Chapter 17: Reporting financial performance Flashcards
1.1 IFRS 5 Assets held for sale and discontinued operations
A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and
- Represents a separate major line of business or geographical area of operations
- Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or
- Is a subsidiary acquired exclusively with a view to resale
If an operation is classed as discontinued then separate disclosure is required on the face of the statement of total comprehensive income comprising the total of the post-tax profit or loss of discontinued operations and 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 groups constituting the discontinued operation.
An asset can be classified as held for sale if its carrying amount will be recovered through a sale transaction rather than through continuing use. To be classified as held for sale the criteria must be met:
- The asset is available for immediate sale
- The sale is highly probable, factors include management committed to plan to sell the asset, active programme to find a buyer, marketed at a reasonable price.
An asset can be held for sale even if not sold within a year, if the delay is due to events outside the entity’s control. If the asset is abandoned it cannot be classified as held for sale.
A disposal group is a group of assets and liabilities which are to be disposed of in one transaction. Disposal groups are valued in the same way as assets held for sale. Any impairment should be allocated to the assets of the disposal group according to the rules of IAS 38 impairment of assets as follows:
- Goodwill first
- Then other asses, pro-rata on the basis of their relative carrying amounts
When accounting for assets held for sale: stop depreciating the asset, transfer the asset to a held for sale category on the SFP, if the asset is recorded at depreciated historic cost write the asset down to FV less expected selling costs if below carrying amount and if the asset is recorded as a revalued amount, it should be revalued to FV less expected selling costs. Selling costs are expensed to P+L.
2.1 IFRS 8 Operating segments
Only applies to entities whose equity or debt is traded on public markets. It requires that financial information is analysed by operating segments. An operating segment is a component of an entity:
- That engages in business activities from which it may earn revenues and incur expenses
- Whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and
- For which discrete financial information is available
2.2 Aggregation
Operating segments may be aggregated if they have similar economic characteristics, and are similar in either products/services, production processes, types of customer, distribution methods or regulatory environment.
2.3 Assessing which segments are reportable
Only some of the identified segments are reportable. For each segment in turn, the following procedure is used to identify reportable segments:
- The segment must meet one of the following tests. Segment total sales more than 10% of total sales of all segments. Segment result more than 10% of the combined result of all segments in profit or the combined result of all segments in loss, whichever is the greater in absolute amount. Segment assets more than 10% of total assets of all segments
- Ensure that the external revenue of segments identified as reportable more than 75% total external revenue
Segments not meeting the thresholds may be reported if management believe the information would be useful to the users of the financial statements.
2.4 Disclosures
For each reportable segment, an entity should report a measure of profit or loss, measure of total assets and liabilities.
The measure disclosed should be the measure used in internal reporting which may be different to the method used in the published accounts.
3.1 IAS 34 Interim Financial Reporting
The preparation of interim financial statements is not mandatory, but is recommended for entities whose equity or debt securities are publicly traded. They are encouraged to provide interim reports for at least the first six months of the financial year and that must be available no later than 60 days after the end of the interim period. The standard gives details of the minimum content for the period, periods covered and recognition and measurement principles.
Minimum components: condensed SFP, condensed SPL, statement of changes in equity, statement of cash flows and selected explanatory notes.
Recognition and measurement: usually same as full financial statements. IAS34 gives special considerations to a few key areas:
- Foreign currency: apply IAS 21 the effects of changes in foreign exchange rates and use closing rate at interim date
- Inventory: value at lower of cost and NRV
- Tax rate used should be the expected average rate of tax for the full year
- Defined benefit pension schemes: an actuarial valuation at end of interim period is not required if reliable measurement can be obtained by extrapolating the results from the most recent actuarial valuation
Periods covered:
Current year Comparatives
SFP: As at end of current period, As at the end of the most recent financial year
SOCI: For the current interim period and cumulative for the current financial year to date, For the corresponding interim period and the cumulative figures for previous financial year
SOCIE: Cumulative for the current financial year to date, For the corresponding interim period in the previous financial year
SOCF: Cumulative for the current financial year to date, For the corresponding interim period in the previous financial year
4.1 IAS 8 Accounting policies, changes in accounting estimates and errors
Accounting policies should be relevant, reliable, consistent and comparable. Changes in accounting policies and material accounting errors should be adjusted retrospectively. Changes in accounting estimates should be adjusted for prospectively. Accounting for a change in accounting policy:
- Retrospective application: adjust opening balance of retained earnings in the statement of changes in equity, this is a prior period adjustment. Restate comparative information unless it is impracticable to do so
5.1 IAS 24 Related Party Disclosures
IAS 24 Related Party Disclosures defines a related party as any of the following:
- A person or a close member of that person’s family is related to a reporting entity if that person has control or significant influence over the reporting entity. Or is a member of the key management personnel
- An entity is related to a reporting entity if: members of the same group, one entity is an associate/joint venture of the other, both entities are joint ventures of the same third party, entity is a post-employment benefit plan for the employees of the reporting entity, the entity is controlled by a personal identified previously or has significant influence over the entity.
Relationships that are not deemed related parties:
- Two entities because they have a mutual director
- Two joint ventures because they share joint control over a joint venture
- Providers of finance, trade unions, public utilities, and departments and agencies of a government
- A significant customer, supplier, franchisor or general agent
5.2 Related party disclosures
Disclosure of control: name of the parent and the name of the ultimate controlling party, if different.
Disclosure of management compensation: IAS 24 says any compensation granted to key management personnel should be disclosed in total and for each of the following categories:
- Short-term employee benefits
- Post-employment benefits
- Other long-term benefits
- Termination benefits, and
- Share-based payments
Disclosure of transactions and balances: if there have been transactions between related parties, the reporting entity should disclose:
- The nature of the related party relationship
- A description of the transaction
- The amounts of the transactions
- The amounts and details of any outstanding balances
- Allowances for receivables in respect of the outstanding balances
- Irrecoverable debt expense in respect of the outstanding balances
Disclosure of the fact that transactions were or were not on an arm’s length basis is voluntary, and should only be made if this can be substantiated.
6.1 Audit and assurance implications of reporting financial performance
Audit risks Audit tests
Inappropriate presentation and disclosure of segmental information Obtain understanding of the methods used by management in determining segmental information. Perform analytical procedures appropriate to the circumstances
Incorrect classification of assets as held for sale Review board minutes for evidence of plan to sell. Comparison of sales price per particulars to fair value. Enquiries of estate agent (or similar) of likelihood of completion within a year.
Undisclosed related party transactions Inspect bank and legal confirmations obtained as part of other procedures. Review minutes of shareholder and management meetings. Identify transactions with unusual terms of trade. Understand relationship with company investments. Obtain written representations.
