Reporting financial performance

Question 1

IFRS 5 Assets Held for Sale and
Discontinued Operations Discontinued operations

Answer 1

‘A discontinued operation is a component of an entity that either
has been disposed of, or is classified as held for sale, and
(a) represents a separate major line of business or geographical
area of operations
(b) is part of a single co-ordinated plan to dispose of a separate
major line of business or geographical area of operations or
(c) is a subsidiary acquired exclusively with a view to resale.’
(IFRS 5, para 32)
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:
(i) the post-tax profit or loss of discontinued operations and
(ii) 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 group(s)
constituting the discontinued operation.’(IFRS 5, para 33(a))
Further analysis of the disclosed amount will be required in the notes.
Note: If a component of the entity is classified as discontinued in the current year, it
must also be shown as discontinued in the comparative statement of profit or loss.

Question 2

IFRS 5 Assets Held for Sale and
Discontinued Operations Assets held for sale

Answer 2

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.’ (IFRS 5, para 6)
To be classified as held for sale the following criteria must be met:
 the asset is available for immediate sale.
 the sale is highly probable. Indicators of high probability of the
sale include:
– management are committed to plan to sell the asset.
– an active programme to locate a buyer has been initiated.
– marketed at a price that is reasonable.
– sale is expected to take place within one year.
– it is unlikely that significant changes to the plan will be made
or that the plan will be withdrawn.
Even if the asset is not sold within one year, it can still be classified as held for sale
provided that the delay is due to events outside the entity’s control.
If the asset is to be abandoned it cannot be classified as held for sale.
A disposal group is a group of assets and associated 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 36 Impairment of Assets as follows:
 goodwill first
 then other assets, pro-rata on the basis of their relative carrying amounts.

Question 3

IFRS 5 Assets Held for Sale and
Discontinued Operations Accounting for assets held for sale

Answer 3

 Stop depreciating the asset
 Transfer the asset to a ‘held for sale’ category on the face of the
statement of financial position below current assets
 If the asset is recorded at depreciated historic cost, write the
asset down to fair value less expected selling costs if below
carrying amount (i.e. process any impairment)
 If the asset is recorded at a revalued amount, it should be
revalued to fair value less expected selling costs. Selling costs
are expensed to profit or loss.

Question 4

IFRS 8 Operating Segments

Answer 4

IFRS 8 Operating segments only applies to entities whose equity or debt is traded on
public markets. In group accounts, only consolidated segmental information needs to
be presented.

Question 5

IFRS 8 Operating Segments 2.1 Objective of IFRS 8 Operating Segments

Answer 5

IFRS 8 Operating Segments requires that financial information is
analysed by operating segments.
‘An operating segment is a component of an entity:
(a) that engages in business activities from which it may earn
revenues and incur expenses (including revenues and
expenses relating to transactions with other components of
the same entity)
(b) 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
(c) for which discrete financial information is available.’ (IFRS 8,
para 5)
Operating segments are identified on a managerial basis i.e. segments are based on
the information used internally for decision making.

Question 6

IFRS 8 Operating Segments 2.2 Aggregation

Answer 6

Operating segments may be aggregated if they have similar economic
characteristics, and are similar in one of the following:
 products/services
 production processes
 types of customer
 distribution methods or
 regulatory environment.

Question 7

IFRS 8 Operating Segments 2.3 Assessing which segments are reportable

Answer 7

 Only some of the identified segments will be reportable.
 For each segment in turn, the following procedure is used to identify reportable
segments.
1 The segment must meet one of the three following tests:
– Segment total sales ≥ 10% of total sales (internal and external) of all
segments
– Segment result ≥ 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 ≥ 10% of total assets of all segments.
2 Ensure that the external revenue of segments identified as reportable ≥
75% total external revenue.
If this is not the case, add in other segments lost at step 1 until the 75%
threshold is met.
Segments that do not meet the thresholds may be reported if management believe
the information would be useful to the users of the financial statements.

Question 8

IFRS 8 Operating Segments 2.4 Disclosures

Answer 8

General information
 ‘factors used to identify reportable segments’ (IFRS 8, 22(a))
 ‘types of product and services from which each reportable
segment derives its revenues’. (IFRS 8, 22(c))
Segment items
For each reportable segment, an entity should report:
 A measure of profit or loss
 A measure of total assets (if used in decision making)
 A measure of total liabilities (if used in decision making).
The measure disclosed should be the measure used in internal reporting which may
be different to the method used in the published financial statements.
A more detailed breakdown of the measure of profit or loss disclosed above may be
required if that information is reviewed by the chief operating decision maker on a
regular basis.

Question 9

IAS 34 Interim Financial Reporting

Answer 9

IAS 34 Interim Financial Reporting provides principles and guidance on the
preparation of interim financial statements.
An interim period is a reporting period of less than one year.

Question 10

IAS 34 Interim Financial Reporting Scope

Answer 10

IAS 34 Interim Financial Reporting does not make the preparation of interim financial
reports mandatory. It does however recommend it for entities whose equity or debt
securities are publicly traded.
Publicly traded entities are encouraged to provide interim financial reports:
 for at least the first six months of the financial year
 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 report
 periods covered, and
 recognition and measurement principles.

