Conceptual Framework for Financial Reporting ‘© Objectives of financial reporting © To provide information to potential and current investors, lenders and other creditors © User groups need to be able to assess future cash flows and management's stewardship of assets. * Qualitative characteristics of useful information: © fundamental characteristics of relevance and faithful representation © enhancing characteristics of comparability, verifiability, timeliness and understandability * Elements of financial statements are: © Assets economic resources controlled by an entity from a past event Liabilities — obligations to transfer economic resources as a result of a past event Equity ~ residual interest in an entity's assets after deduction of all liabilities Income — an increase in assets/reduction in liabilities that increases equity Expenses — a decrease in assets/increase in liabilities that reduces equity ‘© Recognise an element if recognition provides © relevant information, and 0 a faithful representation © Derecognise an element if: 0 Entity no longer controls asset, or © Entity no longer has obligation for liability. ‘Measurement in financial statements: e000 0 Historical cost or current value © When deciding on measurement base, consider characteristics of item and how it will generate cash flows. * Presentation: © Profit or loss is the primary source of information about performance © Income/expenses normally recognised in P/L © Recognise income/expense in OCI if arises from current value measurement and enhances relevance of P/L © Items in OC! will be reclassified to P/L unless unable to determine timing or amount. IAS 1 Presentation of financial statements * Provides formats for classification and presentation of financial statements and disclosures * Items of OCI must be classified as either items that may be reclassified to profit or loss in future periods, or those items which will not be reclassified in future periods IAS 2 Inventories * Definition: items sold in the ordinary course of business (or associated raw materials and work-in-progress) * Valued at lower of cost and estimated selling price less selling costs (ie. NRV) for each separate item or product ‘* The ‘cost’ of inventory includes all costs of getting the item or product to current location and conditionIAS 7 Statement of cash flows Reconciles cash and cash equivalents year-on-year © Cash equivalents are short-term, highly liquid and readily convertible to a known amount of cash Three standard headings © Operating activities © Investing activities © Financing activities. Cash generated from operations can be derived using the direct method or the indirect method © The indirect method begins with profit before tax and then adjusts it for non-cash items, as well as for items that relate to investing or financing acti IAS 8 Accounting policies, changes in accounting estimates and errors Accounting policies should be appropriate and relevant, be consistently applied and be disclosed Changes in estimates are taken to statement of profit or loss in current and future periods — e.g. change in depreciation method Changes in accounting policy and the correction of prior period errors require the restatement of comparative information and opening reserves IAS 10 Events after the reporting period Definition — those events between the reporting date and date of approval of financial statements Adjusting events - those which provide additional evidence of the situation existing at the reporting date e.g. insolvency of major debtor notified shortly after the reporting date Non-adjusting events — those which do not provide evidence of the situation at the reporting date e.g. share issue after the reporting date. These are disclosed, but may become adjusting event if going concern basis threatened, IAS 12 Income Taxes Deferred tax is accounted for on temporary differences (differences between the carrying amount and tax base of assets and liabilities). © Ifthe tax base is higher than the carrying amount = deferred tax asset © If the carrying amount is higher than the tax base = deferred tax liability Temporary differences include: © The timing difference between accounting and tax depreciation © The timing difference between the amortisation of development assets and the period in which tax relief for development activity is obtained. Deferred tax is calculated by applying the applicable tax rate to the temporary difference © Deferred tax is not discounted to present value © Deferred tax assets can only be recognised if probable benefits are expected The deferred tax charge (or credit) is recorded in the same statement as the underlying transaction © Most deferred tax is recorded in profit or loss © Deferred tax on transactions in OCI (such as PPE revaluations) is recorded in OCIIAS 16 Property, plant & equipment * Definition = asset used to produce or store inventories or for administrative or distribution functions. * Initially recognised at cost © Cost is all expenditure attributable to bringing the asset into working condition as well as directly attributable borrowing costs. * Subsequent expenditure is capitalised if it enhances the economic benefits of the asset. © Depreciation starts when the asset is available for use © PPE may be revalued © Revalue all items in the same class © Gains are recorded in other comprehensive income. © Losses are recorded in OCI until the revaluation reserve is reduced to nil, Any excess loss is recorded in P/L. IAS 19 Employee benefits © Notin FR syllabus ‘* Defined contribution scheme: © Definition = no further obligation exists to contribute further funds to pension scheme. © Recognise annual cost of pension contribution in P/L * Defined benefit scheme: © Net interest component charged to profit or loss in the year = apply discount rate to net obligation at start of year © The service cost component is charged to profit or loss in the year and includes: = current year service cost = past service costs recognised in full when announced = gains and losses on curtailments and settlements © remeasurement component presented in other comprehensive income IAS 20 Accounting for