Chapter 9 Reporting financial performance Flashcards
1.1 IAS 8 Accounting policies, changes in accounting estimates and errors
According to IAS 8 accounting policies are the specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements. Selecting accounting policies start by applying the specific IFRS/IAS standard. In the absence of a standard of interpretation select an accounting policy in compliance with the conceptual framework. Seek to maximise the relevance and reliability of information presented and consider substance over form, freedom from bias and prudence.
Changing accounting policies: accounting policies usually kept the same from periods. Changes only made if required by an IFRS standard or if they result in more reliable or relevant presentation in the accounts. For changes retrospective application it taken. We adjust opening balance of retained earnings in the statement of changes in equity (prior period adjustment) and restate comparative information unless it is impracticable to do so.
Disclosure requirements: when a change in accounting policy has a material effect on any period presented, or has a future material impact, the entity should disclosure the reasons for change, the amounts of the adjustments recognised in the current period and the prior period presented and the amount of adjustment relating to periods prior to those included in the accounts.
1.2 Accounting estimates
An estimation technique is a method adopted by an entity to arrive at estimated amounts for financial statements. Examples are useful lives of non-current assets and warranty provisions. Accounting for changes in accounting estimates involve prospective application (recognise in current and future periods).
1.3 Prior period errors
IAS 8 states prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more period arising from a failure to use, or misuse of, reliable information that was available when the accounts for those periods were authorised for issue and could reasonably be expected to have been taken into account in preparing those accounts.
Correction of prior period errors are retrospective, 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.
The entity should disclose the nature of the error, the amount of the correction to each account line item presented for the prior periods and the amount of correction at the beginning of the earliest prior period presented.
2.1 IFRS 5 Non-current assets held for sale and discontinued operations – objectives
The objectives are to set out requirements for the classification, measurement and presentation of non-current assets held for sale and to set out rules for the presentation of discontinued operations.
2.2 Discontinued operations
IFRS 5 states 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.
2.3 Presentation in the statement of profit or loss
IFRS 5 requires a single amount to be disclosed separately from continuing operations on the face of the P+L comprising, the total of post-tax profile/loss from discontinued operations and the post-tax gain/loss on remeasurement to FV-CTS or on disposal of the discontinued operation. An analysis of this single amount must be presented in the notes or on the face of the P+L and must disclose the revenue, expenses and pre-tax profit/loss from discontinued operations and the related income tax expense.
2.4 Presentation in the statement of cash flows
Show either on the face of or in the notes of the statement of cash flows. The net cash net flows attributable to operating, investing, and financing activities of discontinued operations
3.1 IAS 24 Related party disclosures: definitions
IAS 24 defines a related party as any of the following:
- A person (or close member of the persons family) is related to a reporting entity if that person has control or joint control over the reporting entity, has significant influence over the reporting entity and is a member of the key management personnel of the reporting entity or parent
- An entity is related if any of the following apply: the entity and reporting entity are members of the same group, one entity is an associate or joint venture of the other entity, both entities are joint ventures of the same third party, one entity is a joint venture of a third entity and the other entity is an associate of the third entity, the entity is a post-employment benefit plan for the benefit of employees of the reporting entity or an entity related to a reporting entity, the entity is controlled or jointly controlled by a person identified in the previous conditions.
3.2 Substance over form
IAS 24 states that the following are not related parties:
- Two entities simply because they have a director or other member of key management personnel in common or because a member of key management personnel of one entity has significant influence over the other entity
- Two joint ventures simply because they share joint control over a joint venture
- Providers of finance, trade unions, public utilities and departments and agencies of a government simply by virtue of their normal dealings with an entity
- A significant customer, supplier, franchisor, or general agent with whom an entity transacts a significant volume of business, simply by virtue of the resulting economic dependence
3.3 Related party transactions
IAS 24 defines a related party transaction as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. Transactions include purchase/sale of goods, purchase/sale of non-current assets, provision of services, leasing arrangements, financing arrangements and provision of guarantees.
3.4 Related party disclosures
Disclosure of control: name of the parent and name of the ultimate controlling party, if different.
Disclosure of management compensation: IAS 24 states any compensation granted to key management personnel should be disclosed in total and for the categories of short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payment.
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, description of the transaction, amounts of the transactions, amounts and details of any outstanding balances, allowances for receivables in respect of outstanding balances and irrecoverable debt expense in respect of the outstanding balances. Disclosure of arm’s length basis on transactions is voluntary and should only be made if this can be substantiated.
4.1 IAS 10 Events after the reporting period
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.
Adjusting events provide additional evidence of conditions existing at the reporting date. Adjust the financial statements to reflect the event. Examples include the settlement after the reporting date of a court which confirms a year-end obligation and the discovery of fraud or errors showing that the financial statements are incorrect.
Non-adjusting events concern conditions which did not exist at the reporting date. If this impacts going concern adjust the financial statements to present on the break-up basis. If it does not impact going concern do not adjust the accounts, if important to user’s understanding disclose the nature of event and estimate of financial effect. Examples include announcing a plan to discontinue an operation or commencing a court case arising out of events after the reporting period.
Dividends proposed or declared after the reporting period are not classified as an adjusting event, so no liability arises. They should be disclosed in the notes to the financial statements.
5.1 UKGAAP differences – discontinued operations
First key difference between UKGAAP and IFRS standards is that FRS 102 does not recognise held for sale assets as a category, so a business segment can only meet the definition of a discontinued operation if it has actually been disposed of during the year.
Presentation is also different. Results of discontinued operations should be presented on the face of the P+L account in a line-by-line basis, in a separate column. The discontinued operations column should show the turnover, expenses and pre-tax profit or loss, the related tax expense, gain or loss on the impairment or on disposal of the assets or disposal groups constituting the discontinued operation and the related income tax expense.