Question 11

IAS 34 Interim Financial Reporting Minimum components

Answer 11

‘An interim financial report shall include, at a minimum, the
following components:
(a) a condensed statement of financial position
(b) a condensed statement or condensed statements of profit or
loss and other comprehensive income
(c) a condensed statement of changes in equity
(d) a condensed statement of cash flows, and
(e) selected explanatory notes.’(IAS 34, para 8)

Question 12

IAS 34 Interim Financial Reporting Recognition and measurement

Answer 12

The general rule is to use the same recognition and measurement
principles in interim statements as in annual financial statements.
IAS 34 Interim Financial Reporting gives special considerations to a
number of 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 (calculated at interim
date)
 Tax – tax rate used should be the expected average rate of tax for
the full year
 Defined benefit pension schemes – an actuarial valuation at the
end of the interim period is not required if reliable measurement
can be obtained by extrapolating the results from the most recent
actuarial valuation.

Question 13

IAS 34 Interim Financial Reporting Periods covered

Answer 13

Statement of
financial position
Current year
As at the end of the current
period
As at the end of the most
recent financial year

Statement of
comprehensive
income
Current year
For the current interim period
and cumulative for the
current financial year to date
Comparatives
For the corresponding interim
period and the cumulative
figures for previous financial
year

Statement of
changes in equity
Current year
Cumulative for the current
financial year to date
Comparatives
For the corresponding interim
period in the previous financial
year

Statement of cash
flows
Current year
Cumulative for the current
financial year to date
Comparatives
For the corresponding interim
period in the previous financial
year

Question 14

IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors

Answer 14

Accounting policies should be:
 relevant
 reliable
 consistent
 comparable.
Changes in accounting policies or material accounting errors in prior years should be
adjusted for retrospectively i.e. recognise a prior period adjustment.
Changes in accounting estimates should be adjusted for prospectively.
Accounting for a change in accounting policy
 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 15

IAS 24 Related Party Disclosures

Answer 15

IAS 24 Related Party Disclosures draws attention to transactions with related parties
through disclosure requirements. It is important to note that the aim is not to prevent
these transactions, simply to inform users of their existence.

Question 16

IAS 24 Related Party Disclosures 5.1 Definition of a related party

Answer 16

IAS 24 Related Party Disclosures defines a related party as
any of the following:
(a) ‘A person or a close member of that person’s family is related to a
reporting entity if that person:
(i) has control or joint control over the reporting entity
(ii) has significant influence over the reporting entity
(iii) is a member of the key management personnel of the reporting entity
or of a parent of the reporting entity.
(b) An entity is related to a reporting entity if any of the following conditions
apply:
(i) The entity and the reporting entity are members of the same group
(which means that each parent, subsidiary and fellow subsidiary is
related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an
associate or joint venture of a member of a group of which the other
entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an
associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of
employees of either the reporting entity or an entity related to a
reporting entity.[…]
(vi) The entity is controlled or jointly controlled by a person identified
(vii) A person identified in (a) (i) has significant influence over the entity
or is a member of the key management personnel of the entity (or of
a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides
key management personnel services to the reporting entity or to the
parent of the reporting entity.’
(IAS 24, para 9).
Close family member: ’family members who may be expected to
influence, or be influenced by, that person in their dealings with
the entity and include:
(a) that person’s children and spouse or domestic partner
(b) children of that person’s spouse or domestic partner, and
(c) dependants of that person or that person’s spouse or
domestic partner.’ (IAS 24, para 9)
Key management personnel: ‘persons having authority and
responsibility for planning, directing and controlling the activities
of the entity, directly or indirectly, including any director (whether
executive or otherwise) of that entity.’ (IAS 24, para 9)

Question 17

IAS 24 Related Party Disclosures Relationships that are not deemed related parties

Answer 17

(a) 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.
(b) two joint venturers simply because they share joint control
over a joint venture.
(c) (i) providers of finance
(ii) trade unions
(iii) public utilities, and
(iv) departments and agencies of a government […] simply
by virtue of their normal dealings with an entity […].
(d) 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’ (IAS 24, para 11).

Question 18

IAS 24 Related Party Disclosures 5.2 Related party disclosures

Answer 18

Disclosure of control
 Name of the parent
 Name of the ultimate controlling party, if different.
Disclosure of management compensation
IAS 24 Related Party Disclosures says any compensation granted to
key management personnel should be disclosed ‘in total and for each
of the following categories:
(a) short-term employee benefits
(b) post-employment benefits
(c) other long-term benefits
(d) termination benefits; and
(e) share-based payment’ (IAS 24, para 17).
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.

Question 19

Audit and assurance implications of
reporting financial performance: Audit tests

Audit risk:

Inappropriate presentation
and disclosure of segmental
information.

Answer 19

Obtain understanding of the methods used
by management in determining segmental
information.
 Perform analytical procedures appropriate
to the circumstances.

Question 20

Audit and assurance implications of
reporting financial performance: Audit tests

Audit risk:

Incorrect classification of
assets as held for sale.

Answer 20

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.

Question 21

Audit and assurance implications of
reporting financial performance: Audit tests

Audit risk:

Undisclosed related party
transactions.

Answer 21

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.