government grants * Match revenue grants against expense to which they relate ‘* Match capital grants with assets to which they relate in one of two ways: © Recognise the grant as deferred income and then release it to profit or loss over the useful life of the asset © Reduce the cost of the asset by the grant received IAS 21 The effects of changes in foreign exchange rates © Functional currency is the currency of the primary economic environment where the entity operates © Subsidiary will have same functional currency as parent if has little autonomy © Determined based primary factors, such as on currency of sales and purchases © inconclusive consider secondary factors, such as currency of financing. Rules in individual financial statements * Use exchange rate ruling at date of transaction to record transactions in overseas currencies * Monetary items are re-translated at SOFP rate with gain or loss to profit or loss © Non-monetary items (e.g. PPE, inventory) are not restatedRules in group financial statements (not in FR syllabus) * Translate assets and liabilities at closing rate © Translate income, expenses and OCI at average rate * Exchange gains and losses arise on the retranslation of: © Goodwill © Opening net assets and profit * The current year exchange gain/loss is recorded in OCI IAS 23 Borrowing costs * Entities must capitalise directly attributable borrowing cost during construction of a qualifying asset. IAS 24 Related party disclosures © Not in FR syllabus * Definition of a related party © Relationships of control or significant influence © Entities under common control o Directors * Must disclose related party transactions, outstanding balances (e.g. receivables) and write- offs IAS 27 Separate financial statements * In separate (non-consolidated) financial statements, subsidiaries, associates and joint arrangements can be accounted for © atcost, or © asa financial instrument, or © using the equity method IAS 28 Investment in associates and joint ventures * Associate - an entity over which an investor has significant influence but not control (usually Indicated by 20%-50% of equity shares in another entity) © Joint venture — an entity over which an investor has joint control (see IFRS 11) * Associates and joint ventures are accounted for using the equity method in the consolidated financial statements: © Profit or loss = group share of associate’s profit after tax less current year impairment © OCI= group share of associate’s OCI © SFP = cost PLUS group share of post-acquisition reserves LESS dividendsIAS 32 Financial Instruments — Presentation IFRS 7 Financial Instruments — Disclosures IFRS 9 Financial Instruments * Financial liability = contractual obligation to transfer cash or another financial asset, or contract to transfer a variable number of the entity's own shares. * Financial liabilities classified as: © Fair value through profit or loss - this includes derivatives for speculation and financial liabilities held for trading © Amortised cost — for all other financial liabilities © Note — entities can opt to measure liabilities at fair value through profit or loss to eliminate or reduce an accounting mismatch * Split compound instruments (those with characteristics of liabilities and equity) into liability and equity elements at inception. © Liability = present value of repayments © Equity = cash proceeds less liability ‘* Financial assets = cash; investment in shares; contractual obligation to receive cash or another financial asset © Classification of financial assets: © Investments in shares can be categorised as: * Fair value through profit or loss * Fair value through other comprehensive income ~ as long as they are not for short- term trade and have been designated as such © Investments in debt can be categorised as = Amortised cost - if the business model is to hold to maturity * Fair value through other comprehensive income — if the business model involves holding financial assets to maturity and selling them * Fair value through profit or loss if business model is to sell or if the contractual cash flow characteristics test is failed * Impairments of financial assets: © Expected credit losses (ECLs) should be recognised for all investments in debt measured at amortised cost or fair value through other comprehensive income © If credit risk has not increased significantly, ECLs should be equal to 12 month expected credit losses © If credit risk has increased significantly, or for trade receivables, ECLs should be equal to lifetime expected credit losses © If the asset is credit impaired, ECLs should equal the difference between the asset’s gross carrying amount and the present value of the expected future cash receipts © Hedge accounting: © Must be formally documented at inception © Must be regularly reviewed to ensure it meets the effectiveness criteria © FV hedge - take changes in FV of hedged item and hedging instrument to profit or loss (unless the hedged item is an investment in equity measured at FVOC!) © Cashflow hedge - take changes in FV of hedging instrument to OCI (any excess FV movement is taken to profit or loss)IAS 33 Earnings per share Basic EPS = Profit after tax attributable to the parent — irredeemable preference dividends Weighted average number of equity shares Consider: © Market issue at full price ~ calculate the weighted average number of equity shares © Bonus issue~ treat as if these had always been in issue and restate the comparative EPS © Rights issue - treat partly as bonus issue and partly as issue at full market price © Diluted EPS - relevant if there is convertible debt or share option schemes IAS 34 Interim financial reporting Not FR syllabus. Interim reports are not mandatory but are recommended If prepared, interim reports should include: © Condensed statement of financial position © Condensed statement of profit or loss © Condensed statement of changes in equity and a statement of cash flows © Selected explanatory notes IAS 36 Impairment of assets Definition = the reduction in recoverable amount below carrying amount © Recoverable amount = the higher of fair value less costs to sell and value in use. ©. Fair