Purpose, Composition and Structure of Financial Statements

Question 1

The purpose of financial statements 1

IAS 1 describes financial statements as a structured representation of the financial position and financial performance of an entity. It states that the objective of financial statements is to provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions.

A focus on assisting decision making by the users of financial statements is seeking a forward looking or predictive quality.

Answer 1

IAS 1 describes financial statements as a structured representation of the financial position and financial performance of an entity. It states that the objective of financial statements is to provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions.

A focus on assisting decision making by the users of financial statements is seeking a forward looking or predictive quality.

Question 2

The purpose of financial statements 2

IAS 1 also acknowledges a second important role of financial statements. That is, that they also show the results of management’s stewardship of the resources entrusted to it.

To meet this objective for financial statements, IAS 1 requires that they provide information about an entity’s:

(a) assets;
(b) liabilities;
(c) equity;
(d) income and expenses, including gains and losses;
(e) contributions by owners and distributions to owners in their capacity as owners (owners being defined as holders of instruments classified as equity);
(f) cash flows.

Answer 2

IAS 1 also acknowledges a second important role of financial statements. That is, that they also show the results of management’s stewardship of the resources entrusted to it.

To meet this objective for financial statements, IAS 1 requires that they provide information about an entity’s:

(a) assets;
(b) liabilities;
(c) equity;
(d) income and expenses, including gains and losses;
(e) contributions by owners and distributions to owners in their capacity as owners (owners being defined as holders of instruments classified as equity);
(f) cash flows.

Question 3

The purpose of financial statements 3

The standard observes that this information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.

Answer 3

The standard observes that this information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.

Question 4

Frequency of reporting and period covered 1

IAS 1 requires that a complete set of financial statements including comparative information be presented ‘at least annually’. Whilst this drafting is not exactly precise, it does not seem to mean that financial statements must never be more than a year apart (which is perhaps the most natural meaning of the phrase).

This is because the standard goes on to mention that the end of an entity’s reporting period may change, and that the annual financial statements are therefore presented for a period longer or shorter than one year.

When this is the case, IAS 1 requires disclosure of, in addition to the period covered by the financial statements:

(a) the reason for using a longer or shorter period; and
(b) the fact that amounts presented in the financial statements are not entirely comparable.

Answer 4

IAS 1 requires that a complete set of financial statements including comparative information be presented ‘at least annually’. Whilst this drafting is not exactly precise, it does not seem to mean that financial statements must never be more than a year apart (which is perhaps the most natural meaning of the phrase).

This is because the standard goes on to mention that the end of an entity’s reporting period may change, and that the annual financial statements are therefore presented for a period longer or shorter than one year.

When this is the case, IAS 1 requires disclosure of, in addition to the period covered by the financial statements:

(a) the reason for using a longer or shorter period; and
(b) the fact that amounts presented in the financial statements are not entirely comparable.

Question 5

Frequency of reporting and period covered 2

Normally financial statements are consistently prepared covering a one year period. Some entities, particularly in the retail sector, traditionally present financial statements for a 52-week period. IAS 1 does not preclude this practice.

Answer 5

Normally financial statements are consistently prepared covering a one year period. Some entities, particularly in the retail sector, traditionally present financial statements for a 52-week period. IAS 1 does not preclude this practice.

Question 6

The components of a complete set of financial statements 1a

A complete set of financial statements under IAS 1 comprises the following, each of which should be presented with equal prominence:

(a) a statement of financial position as at the end of the period;

(b) a statement of profit or loss and other comprehensive income for the period to be
presented either as:
(i) one single statement of comprehensive income with a section for profit and loss followed immediately by a section for other comprehensive income; or
(ii) a separate statement of profit or loss and statement of comprehensive income. In this case, the former must be presented immediately before the latter;

Answer 6

A complete set of financial statements under IAS 1 comprises the following, each of which should be presented with equal prominence:

(a) a statement of financial position as at the end of the period;

(b) a statement of profit or loss and other comprehensive income for the period to be
presented either as:
(i) one single statement of comprehensive income with a section for profit and loss followed immediately by a section for other comprehensive income; or
(ii) a separate statement of profit or loss and statement of comprehensive income. In this case, the former must be presented immediately before the latter;

Question 7

The components of a complete set of financial statements 1b

(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;
(f) comparative information in respect of the preceding period; and

(g) a statement of financial position as at the beginning of the preceding period when:
(i) an accounting policy has been applied retrospectively; or
(ii) a retrospective restatement has been made; or
(iii) items have been reclassified.

