumptions behind general financial statement preparation.

6 Fair Presentation under IFRS
Overriding premise in the preparation of financial information ----fair presentation of an entity’s cashflow and results of operations based on a consistent set of principles/guidelines. Presumed that IFRS will result in fair presentation With additional disclosure where necessary Inappropriate accounting policies are not rectified by disclosure (An entity cannot adopt inappropriate accounting policies and just disclose that it is inappropriate in their note disclosures and assume this would mitigate the wrong accounting.) Overriding assumption of f/s prepared under IFRS is that the presentation is fair. Fairly presents an entity’s financial performance.

7 Fair Presentation of Financial Results
Fair as guided by: The selection and application of consistent accounting policies in accordance with authoritative guidance under IFRS/IASB Presentation of information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information. Providing additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. Departure from a specific guideline --- allowable if and only if application of IFRS would materially mispresent the substance of the transaction. The overriding assumption in IFRS is that financial statements prepared under IFRS would be FAIR. What is considered as FAIR? Consistent accounting policies Relevant, reliable and comparable presentation of information Sufficiency of disclosure to allow users of financial statements to understand the entity’s performace. In some occasions, an Entity may determine that complying with IFRS may not fairly present the substance of the transaction or of its financial performance. This has to be duely proven by the entity and disclosed. (SHOULD BE RARE)

8 Departure from IFRS – required disclosure
Explanation that the departure results in fair presentation Compliance with IFRS, except for… The standard or interpretation not complied with Nature of the departure What treatment would have been under IFRS Why compliance would be misleading & conflict with IFRS obj. The treatment adopted Financial impact of the departure Current year departure Current year impact of prior year departure If an entity does determine that application of certain IFRS would not fairly present the substance of a transaction, what does it have to disclose? Inform the learning group that throughout our audits, we may come across instances where the client may not want to account for/disclose certain transactions under IFRS. We should consider the concept of compliance with IFRS and ‘fairness’ in presentation when this occurs. Our seniors or managers may be alerted when this occurs.

9 Basis Pillars of Financial Statement Presentation
Accrual Basis of Accounting Going Concern Assumption Materiality and Aggregation Offsetting Comparative Disclosure Estimation Uncertainty Management Judgement Reclassifications of prior period comparatives We had covered minimum content of financial statements and also the concept of fair presentation. There are some key assumptions/concepts that underline the preparation of fair financial statements. They are: assumption of accrual basis of accounting The next few slides cover each of these concepts separately.

10 Accrual Basis of Accounting
Financial information, other than cash flow statement is required to be presented on an accrual basis. Revenue, expenses, assets and liabilities are recorded in the period where criteria for recognition and measurement is satisfied. An example of accrual basis of accounting – A company has a sales contract to sell 50 units of product A every month to company B. At the end of the month when it prepares it financial statements under

11 Accrual Basis of Accounting - Example
Company A has a sales contract to sell 50 units of product A to Company B. At the end of August when it prepares it financial statements under IFRS, it only delivered 40 units to Company B. It had received the payment from Company B for all 50 units in advance. Question – how much revenue can Company A recognize in its August financial statements? Response – Company A can only recognize and measure revenue for 40 units that are sold and delivered to Company B. Although Company A has received the entire payment for 50 units, it had only delivered to Company B 40 units. It has not effectively earned the revenue for all 50 units.

12 Going Concern Key assumption in the preparation of financial statement. An assessment is required to be made by management Intention to liquidate or No realistic alternative but to liquidate Disclosure of uncertainties is required. Disclosure of any other method used to prepare financial statements NOTE to facilitator: Even when the entity is on a severe financial difficulty, IAS1 requires going concern basis to be used UNLESS the company intents to liquidate and has no realistic alternative but to do so.

13 Going Concern – Example 1
Company A experienced significant decrease in its sales this year. It has significant bank loans that are coming due and is concerned whether it can survive and also pay its loans. Company A’s owners are concerned about the economic situation but do not intent to close the business. Question – does the going concern assumption apply to Company A’s financial statements? Response – Yes, while Company A is not having a good business year, it has no intention to close and therefore the assumption that it will be continue to operate is valid. The financial statement of the Company will continue to be presented under that assumption. Depending on the seriousness of the business downturn, Company A may disclose this in its financial statements. NOTE to facilitator: Even when the entity is on a severe financial difficulty, IAS1 requires going concern basis to be used UNLESS the company intents to liquidate and has no realistic alternative but to do so.