value is determined in accordance with IFRS 13 Fair Value Measurement © Value in use is the present value of the estimated future cash flows derived from the asset. Entities perform an impairment review if there is an indication that an asset(s) is impaired. However, annual impairment reviews required for: © Goodwill © Intangible assets that are not amortised Impairment losses are normally charged to profit or loss © If an asset has been previously revalued, impairments are charged to OCI until the revaluation reserve relating to that specific asset is reduced to nil If an asset does not generate individual cash flows then it may need to be reviewed for impairment as part of a cash generating unit (CGU) © CGU=smallest group of assets that generate cash flows independently of other assets © Ifa CGU is impaired, then the impairment is allocated to goodwill and then to the other assets in proportion to their carrying amounts. © Anindividual asset cannot be written down below recoverable amount. © When conducting an impairment review on a CGU that includes goodwill calculated on a proportionate basis, the goodwill must be grossed up to include the NCI’s share of the goodwill.IAS 37 Provisions, contingent liabilities and contingent assets © Aprovision =a liability of uncertain timing or amount * Provisions are recognised if: © There is an obligation from a past event © There isa probable outflow of benefits © The outflow of benefits can be measured reliably ‘* Provisions are recognised at the present value of the best estimate of the outflow required ‘©The following are not provided for: o Future operating losses © Relocation and retraining of existing employees © Periodic repairs * Contingent liabilities are disclosed if an outflow of resources is possible © Contingent assets are disclosed if an inflow of resources is probable IAS 38 Intangible assets * Definition = an asset without physical substance © Recognise at cost if: © Identifiable © Itis controlled by the entity © Itis expected to generate future economic benefits © Itcan be measured reliably ‘* Research and development costs dealt with by IAS 38: © Research expenditure if expensed to profit or loss © Development expenditure is capitalised if the criteria in IAS 38 are met ‘* Apply either cost model or the revaluation model. If the revaluation model is used: © anactive market must be available © increases in carrying amount presented in OCI * If the asset has a finite useful life, then amortise over the useful life If the asset has an indefinite life, then review annually for impairment. IAS 40 Investment property * Definition = property (including land) held for rentals or capital appreciation * Initially recognised at cost * Subsequently measured using either: © Cost model - cost less depreciation and impairment © Fair value model ~ revalued to fair value at year end with gains or losses in profit or loss (no depreciation charged). IAS 41 Agriculture © Biological assets are living plants and animals © They are Initially valued at fair value less costs to sell © They are revalued to fair value less costs to sell at the reporting date with the gain or loss in profit or loss. * Agricultural produce is the harvested product on a biological asset © Itisinitially measured at fair value less costs to sell. © Itis subsequently accounted for under IAS 2 Inventories.IFRS 1 First-time adoption of International Financial Reporting Standards . Not in FR syllabus When adopting IFRS Standards for the first time, an opening SFP must be produced at the date of transition in which the entity must: © Recognise assets and liabilities in accordance with IFRS Standards © Derecognise assets and liabilities that do not comply with IFRS Standards © Measure assets and liabilities in accordance with IFRS Standards © Classify assets in accordance with IFRS Standards. Gain and losses arising at the date of transition are recorded in retained earnings. IFRS 2 Share-based payment Not FR syllabus Definition = an entity paying for goods or services received by transferring its own shares, share options, or a cash amount based on its share price. Equity settled (shares/share options): © Value at grant date: © use fair value of good/service if transaction with supplier © use fair value of equity if transaction with employee. © Account over the vesting period (recognise expense/asset and equity) © Modifications give rise to an additional expense recognised between the modification date and the vesting date © Cancellation of a share scheme accelerates the expense. Compensation is treated as a deduction to equity. Cash settled (cash amount based on share price): © Value using the fair value of the rights at the reporting date © Account over the vesting period (recognise expense/asset and liability) Hybrid transactions © If the transaction gives the entity a choice over whether to settle in cash or by issuing equity instruments: © Account as cash-settled share-based payment transaction if entity has an obligation to settle in cash © Account as an equity-settled share-based payment scheme if no obligation exists to settle in cash. © If the transactions gives the counterparty (e.g. the employee) the choice of settling in cash or in equity instruments then the credit entry must be split between equity and : © If with employees, the equity is the fair value of the equity alternative at the grant date less the fair value of the cash alternative at the grant date © If not with employees, the equity is the fair value of the good or service received, less the fair value of the cash alternative at the date of the transaction. © The liability is calculated by taking the cash settlement option and applying the rules for cash-settled share-based payments,IFRS 3 Business combinations IFRS 5 Non-current assets held-for-sale and discontinued activi A business combination is where an entity obtains control over another entity that is a business. co To meet the definition of a business, inputs and substant acquired that can contribute to the creation of outputs © An optional concentration test can be used to assess whether an acquired set of assets is not a business. Business