Answer 7

(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;
(f) comparative information in respect of the preceding period; and

(g) a statement of financial position as at the beginning of the preceding period when:
(i) an accounting policy has been applied retrospectively; or
(ii) a retrospective restatement has been made; or
(iii) items have been reclassified.

Question 8

The components of a complete set of financial statements 2

The standard explains that notes contain information in addition to that presented in the statements above, and provide narrative descriptions or disaggregations of items presented in those statements and information about items that do not qualify for recognition in those statements

In addition to information about the reporting period, IAS 1 also requires information about the preceding period. Comparative information is discussed below.

Answer 8

The standard explains that notes contain information in addition to that presented in the statements above, and provide narrative descriptions or disaggregations of items presented in those statements and information about items that do not qualify for recognition in those statements

In addition to information about the reporting period, IAS 1 also requires information about the preceding period. Comparative information is discussed below.

Question 9

The components of a complete set of financial statements 3

Financial statements are usually published as part of a larger annual report, with the accompanying discussions and analyses often being more voluminous than the financial statements themselves.

IAS 1 acknowledges this, but makes clear that such reports and statements (including financial reviews, environmental reports and value added statements) presented outside financial statements are outside the scope of IFRS.

Answer 9

Financial statements are usually published as part of a larger annual report, with the accompanying discussions and analyses often being more voluminous than the financial statements themselves.

IAS 1 acknowledges this, but makes clear that such reports and statements (including financial reviews, environmental reports and value added statements) presented outside financial statements are outside the scope of IFRS.

Question 10

The components of a complete set of financial statements 4

Notwithstanding that this type of information is not within the scope of IFRS, IAS 1 devotes two paragraphs to discussing what this information may comprise, observing that:

• a financial review by management may describe and explain the main features of the entity’s financial performance and financial position and the principal
uncertainties it faces and that it may include a review of:

a) the main factors and influences determining financial performance, including changes in the environment in which the entity operates, the entity’s response
to those changes and their effect, and the entity’s policy for investment to maintain and enhance financial performance, including its dividend policy;

b) the entity’s sources of funding and its targeted ratio of liabilities to equity (IAS 1 itself requires certain disclosures about capital.)
c) the entity’s resources not recognised in the statement of financial position in accordance with IFRS.

• reports and statements such as environmental reports and value added statements may be presented, particularly in industries in which environmental factors are significant and when employees are regarded as an important user group.

Answer 10

Notwithstanding that this type of information is not within the scope of IFRS, IAS 1 devotes two paragraphs to discussing what this information may comprise, observing that:

• a financial review by management may describe and explain the main features of the entity’s financial performance and financial position and the principal
uncertainties it faces and that it may include a review of:

a) the main factors and influences determining financial performance, including changes in the environment in which the entity operates, the entity’s response to those changes and their effect, and the entity’s policy for investment to maintain and enhance financial performance, including its dividend policy;
b) the entity’s sources of funding and its targeted ratio of liabilities to equity (IAS 1 itself requires certain disclosures about capital.)
c) the entity’s resources not recognised in the statement of financial position in accordance with IFRS.

• reports and statements such as environmental reports and value added statements may be presented, particularly in industries in which environmental factors are significant and when employees are regarded as an important user group.

Question 11

The components of a complete set of financial statements 5

In December 2010 the IASB published a practice statement on management commentary. The practice statement is a broad, non-binding framework for the presentation of narrative reporting to accompany financial statements prepared in accordance with IFRS.

Although management commentaries add helpful and relevant information beyond what is included in the financial statements, IFRS requires the financial statements to provide a fair presentation of the financial position, financial performance and cash
flows of an entity on a stand-alone basis.

Answer 11

In December 2010 the IASB published a practice statement on management commentary. The practice statement is a broad, non-binding framework for the presentation of narrative reporting to accompany financial statements prepared in accordance with IFRS.

Although management commentaries add helpful and relevant information beyond what is included in the financial statements, IFRS requires the financial statements to provide a fair presentation of the financial position, financial performance and cash
flows of an entity on a stand-alone basis.