14 Going Concern – Example 1 (cont’d)
If there is risk that GC is not appropriate, the Company (and the auditors) should assess: Whether there are impariment indicators? Whether assets should be written down to recoverable amount? Whether provision is required for any unavoidable costs under onerous contracts ? Whether debt now becomes due/current classification ?

15 Going Concern – Management Assessment
Question – What types of information do management need to prepare as part of its assessment of going concern? Response – the Company should review financial ratios/measures that indicate its ability to continue to operate in the next 12 months, at a minimum. This should generally include but is not limited to: Review of the following12 months’ cash flow projection Review of the Company’s sales/suppliers structure and payment requirements Review of the Company’s debt positions and whether the Company will be liquid enough to meet its obligations THESE ASSESSMENTS SHOULD BE INITIATED BY MANAGEMENT.

16 Offsetting Balance sheet Statement of Income
Offsetting is never allowed, unless explicitly permitted by another Standard Statement of Income Offsetting is not allowed, unless: Permitted by another Standard Similar transactions, immaterial gains or losses

17 Offsetting - Example Example – Company A and B are unrelated parties, Company A has trading relationship with its suppliers, it then sells to Company B. Company B pays A for the supplies at the same cost to A. Can A net off the revenue from B and the cost it incurred with its suppliers? Response - No, the practice of selling and buying at the same cost does not represent a contractual arrangement for reimbursement of costs of goods.

18 Offsetting – Example Example – Company A rents the property from the landlord who could not complete the property ready for renting out. Company A itself enters into a loan arrangement with a bank to finance construction of leasehold improvements (to get the property ready). The bank agreement does not make reference to the landlord. Company A has another agreement with its landlord where Company A can net of the amount of rental expenses with the lease payments. (effectively the landlord will pay for the finance costs to construct the leasehold improvements.) Can Company A net off its loan payments due to the bank with the amount it will recover from the landlord? Response – NO, the Company has to present its obligations under the loan arrangement separate from the amount recoverable from the landlord.

19 Consistency, Materiality and Aggregation
Consistency of presentation Unless change is required by IAS, or significant change in operations require accounting change – presentation of F/S should be consistent period over period Materiality and aggregation Separate presentation of material items Aggregation of immaterial amounts Applies to both Balance Sheet and Statement of Income Other concepts of financial statement preparation include consistency, and materiality/aggregation.

20 Other Concepts of IAS 1 Comparative Disclosures
F/S in compliance with IFRS are generally required to provide comparative balances and disclosures. Unless it is explicitly permitted by IFRS, comparatives are required. Measurement Uncertainty/Management Estimate and Judgement Assumption that there is inherent need for management estimation and judgement for certain items or transactions. Disclosure of the types of estimates and critical judgement areas is a MUST in IAS 1

21 Disclosure in a Balance Sheet
Provide information that assists users in assessing liquidity/ solvency Classification of assets & liabilities as current/ non-current Based on conditions existing at balance sheet date KEY: 12 months Alternatively in order of liquidity Only if this provides reliable & more relevant information

22 Disclosure in Balance Sheet
Current assets Expected to realized in normal course of operating cycle, Held primarily for trading purposes, Expected to be realized within 12 months, Unrestricted cash or cash equivalents Current liabilities Expected to settle in normal course of operating cycle Due to be settled within 12 months, Entity does not have unconditional right to defer

23 Disclosure in Balance Sheet
Non-current assets and liabilities All those not classified as current Financial liabilities (FL) are current, if settlement within 12 months, even if: original term > 12 months intention to refinance on a long term basis agreement to refinance after B/S date but before FS are issued FL are current if breach of covenant and can be called Because they become due on demand Remains as non-current if waiver is received BY B/S date Non-adjusting post-B/S events Refinancing, rectifying breach after B/S date Important to highlight waiver has to be received BY the balance sheet date. It is not sufficient to receive bank waiver after the date of the balance sheet date. The reason is because as of that balance sheet date, its obligations to pay immediately on demand has not been removed by the bank. If by the balance sheet date, a waiver was received, it can then conclude that the obligation didnot become due immediately and the long term classification is correct. THIS IS IMPORTANT, VERY OFTEN THE CLIENT RECEIVED WAIVER AFTER BALANCE SHEET DATE – not sufficient, it has to reclassify the financial liability to current.

