Chapter 7 - Reporting Financial Performance

Question 1

Within a question, if management suggest a change in accounting policy what should you be wary of?

Answer 1

Within a question, if management suggest a change in accounting policy you need to be alert to ethical risk

Question 2

What is retrospective application?

Answer 2

Retrospective application = as though policy had always been in place

• adjust opening balance of retained earnings in the statement of changes in equity - this will be called a prior period adjustment
• restate comparative information unless it is impracticable to do so

Question 3

What is a change in presentation or classification?

Answer 3

A change in presentation or classification (for example deciding to charge depreciation to cost of sales instead of admin) is also a change in an accounting policy. Only comparatives need to be restated.

Question 4

What are the disclosure requirements when a change in accounting policy has a material effect on any of the prior, current, or future periods?

Answer 4

• the reasons for the change
• the amounts of the adjustments recognised in the current period and the previous period presented (i.e comparative figures)
• the amount of the adjustment relating to periods prior to those included in the financial statements

Question 5

What is an estimation technique?

Answer 5

An estimation technique is a method adopted by an entity to arrive at estimated amounts for the financial statements

Question 6

What is prospective application?

Answer 6

Prospective application = recognise in current and future periods

Question 7

How do you correct prior period errors?

Answer 7

• Retrospective correction
• Present the necessary adjustment to the opening balance of retained earnings in the statement of changes in equity; and
• Restate the comparative figures presented, as if the error had never occurred

Question 8

What should you disclose if you correct prior period errors?

Answer 8

The entity should disclose in the notes:

• the nature of the error
• the amount of the correction to each financial statement line item presented for the prior periods
• the amount of the correction at the beginning of the earliest prior period presented

Question 9

What does IFRS 5 require?

Answer 9

It requires a single amount to be disclosed separately from continuing operations on the face of the statement of profit or loss, comprising:

• the total of the post-tax profit/loss from discontinued operations, and
• the post-tax gain/loss on remeasurement to fair value less costs to sell or on disposal of the discontinued operation

Question 10

What does the analysis of the single amount require?

Answer 10

An analysis of this single amount must be presented, either in the notes or on the face of the statement of profit or loss

The analysis must disclose:

• the revenue, expenses, and pre-tax profit/loss from discontinued operations (including gains or losses on remeasurement or disposal)
• the related income tax expense

Question 11

How do you present activities of discontinued operations?

Answer 11

Show either on the face of or in the notes to the statement of cash flows:

The net cash flows attributable to
- operating 
- investing and 
- financing 
activities of discontinued operations

Question 12

What are some forms of related party transactions?

Answer 12

• Purchase/sale of goods
• Purchase/sale of non-current assets
• Provision of services
• Leasing arrangements
• Financing arrangements
• Provision of guarantees

Question 13

What are the disclosures of control required for related party transactions?

Answer 13

• Name of the parent

- Name of the ultimate controlling party, if different

Question 14

What categories does IAS 24 require compensation to be disclosed for?

Answer 14

IAS 24:

• short-term employee benefits
• post-employment benefits
• other long-term benefits
• termination benefits
• share-based payment

Question 15

When should transactions that were at an arm’s-length be disclosed?

Answer 15

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

Question 16

When can an event after the reporting period be defined as a material event?

Answer 16

An event after the reporting period can be defined as a material event occurring between the reporting date and the date on which the financial statements are authorised for issue

Question 17

What if the events after the reporting period are adjusting?

Answer 17

• Provide additional evidence of conditions existing at the reporting date
• Adjust the financial statements to reflect the events

Question 18

What if the events are non-adjusting, concern conditions which did not exist at the reporting date and impacts the going concern?

Answer 18

Adjust the financial statements to present on the break-up basis

Question 19

What if the events are non-adjusting, concern conditions which did not exist at the reporting date and does not impact the going concern?

Answer 19

Do not adjust the financial statements

Question 20

What are some examples of a non-adjusting event?

Answer 20

• announcing a plan to discontinue an operation
• major purchases of assets
• the destruction of assets after the reporting date by fire or flood
• entering into significant commitments or contingent liabilities
• commencing a court case arising out of events after the reporting period

Question 21

Can dividends be declared after the reporting period?

Answer 21

Dividends declared after the reporting period cannot be shown as a liability at the end of the reporting period, as no obligation exists at that date. These are not classified as an adjusting event.

They should be disclosed in the notes to the financial statements if they are declared after the reporting date but before the financial statements are authorised for issue

Question 22

How should you present discontinued operations under UK GAAP?

Answer 22

• Should be presented on the face of the profit and loss account (also known as an income statement) in a line-by-line analysis, in a separate column identified as relating to discontinued operations
• A total column should also be presented

Question 23

What does the total column relating to discontinued operations contain?

Answer 23

Should show:

• the turnover, expenses and pre-tax profit or loss of discontinued operations
• the related tax expense
• the gain or loss recognised on the impairment or on disposal of the assets or disposal groups constituting the discontinued operation
• the related income tax expense