Question 12

Comparative information 1

IAS 1 requires, except when IFRSs permit or require otherwise, comparative information to be disclosed in respect of the previous period for all amounts reported
in the current period’s financial statements.

If any information is voluntarily presented, there will by definition be no standard or interpretation providing a
dispensation from comparatives. Accordingly, comparative information is necessary for any voluntarily presented current period disclosure.

Answer 12

IAS 1 requires, except when IFRSs permit or require otherwise, comparative information to be disclosed in respect of the previous period for all amounts reported
in the current period’s financial statements.

If any information is voluntarily presented, there will by definition be no standard or interpretation providing a
dispensation from comparatives. Accordingly, comparative information is necessary for any voluntarily presented current period disclosure.

Question 13

Comparative information 2

An entity may present comparative information in addition to the minimum comparative financial statements required by IFRS, as long as that information is prepared in accordance with IFRSs.

This comparative information may consist of one or more primary statements, but need not comprise a complete set of financial statements. When this is the case, IAS 1 requires an entity to present related note information for those additional statements.

Answer 13

An entity may present comparative information in addition to the minimum comparative financial statements required by IFRS, as long as that information is prepared in accordance with IFRSs.

This comparative information may consist of one or more primary statements, but need not comprise a complete set of financial statements. When this is the case, IAS 1 requires an entity to present related note information for those additional statements.

Question 14

Comparative information 3

For example, an entity may present a third statement of profit or loss and other comprehensive income (thereby presenting the current period, the preceding period
and one additional comparative period). In such circumstances, IAS 1 does not require a third statement of financial position, a third statement of cash flows or a third statement of changes in equity (that is, an additional comparative financial statement).

The entity is required to present, in the notes to the financial statements, the comparative information related to that additional statement of profit or loss and other comprehensive income.

Answer 14

For example, an entity may present a third statement of profit or loss and other comprehensive income (thereby presenting the current period, the preceding period
and one additional comparative period). In such circumstances, IAS 1 does not require a third statement of financial position, a third statement of cash flows or a third statement of changes in equity (that is, an additional comparative financial statement).

The entity is required to present, in the notes to the financial statements, the comparative information related to that additional statement of profit or loss and other comprehensive income.

Question 15

Comparative information 4

However, further comparative information is required by IAS 1 in certain circumstances. Whenever an entity:

(a) applies an accounting policy retrospectively; or
(b) makes a retrospective restatement; or
(c) reclassifies items in its financial statements;

an additional statement of financial position is required as at the beginning of the preceding period if the change has a material effect on that additional statement. As such restatements are considered, by the IASB, narrow, specific and limited, no notes are required for this additional statement of financial position

Answer 15

However, further comparative information is required by IAS 1 in certain circumstances. Whenever an entity:

(a) applies an accounting policy retrospectively; or
(b) makes a retrospective restatement; or
(c) reclassifies items in its financial statements;

an additional statement of financial position is required as at the beginning of the preceding period if the change has a material effect on that additional statement. As such restatements are considered, by the IASB, narrow, specific and limited, no notes are required for this additional statement of financial position

Question 16

Comparative information 5

It is important to note that ‘reclassifies’, as that word is used by IAS 1 in this context (at (c) above), is not referring to a ‘reclassification adjustment’.

‘Reclassification adjustments’ is a term defined by IAS 1 which describes the recognition of items in profit
or loss which were previously recognised in other comprehensive income (often referred to as ‘recycling’). IAS 1 applies this definition when setting out the required presentation and disclosure of such items

Answer 16

It is important to note that ‘reclassifies’, as that word is used by IAS 1 in this context (at (c) above), is not referring to a ‘reclassification adjustment’.

