C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - OTHER REPORTING ISSUES

Question 1

Government grants (IAS 20)

Answer 1

 Government grants (IAS 20) are not recognized until there is reasonable assurance that the conditions will be complied with and the grant will be received.
 Grants are recognized in profit and loss so as to match them with related costs they are intended to compensate on a systematic basis
 Government grants relating to assets can be presented either as deferred income or by deducting the grant in calculating the carrying amount of the asset.
 Grants relating to income may either be shown separately or as part of ‘other income’ or alternatively deducted from the related expense.

Question 2

Repayment of government grant

Answer 2

 A government grant that becomes repayable is accounted for as a change in accounting estimate in accordance with IAS 8 accounting policies, changes in accounting estimates and errors:
o Repayments of grants relating to income are applied first against any unamortised deferred credit and then in profit and loss
o Repayments of grants relating to assets are recorded by increasing the carrying amount of the asset or reducing the deferred income balance. Any resultant cumulative extra depreciation is recognized in profit and loss immediately.
 The doubt over possible repayment in future should be disclosed in as a contingent liability in line with IAS 37 (ie there are conditions which need to be maintained)

Question 3

IAS 41 Agriculture

Answer 3

IAS 41 Agriculture covers the accounting treatment of biological assets (except bearer plants) and agricultural produce at the point of harvest. After harvest IAS 2 Inventories applies to the agricultural produce. Bearer plants, which are plants that are used to grow crops but are not themselves consumed (eg grapevines), are excluded from the scope of IAS 41. Instead they are accounted for under IAS 16 using either the cost or revaluation model.

Question 4

Agricultural produce

Answer 4

Agricultural produce is the harvested product of the entity’s biological assets.

Question 5

Biological asset

Answer 5

Biological asset – a living animal or plant, such as sheep, cows, rice, wheat, potatoes and so on.

Question 6

Biological transformation

Answer 6

Biological transformation means the processes of growth, production, degeneration and procreation that cause changes in the quality or the quantity of a biological asset

Question 7

IAS 41 recognition

Answer 7

Recognition. An entity should recognise a biological asset or agricultural produce when (and only when):
 The entity controls the asset as a result of past events
 It is probable that future economic benefits associated with the asset will flow to the entity, and
 The fair value or cost of the asset can be measured reliably.

Question 8

IAS 41 Measurement

Answer 8

Measurement. Biological assets are measured both on initial recognition and at the end of each reporting period at fair value less costs to sell. Agricultural produce at the point of harvest is also measured at fair value less costs to sell. The fai value less costs to sell of agricultural produce harvested becomes its cost under IAS 2. After harvest, the agricultural produce is measured at the lower of cost and net realisable value in accordance with IAS 2. Changes in fair value less costs to sell are recognized in profit and loss. Where fair value cannot be measured reliably, biological assets are measured at cost less accumulated depreciation and impairment losses.

Question 9

Interim financial report (IAS 34):

Answer 9

Interim financial report (IAS 34): a financial report containing either a complete set of financial statements (as described in IAS 1) or a set of condensed financial statements (as described in IAS 34) for an interim period.

Question 10

IAS 34 requires that, as a minimum, an interim financial report should include:

Answer 10

IAS 34 requires that, as a minimum, an interim financial report should include:
 A condensed statement of financial position
 A condensed statement of profit or loss and other comprehensive income
 A condensed statement of changes in equity
 A condensed statement of cash flows, and
 Selected explanatory notes.
Condensed financial statements must include at least each of the headings and sub-totals included in the entity’s most recent annual financial statements and limited explanatory notes required by the standard.

Question 11

interim reports voluntary

Answer 11

Interim reports are voluntary as far as IAS 34 is concerned; however, IAS 34 applies where an interim report is described as complying with IFRSs, and publicly traded entities are encouraged to provide at least half yearly interim reports. Regulators in a particular regime may require interim reports to be published by certain companies.

Question 12

Reporting period and comparative figures.