combinations apply acquisition accounting © Identify the acquirer © Identify the acquisition date © Measure the identifiable net assets at fair value © Recognise goodwill and the non-controlling interest. The non-controlling interest at acquisition can be measured at fair value or at its proportion of the fair value of the subsidiary’s identifiable net assets at the acquisition date. Acquisition costs are expensed to profit or loss. ‘Again on a bargain purchase is recognised in profit or loss. fe processes must have been Ss An asset or disposal group is classified as held for sale if its carrying amount will be mainly recovered through a sale and the sale is highly probable. To qualify, the following criteria should be met: © The asset must be available to sell in its present condition © The asset must be marketed at a reasonable price © The sale is expected within 12 months Assets held for sale are measured at the lower of carrying amount and fair value less costs to sell. They are not depreciated. Separate disclosure of discontinued operation required in the statement of profit or loss — defined as a component of a business which has either been disposed of or is classified as held for sale and © represents a separate major line of business or geographical area of business © is part of a single co-ordinated plan to dispose, or © isa subsidiary acquired exclusively with a view to sale. IFRS 8 Operating segments Not in FR syllabus Operating segments: © engage in business activities © have discreet financial information available © have results reviewed by chief decision makers. Segments can be aggregated if they have similar economic characteristics Disclose a segment separately if it represents 10% or more of any of the following: © Total assets © Total (internal and external) revenues © The greater of the profit or the profit making segments, or the loss of the loss making segments. Must report additional segments until 75% of external revenue is reported.IFRS 10 Consolidated financial statements Elements of control: © Power over the investee © Exposure, or rights to, variable returns © Ability to use that power to affect returns One entity can have control, while another has significant influence, in a third entity. Potential voting rights (e.g. share options and convertible loans) should be considered if currently capable of being exercised. IFRS 11 Joint arrangements Not in FR syllabus Definition — two or more parties with joint control. Joint control requires unanimous consent of parties that share control. Joint venture: © parties have joint control and rights to net assets of a separate entity formed for the joint venture © Account using the equity accounting. Joint operation: © parties have joint control and rights to the assets and obligations for the liabilities of the joint operation — normally will not be a separate entity. © Each party to joint operation accounts for its share of assets, liabilities, income and expenses. IFRS 13 Fair value measurement Provides single and standardised definition and source of guidance for fair value measurements. Fair value is defined as the amount received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value should be identified with reference to the principal market or, if there is no principal market, the most advantageous market IFRS 13 uses a 3-tier hierarchy of inputs for valuation purposes: © Level 1 - quoted prices for identical assets or liabilities traded in an active market © Level 2 - quoted prices not included in level 1 © Level 3 - other data used to determine fair value (unobservable prices) The fair value of a financial asset is determined based on its highest and best use.IFRS 15 Revenue from contracts with customers Revenue recognition is a five step process: 1. Identify the contract © It must be probable the seller will be paid 2. Identify the distinct performance obligations within the contract, © A good/service is distinct if an entity can benefit from it on its own or if the promise to provide it is separately identifiable. 3. Determine the transaction price © Variable consideration is included if it is highly probable that a significant reversal in the revenue recognised will not occur when the uncertainty is resolved. © Discount consideration to present value if there is a significant financing component © Non-cash amounts measured at fair value © Consideration payable to a customer is deducted from the transaction price. 4. Allocate the transaction price to the performance obligations in the contract. © Allocate based on stand-alone selling prices 5. Recognise revenue when (or as) a performance obligation is satisfied. Recognise revenue over time if: © The customer simultaneously consumes and benefits from the seller’s performance, or © The seller is enhancing an asset controlled by the customer, or © The seller cannot use the asset for an alternative use and can demand payment for performance to date. IFRS 16 Leases ‘* A lease contract allows an entity to control an identified asset for a period of time in exchange for consideration ‘* Unless the lease is short-term or of minimal value, lessees recognise a lease liability and a right-of-use asset at inception of lease © Interest on the liability is charged to profit or loss © Depreciation on the right-of-use asset is charged to profit or loss. * Lessors must assess if the lease is a finance lease or an operating lease © Afinance lease transfers substantially all of the risks and rewards of the asset to the lessee © Ifa finance lease, the lessor dercognises the asset and recognises a lease receivable © [fan operating lease, the lessor continues to recognise the asset and recognises the lease rental income in profit or loss on a straight line basis. ‘+ For sale and leaseback transactions, need to assess if transfer is a ‘sale’ (per IFRS 15) © If not a sale, the seller-lessee continues to recognise the transferred asset and will recognise a financial liability equal to the transfer proceeds. © Ifa -sale, the seller-lessee must measure the right-of-use asset as the proportion of the previous carrying amount that relates to the rights retained