‘Reclassification adjustments’ is a term defined by IAS 1 which describes the recognition of items in profit
or loss which were previously recognised in other comprehensive income (often referred to as ‘recycling’). IAS 1 applies this definition when setting out the required presentation and disclosure of such items

Question 17

Comparative information 6

Comparative information is also required for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements. The standard illustrates the current year relevance of the previous year’s narratives with a legal dispute, the outcome of which was uncertain at the previous period and is yet to be resolved

It observes that users benefit from information that the uncertainty existed at the end of the previous period, and about the steps that have been taken during the period to resolve the uncertainty

Answer 17

Comparative information is also required for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements. The standard illustrates the current year relevance of the previous year’s narratives with a legal dispute, the outcome of which was uncertain at the previous period and is yet to be resolved

It observes that users benefit from information that the uncertainty existed at the end of the previous period, and about the steps that have been taken during the period to resolve the uncertainty

Question 18

Comparative information 7

As noted at 1.1 above, one of the objectives of IAS 1 is to ensure the comparability of financial statements with previous periods. The standard notes that enhancing the inter-period comparability of information assists users in making economic decisions, especially by allowing the assessment of trends in financial information for predictive purposes.

Requiring the presentation of comparatives allows such a comparison to be made within one set of financial statements. For a comparison to be meaningful, the amounts for prior periods need to be reclassified whenever the presentation or classification of items in the financial statements is amended. When this
is the case, disclosure is required of the nature, amount and reasons for the reclassification (including as at the beginning of the preceding period).

Answer 18

As noted at 1.1 above, one of the objectives of IAS 1 is to ensure the comparability of financial statements with previous periods. The standard notes that enhancing the inter-period comparability of information assists users in making economic decisions, especially by allowing the assessment of trends in financial information for predictive purposes.

Requiring the presentation of comparatives allows such a comparison to be made within one set of financial statements. For a comparison to be meaningful, the amounts for prior periods need to be reclassified whenever the presentation or classification of items in the financial statements is amended. When this
is the case, disclosure is required of the nature, amount and reasons for the reclassification (including as at the beginning of the preceding period).

Question 19

Comparative information 8

The standard acknowledges, though, that in some circumstances it is impracticable to reclassify comparative information for a particular prior period to achieve comparability with the current period. For these purposes, reclassification is impracticable when it cannot be done after making every reasonable effort to do so.

An example given by the standard is that data may not have been collected in the prior period(s) in a way that allows reclassification, and it may not be practicable to recreate the information. When it proves impracticable to reclassify comparative data, IAS 1 requires disclosure of the reason for this and also the nature of the adjustments that would have been made if the amounts had been reclassified.

Answer 19

The standard acknowledges, though, that in some circumstances it is impracticable to reclassify comparative information for a particular prior period to achieve comparability with the current period. For these purposes, reclassification is impracticable when it cannot be done after making every reasonable effort to do so.

An example given by the standard is that data may not have been collected in the prior period(s) in a way that allows reclassification, and it may not be practicable to recreate the information. When it proves impracticable to reclassify comparative data, IAS 1 requires disclosure of the reason for this and also the nature of the adjustments that would have been made if the amounts had been reclassified.

Question 20

Comparative information 9

As well as reclassification to reflect current period classifications as required by IAS 1, a change to comparatives as they were originally reported could be necessary:

(a) following a change in accounting policy
(b) to correct an error discovered in previous financial statements
(c) in relation to discontinued operations

Answer 20

As well as reclassification to reflect current period classifications as required by IAS 1, a change to comparatives as they were originally reported could be necessary:

(a) following a change in accounting policy
(b) to correct an error discovered in previous financial statements
(c) in relation to discontinued operations

Question 21

Components of financial statements

According to IAS 1 Presentation of Financial Statements, a complete set of financial statements has the following components:

• a statement of financial position
• a statement of profit or loss and other comprehensive income (or statement of profit or loss with a separate statement of other comprehensive income)
• a statement of changes in equity
• a statement of cash flows (discussed in a later chapter)
• accounting policies note and other explanatory notes
• a statement of financial position at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or corrects an error retrospectively.

Answer 21

According to IAS 1 Presentation of Financial Statements, a complete set of financial statements has the following components:

• a statement of financial position
• a statement of profit or loss and other comprehensive income (or statement of profit or loss with a separate statement of other comprehensive income)
• a statement of changes in equity
• a statement of cash flows (discussed in a later chapter)
• accounting policies note and other explanatory notes
• a statement of financial position at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or corrects an error retrospectively.

Question 22

Financial position : Intro

IAS 1 provides a list of items that, as a minimum, must be shown on the face of the statement of financial position as a ‘line item’ (in other words, on a separate line in the statement):

Current and non-current items should normally be presented separately in the statement of financial position, so that:

current and non-current assets are divided into separate classifications, and current and non-current liabilities are also classified separately.