24 Disclosure in Balance Sheet - Example
Question – Company A’s year-end is December. In December 2012, it has total receivables from Company B in the amount of 500,000TL. Of this amount, one receivable of 200,000TL is due by the end of Feburary The rest relating to a long term sales arrangement is due in March Assuming all sales have been delivered. How should Company A present the receivables in its financial statements? Response: Only 200,000TL would be a current receivables in the December year-end financial statement with the rest as long term receivable.

25 Disclosure in Balance Sheet - Example
Question – The Company could not meet its loan covenants as at 31 December It also was not able to renegotiate the terms of the loan. The loan agreement states that in the event of covenant default, the loan is due immediately on demand. What should the Company consider when it is preparing the 2011 financial statements? Response – Since the loan now becomes due on demand and it was not renegotiated or refinanced, the Company should reclassify the portion of the loan that was considered Long Term and reclassify it to ‘Current’.

26 Minimum account line items in B/S
Cash and Cash equivalents Trade and other receivables and payables Biological assets Inventories Property, plant and equipment Investment properties Intangible assets Financial assets & liabilities Equity accounted investments Trade and other payables Provisions Liabilities & assets for current tax Deferred tax assets & liabilities Minority interests, as part of equity Issued capital & reserves After showing this slide, we may show the learning group a sample balance sheet from our clients. We can indicate that he order of presentation of these line items is based on current items being disclosed first before long term portions are disclosed.

27 Statement of Income Revenue Expenses (either by function or by nature)
Finance costs (separate from finance revenue – NO offsetting is allowed) Share of the profit or loss of associates and joint ventures accounted for using the equity method; Tax expense; 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 less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; Profit or loss; Each component of other comprehensive income classified by nature Share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and Total comprehensive income A statement of income generally includes information on revenue and costs. Share with the group that a company can choose to disclose its expenses by nature or by its function. İnclude examples of both from our clients.

28 Statement of Comprehensive Income
Requires non-owners type transactions to be presented as part of Other Comprehensive Income. Examples include: changes in FX differences due to foreign operations, revaluation reserve, hedging differences, etc. Companies have the option of presenting a single combined statement of income and comprehensive income = Statement of Total Comprehensive Income, or, Presenting two separate statements – Statement of Income and a separate Statement of Comprehensive Income. Disclosure of profit/loss and related EPS appropriated to owners and minority interests is required in both disclosure options For the semi group – inform them slide 28 to 32 in details. Indicate they will be more familiar with the concept of comprehensive income in the preparation of 2009 financial statements as it is effective for December 31 financial year’s reporting. For the junior group – we can collapse slides 29 to 32. At this stage, they are unlikely to be involved in auditing items that relate to OCI.

29 Statement of Comprehensive Income – Single Format:
Revenue xxxx xxxx Cost of sales Gross margin Operating expenses (classification of expenses by profit function) Profit/(Loss) before tax Income tax expense (recovery) PROFIT/LOSS for the year Other Comprehensive Income: (list items individually at net of tax amounts or at pre-tax balances with a separate line called ‘Income tax relating to components of other comprehensive income’ ) Other comprehensive income for the year, net of tax TOTAL COMPREHENSIVE INCOME

30 Statement of Comprehensive Income – Single Statement Format:
Profit attributable to: Owners of the parent xxx xxx Minority Interest yyy yyy ZZZ ZZZ (related breakdown on EPS) Total Comprehensive Income attributed to: Minority interest yyy yyy

31 Statement of Comprehensive Income – two statements format:
Revenue Cost of sales Gross margin Operating expenses (classification of expenses by profit function) Profit/(Loss) before tax Income tax expense (recovery) PROFIT/LOSS for the year Profit attributable to: Owners of the parent xxx xxx Minority Interest yyy yyy (related breakdown on EPS)