Answer 12

Reporting period and comparative figures.
 Statement of financial positions
o At end of current interim period
o At end of immediately preceding financial year
 Statement of profit or loss and other comprehensive income
o Current interim period and cumulatively for current financial year to date
o Comparable interim period of immediately preceding financial year and comparable year-to-date period of immediately preceding financial year
 Statement of changes in equity and statement of cash flows
o Cumulatively for current financial year to date
o Comparable year-to-date period of immediately preceding financial year

Question 13

Recognition and measurement (interim reports)

Answer 13

Recognition and measurement. An entity should use the same accounting policies in the interim accounts that it uses in the annual financial statements. Measurement for interim purposes should be made on a year-to-date basis.
 Intangible assets. If development costs have been incurred, which at the interim date do not meet the recognition criteria, then they should be expensed.
 Interim period tax should be accrued using the tax rate that would be applicable to expected total earnings.

Question 14

Estimates (interim reports)

Answer 14

Estimates. The interim financial statements should be reliable and relevant. However, IAS 34 recognises that the preparation of interim accounts will generally rely more heavily on estimates than the annual financial statements.
 A company is not expected to obtain an actuarial valuation of its pension liabilities at the interim date.
 Provisions - the figure included in the annual financial statements for the previous year should be updated without reference to an expert.
 A full count of inventory may not be necessary at the interim reporting date. It may be sufficient to make estimates based on sales margins to establish a valuation for the interim accounts.

Question 15

Notes interim reports

Answer 15

Notes. Limited notes to the interim financial statements are required. They should include an explanation of events and transactions that are significant to an understanding of the changes in financial position and financial performance since the end of the last annual reporting period (eg write-downs settlements etc).Other disclosures are required such as comments about seasonality of interim operations, nature and amount of estimates and unusual items, capital changes and limited segment data.

Question 16

Accounting policies are defined in IAS 8

Answer 16

Accounting policies are defined in IAS 8 as the ‘specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements’.
IAS 8 requires that an entity selects its accounting policies by applying the relevant IFRS. Some standards permit the choice of accounting policies (eg cost vs revaluation)

Question 17

In the absence of an IFRS

Answer 17

In the absence of an IFRS covering the specific transaction, other event or condition, management uses its judgment to develop an accounting policy which results in information that is relevant to the economic decision-making needs of users and reliable, considering in the following order:
 IFRs dealing with similar and related issues
 The Conceptual Framework definitions of elements of financial statements and recognition criteria
 The most recent pronouncements of other national GAAPs based on similar conceptual framework and accepted industry practice.

Question 18

Changes in accounting policies.

Answer 18

Changes in accounting policies. A change in accounting policy is permitted only under either of two circumstances (IAS 8):
 if a change in policy is required by an IFRS,
 if a change in accounting policy will result in reliable and more relevant financial information.
The accounting treatment for a change in accounting policy is:
 Prior period adjustment (apply new policy retrospectively unless transitional provisions of IFRS specifies otherwise)
o Adjust opening balances of each affected component of equity
o Restate comparatives

Question 19

Accounting estimates.

Answer 19

Accounting estimates. Many items in financial statements cannot be measured with precision but can only be estimated (eg bad debts, fair value of financial assets, useful lives etc). Estimation involves judgements based on the latest reliable information.
Change in accounting estimate (IAS 8): an adjustment of the carrying amount of an asset or liability, or the amount of periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with assets or liabilities.
An estimate may need revision if changes occur in the circumstances on which the estimate was based or as a result of new information or more experience. By its nature the revision does not relate to prior periods and is not correction of an error.
The accounting treatment for a change in estimate is:
 Apply the change prospectively
o Adjust in the period of changes (and in future periods if the change affects both)
o Restate comparatives

Question 20

Prior period errors.

Answer 20

Prior period errors. Omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use or misuse of, reliable information that:
 Was available when the financial statements for those periods were authorized for issue; and
 Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements
Accounting treatment: An entity corrects material prior period errors retrospectively in the first set of the financial statements authorised for issue after their discovery by:
 Restating comparative amounts for each prior period presented in which error occurred
 Including any adjustments to opening equity as the second line of the statement of changes in equity.

Question 21

Creative accounting.

Answer 21

Creative accounting. There is scope in choice of accounting policy and use of judgment in accounting estmates to select accounting treatment that presents financial statements in the best light rather than focusing on the most relevant and reliable accounting policy or estimate.
 Timing of transactions may be delayed/speeded up to improve results
 Profit smoothing through choice of accounting policy (eg inventory valuation)
 Classification of items (eg expenses vs non-current assets)
 Off balance sheet financing to improve gearing and ROCE (eg operating lease)
 Revenue recognition policies (eg adopting aggressive accounting policy of early recognition)