As a general rule, an amount is ‘current’ if it is expected to be recovered or settled no more than 12 months after the end of the reporting period.

Answer 22

IAS 1 provides a list of items that, as a minimum, must be shown on the face of the statement of financial position as a ‘line item’ (in other words, on a separate line in the statement):

Current and non-current items should normally be presented separately in the statement of financial position, so that:

current and non-current assets are divided into separate classifications, and current and non-current liabilities are also classified separately.

As a general rule, an amount is ‘current’ if it is expected to be recovered or settled no more than 12 months after the end of the reporting period.

Question 23

Financial position : Current assets

IAS 1 states that an asset should be classified as a current asset if it satisfies any of the following criteria:

 The entity expects to realise the asset, or sell or consume it, in its normal operating cycle.

 The asset is held for trading purposes.

 The entity expects to realise the asset within 12 months after the reporting period.

 It is cash or a cash equivalent. (Note: An example of ‘cash’ is money in a current bank account. An example of a ‘cash equivalent’ is money held in a term deposit
account with a bank).

 All other assets should be classified as non-current assets.

Answer 23

IAS 1 states that an asset should be classified as a current asset if it satisfies any of the following criteria:

 The entity expects to realise the asset, or sell or consume it, in its normal operating cycle.

 The asset is held for trading purposes.

 The entity expects to realise the asset within 12 months after the reporting period.

 It is cash or a cash equivalent. (Note: An example of ‘cash’ is money in a current bank account. An example of a ‘cash equivalent’ is money held in a term deposit
account with a bank).

 All other assets should be classified as non-current assets.

Question 24

Financial position : Current liabilities 1

IAS 1 also states that a liability should be classified as a current liability if it satisfies any of the following criteria:

 The entity expects to settle the liability in its normal operating cycle. This means that all trade payables are current liabilities, even if settlement is not due for
over 12 months after the end of the reporting period.

 The liability is held primarily for the purpose of trading.

 It is due to be settled within 12 months after the end of the reporting period.

 The entity does not have the unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period (known as
rolling over the liability).

Answer 24

IAS 1 also states that a liability should be classified as a current liability if it satisfies any of the following criteria:

 The entity expects to settle the liability in its normal operating cycle. This means that all trade payables are current liabilities, even if settlement is not due for
over 12 months after the end of the reporting period.

 The liability is held primarily for the purpose of trading.

 It is due to be settled within 12 months after the end of the reporting period.

 The entity does not have the unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period (known as
rolling over the liability).

Question 25

Financial position : Current liabilities 2

All other liabilities should be classified as non-current liabilities. This means (amongst other things) that if an entity has the unconditional right to defer settlement of a liability for at least 12 months after the end of the reporting period, that liability would be non-current.

Answer 25

All other liabilities should be classified as non-current liabilities. This means (amongst other things) that if an entity has the unconditional right to defer settlement of a liability for at least 12 months after the end of the reporting period, that liability would be non-current.

Question 26

ED 2015/01: Classification of liabilities – proposed amendments to IAS1 1

The proposed amendments are meant to clarify the guidance in IAS 1 on the identification of current liabilities but not to change it by making minor changes to the wording of that part of the definition of current liabilities concerned with rolling a liability over.

The rolling over criterion changes to a liability should be classified as a current liability if the entity does not have a right at the end of the reporting period to defer
settlement of the liability for at least 12 months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

Answer 26

The proposed amendments are meant to clarify the guidance in IAS 1 on the identification of current liabilities but not to change it by making minor changes to the wording of that part of the definition of current liabilities concerned with rolling a liability over.

The rolling over criterion changes to a liability should be classified as a current liability if the entity does not have a right at the end of the reporting period to defer
settlement of the liability for at least 12 months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

Question 27

ED 2015/01: Classification of liabilities – proposed amendments to IAS1 2

The changes are as follows:

 The term “unconditional right” is replaced with “right”. Rights are rarely “unconditional” as the entity would have to comply with conditions imposed by a lender.
 The new criterion stresses that the right must exist at the reporting date.
 The new criterion also states that a conversion right does not otherwise affect the classification.