32 Statement of Comprehensive Income – two statements format (cont’d)
PROFIT/LOSS for the year xxx xxx Other Comprehensive Income: (list items individually at net of tax amounts or at pre-tax balances with a separate line called ‘Income tax relating to components of other comprehensive income’ ) Other comprehensive income for the year, net of tax TOTAL COMPREHENSIVE INCOME ZZZ ZZZ Total Comprehensive Income attributed to: Owners of the parent xxx xxx Minority interest yyy yyy ZZZ ZZZ

33 Statement of Changes in Owners’ Equity
Total Comprehensive Income Capital transactions Accumulated profit / loss at beginning and end of period Reconciliation of share capital, premium and reserves

34 Owner Changes in Equity and Statement of Comprehensive Income
All owner changes in equity to be reflected in a Statement of Changes in Equity and all non-owner changes in a Statement of Comprehensive Income (one statement or two statement format); Examples of owner changes in equity: Proceeds on issue of shares Dividend payments to owners Examples of non-owner changes in equity: Revaluation surplus Translation differences related to foreign operations Gains or losses on AFS financial assets/cash flow hedges Share of other comprehensive income of assocaites Actuarial gains or losses on pension plans For the junior learning group, we may share with them examples of owner changes in equity. For the other non-owner changes, they do not need to be very concerned about them as they will not likely be involved in auditing them.

35 Other disclosures When the item is material, the following should be disclosed: write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs; restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring; disposals of items of property, plant and equipment; disposals of investments; discontinued operations; litigation settlements; and other reversals of provisions.

36 Note Disclosure Statement of Compliance with IFRS Basis of Accounting
Summary of Significant Accounting Policies Supporting information for items presented in the face of the financial statements Contingencies, commitment, guarantee.

37 Capital Disclosures An entity is required to disclose the following:
Its objectives, policies and processes for managing capital Quantitative data about what the entity regards as capital Whether the entity has complied with any capital requirements If it has not complied, the consequences of such non-compliance

38 Capital Disclosures - example
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital and retained earnings. The Group’s board of directors reviews the capital structure regularly. As a part of this review, the board considers the cost of capital and the risks associated with each class of capital. Based on recommendations of the board, the Group will balance its overall capital structure through the payment of dividends, new share issues as well as the issue of new debt or the redemption of existing debt. Th e Company is required to meet certain financial covenants related to its loans, as disclosed in Note XXX Borrowings. For the year ended 31 December 2008, the Company has met its capital requirements per the loan covenants.

39 Overview of the structure of the IFRS Foundation and IASB
Governance IFRS FoundationOversees the work of the IASB, the structure, and strategy, and has fund raising responsibility.8 March 2001 Due Process Oversight Committee (DPOC)Trustee committee responsible for the Trustee's oversight function under the IFRS Foundation Constitution.2006 Monitoring BoardOversees the IFRS Foundation Trustees, participates in the Trustee nomination process, and approves appointments to the Trustees.1 February 2009 Technical International Accounting Standards Board (IASB)Sole responsibility for establishing International Financial Reporting Standards (IFRSs).1 April 2001 (1) IFRS Interpretations Committee (2)Develops interpretations for approval by the IASB, and undertakes under tasks at the request of the IASB 1 April 2001 (2)Working groupsExpert task forces for individual agenda projectsFormed as needed Advisory IFRS Advisory Council (3)Advises the IASB and the IFRS Foundation25 June 2001 Specialised advisory groups Capital Markets Advisory Committee (4)2003 Global Preparers ForumFinancial Crisis Advisory Group (jointly with FASB)30 December 2008 Emerging Economies Group26 July 2011 Methodology for Fieldwork and Effects Analyses Consultative Group2012 The IASB replaced the IASC Board of the International Accounting Standards Committee (IASC) with effect from this date. The IASC was formed in 1973. Until 31 March 2010, the IFRS Interpretations Committee was named the International Financial Reporting Interpretations Committee (IFRIC). IFRIC replaced the Standards Interpretations Committee (SIC) of the IASC with effect from 1 April The SIC was part of the original IASC structure formed in 1973. Until 31 March 2010, the IFRS Advisory Council was named the Standards Advisory Council (SAC). Formerly the Analyst Representative Group (ARG).

40 Kamu Gözetimi Muhasebe ve Denetim Standartları Kurumu
QUESTIONS?


Download ppt "Agenda Objective of the Standard Components of Financial Statements"

Similar presentations


Ads by Google