Answer 27

The changes are as follows:

 The term “unconditional right” is replaced with “right”. Rights are rarely “unconditional” as the entity would have to comply with conditions imposed by a lender.
 The new criterion stresses that the right must exist at the reporting date.
 The new criterion also states that a conversion right does not otherwise affect the classification.

Question 28

ED 2015/01: Classification of liabilities – proposed amendments to IAS1 3

The proposed amendments also clarify that settlement of a liability refers to the transfer to the counterparty of cash, equity instruments, other assets or services that
results in the extinguishment of the liability.

Answer 28

The proposed amendments also clarify that settlement of a liability refers to the transfer to the counterparty of cash, equity instruments, other assets or services that
results in the extinguishment of the liability.

Question 29

The statement of profit or loss and other comprehensive income 1

What is financial performance?

One of the purposes of financial statements is to provide users with relevant and reliable information about an entity’s financial performance. It is probably tempting to think of financial performance for a business entity in terms of the profit or loss it
makes from its operations. However, there are other aspects to financial performance other than operating profit or loss.

Answer 29

What is financial performance?

One of the purposes of financial statements is to provide users with relevant and reliable information about an entity’s financial performance. It is probably tempting to think of financial performance for a business entity in terms of the profit or loss it
makes from its operations. However, there are other aspects to financial performance other than operating profit or loss.

Question 30

The statement of profit or loss and other comprehensive income 2

Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.

Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs.

Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.

Answer 30

Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.

Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs.

Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.

Question 31

The statement of profit or loss and other comprehensive income 3

AS 1 requires that OCI is classified into two groups as follows:
• items that might be reclassified (or recycled) to profit or loss in subsequent accounting periods:
– foreign exchange gains and losses arising on translation of a foreign operation (IAS 21)
– effective parts of cash flow hedging arrangements (IFRS 9)
– Remeasurement of investments in debt instruments that are classified as fair value through OCI (IFRS 9)

• items that will not be reclassified (or recycled) to profit or loss in subsequent accounting periods:
– changes in revaluation surplus (IAS 16 & IAS 38)
– remeasurement components on defined benefit plans (IAS 19)
– remeasurement of investments in equity instruments that are classified as fair value through OCI (IFRS 9)

Answer 31

AS 1 requires that OCI is classified into two groups as follows:
• items that might be reclassified (or recycled) to profit or loss in subsequent accounting periods:
– foreign exchange gains and losses arising on translation of a foreign operation (IAS 21)
– effective parts of cash flow hedging arrangements (IFRS 9)
– Remeasurement of investments in debt instruments that are classified as fair value through OCI (IFRS 9)

• items that will not be reclassified (or recycled) to profit or loss in subsequent accounting periods:
– changes in revaluation surplus (IAS 16 & IAS 38)
– remeasurement components on defined benefit plans (IAS 19)
– remeasurement of investments in equity instruments that are classified as fair value through OCI (IFRS 9)

Question 32

The statement of profit or loss and other comprehensive income 4

IAS 1 requires an entity to disclose income tax relating to each component of OCI. This may be achieved by either:

• disclosing each component of OCI net of any related tax effect, or
• disclosing OCI before related tax effects with one amount shown for tax.

Answer 32

IAS 1 requires an entity to disclose income tax relating to each component of OCI. This may be achieved by either:

• disclosing each component of OCI net of any related tax effect, or
• disclosing OCI before related tax effects with one amount shown for tax.

Question 33

The statement of profit or loss and other comprehensive income 5

Entities can prepare one combined statement showing profit or loss for the year and OCI. Alternatively, an entity can prepare a statement of profit or loss and a separate statement of OCI. If the latter option is chosen, the statement of OCI should begin with profit or loss for the year so that there is no duplication or confusion as to which items are included within each
statement.

Answer 33

Entities can prepare one combined statement showing profit or loss for the year and OCI. Alternatively, an entity can prepare a statement of profit or loss and a separate statement of OCI. If the latter option is chosen, the statement of OCI should begin with profit or loss for the year so that there is no duplication or confusion as to which items are included within each
statement.

Question 34

The statement of profit or loss and other comprehensive income : Reclassification adjustments 1

Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or
previous periods. Amounts are said to be recycled from OCI to profit or loss.

Answer 34

Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or
previous periods. Amounts are said to be recycled from OCI to profit or loss.

Question 35

The statement of profit or loss and other comprehensive income : Reclassification adjustments 2

For example, an entity might own a foreign subsidiary. Exchange gains and losses on the periodic retranslation of the subsidiary’s financial statements are recognised in OCI and accumulated as a separate reserve in equity. When the subsidiary is sold the net gain or loss previously recognised is reclassified from OCI to P&L.

Answer 35

For example, an entity might own a foreign subsidiary. Exchange gains and losses on the periodic retranslation of the subsidiary’s financial statements are recognised in OCI and accumulated as a separate reserve in equity. When the subsidiary is sold the net gain or loss previously recognised is reclassified from OCI to P&L.

Question 36

The statement of profit or loss and other comprehensive income : Reclassification adjustments 3

For example, suppose that an entity buys a foreign subsidiary at the start of year 1. At the end of year 1 the financial statements of this subsidiary are retranslated
resulting in an exchange loss of $10,000. This is recognised in year 1 as a debit to OCI and this debit in turn is transferred to a separate balance in equity. The entity then sells the subsidiary in year 2. The loss previously recognised in OCI must now be recognised in P&L.

The double entry to achieve this is:
Dr P&L $10,000
Cr OCI $10,000

This credit in OCI in turn is transferred to the separate balance in equity where it nets the debit that was taken there in year 1 back to zero.

Answer 36

For example, suppose that an entity buys a foreign subsidiary at the start of year 1. At the end of year 1 the financial statements of this subsidiary are retranslated
resulting in an exchange loss of $10,000. This is recognised in year 1 as a debit to OCI and this debit in turn is transferred to a separate balance in equity. The entity then sells the subsidiary in year 2. The loss previously recognised in OCI must now be recognised in P&L.

The double entry to achieve this is:
Dr P&L $10,000
Cr OCI $10,000

This credit in OCI in turn is transferred to the separate balance in equity where it nets the debit that was taken there in year 1 back to zero.

Question 37

The statement of profit or loss and other comprehensive income : Reclassification adjustments 4

Reclassification adjustments are needed for most items of other comprehensive income, when a gain or loss is subsequently recognised in profit or loss.

Answer 37

Reclassification adjustments are needed for most items of other comprehensive income, when a gain or loss is subsequently recognised in profit or loss.

Question 38

The statement of profit or loss and other comprehensive income : Reclassification adjustments 5

Reclassification adjustments required:

 for any exchange differences previously recognised in OCI in respect of a foreign operation that is later sold; and

 for deferred gains or losses in designated cash flow hedges.

Answer 38

Reclassification adjustments required:

 for any exchange differences previously recognised in OCI in respect of a foreign operation that is later sold; and

 for deferred gains or losses in designated cash flow hedges.

Question 39

The statement of profit or loss and other comprehensive income : Reclassification adjustments 6

Reclassification adjustments are not allowed for:

 changes in the revaluation surplus on a non-current asset, and

 remeasurements of defined benefit pension schemes.

Answer 39

Reclassification adjustments are not allowed for:

 changes in the revaluation surplus on a non-current asset, and

 remeasurements of defined benefit pension schemes.

Question 40

The statement of profit or loss and other comprehensive income : Reclassification adjustments 7

Arguments for and against reclassification refer Emile Woolf page 78 need screenshot

Answer 40

Arguments for and against reclassification refer Emile Woolf page 78 need screenshot

Question 41

The statement of profit or loss and other comprehensive income : Profoma

Kaplan SBR page 32, 33

Answer 41

Kaplan SBR page 32, 33

Question 42

Statement of changes in equity (SOCIE) - Intro 1

The difference between total equity at the beginning and end of a financial period can be explained by two factors:

 total comprehensive income; and

 owner changes in equity.

Answer 42

The difference between total equity at the beginning and end of a financial period can be explained by two factors:

 total comprehensive income; and

 owner changes in equity.

Question 43

Statement of changes in equity (SOCIE) - Intro 2

Owner changes in equity are caused by transactions with the equity shareholders of an entity ‘in their capacity as owners’. These transactions have nothing to do with the financial performance of the entity, but they create increases or reductions in total equity.

The main examples of these transactions are:

 issues of new equity;
 payments of dividends; and
 purchase of its own shares by the company (and subsequent cancellation of the shares).

Answer 43

Owner changes in equity are caused by transactions with the equity shareholders of an entity ‘in their capacity as owners’. These transactions have nothing to do with the financial performance of the entity, but they create increases or reductions in total equity.

The main examples of these transactions are:

 issues of new equity;
 payments of dividends; and
 purchase of its own shares by the company (and subsequent cancellation of the shares).

Question 44

Statement of changes in equity (SOCIE) - Intro 3

The purpose of a statement of changes in equity is to show how each component of equity has changed between the beginning and the end of the reporting period.

Answer 44

The purpose of a statement of changes in equity is to show how each component of equity has changed between the beginning and the end of the reporting period.

Question 45

Statement of changes in equity (SOCIE) - Intro 4

For each component of equity, the SOCIE should show changes resulting from:

 profit or loss for the period
 each item of other comprehensive income (e.g. a property revaluation)
 ‘transactions with owners in their capacity as owners’.

Answer 45

For each component of equity, the SOCIE should show changes resulting from:

 profit or loss for the period
 each item of other comprehensive income (e.g. a property revaluation)
 ‘transactions with owners in their capacity as owners’.

Question 46

Statement of changes in equity (SOCIE) - Intro 5

‘Owner changes in equity’ (transactions with equity owners in their capacity as owners) are distinguished from changes in equity due to profit or loss and other
comprehensive income.

For each component of equity, a SOCIE shows the amount at the beginning of the period for that component of equity, changes during the period, and its amount at the end of the period.

Answer 46

‘Owner changes in equity’ (transactions with equity owners in their capacity as owners) are distinguished from changes in equity due to profit or loss and other
comprehensive income.

For each component of equity, a SOCIE shows the amount at the beginning of the period for that component of equity, changes during the period, and its amount at the end of the period.

Question 47

Statement of changes in equity (SOCIE) - Intro 6

Components of equity include:

 share capital
 share premium
 retained earnings
 revaluation reserve
 non-controlling interests.

Answer 47

Components of equity include:

 share capital
 share premium
 retained earnings
 revaluation reserve
 non-controlling interests.

Question 48

Statement of changes in equity (SOCIE) - Intro 7

In a SOCIE for a group of companies, the amounts attributable to owners of the parent entity and the amounts attributable to the non-controlling interest (NCI) should be shown separately.

Answer 48

In a SOCIE for a group of companies, the amounts attributable to owners of the parent entity and the amounts attributable to the non-controlling interest (NCI) should be shown separately.

Question 49

Statement of changes in equity (SOCIE) - Retrospective adjustments 1

IAS 8 requires that when an entity introduces a change of accounting policy or restates amounts in the financial statements to correct prior period errors, the
adjustments should be made retrospectively (to the extent that this is practicable).

Answer 49

IAS 8 requires that when an entity introduces a change of accounting policy or restates amounts in the financial statements to correct prior period errors, the
adjustments should be made retrospectively (to the extent that this is practicable).

Question 50

Statement of changes in equity (SOCIE) - Retrospective adjustments 2

Retrospective adjustments result in changes in the reported amount of an equity component, usually retained earnings. Retrospective adjustments and re-statements are not changes in equity, but they are adjustments to the opening balance of retained earnings (or other component of equity).

Answer 50

Retrospective adjustments result in changes in the reported amount of an equity component, usually retained earnings. Retrospective adjustments and re-statements are not changes in equity, but they are adjustments to the opening balance of retained earnings (or other component of equity).

Question 51

Statement of changes in equity (SOCIE) - Retrospective adjustments 3

Where retrospective adjustments are made, the SOCIE must show for each component of equity (usually retained earnings) the effect of the retrospective
adjustment. This is shown first, as an adjustment to the opening balance, before the changes in equity are reported.

Answer 51

Where retrospective adjustments are made, the SOCIE must show for each component of equity (usually retained earnings) the effect of the retrospective
adjustment. This is shown first, as an adjustment to the opening balance, before the changes in equity are reported.

Question 52

Statement of changes in equity (SOCIE) - Profoma

Kaplan SBR page 34, need screenshot

Answer 52

Kaplan SBR page 34, need screenshot