Financial Reporting

Frameworks

The Financial Reporting

Framework
⚫ Regulatory Framework
⚫ Company law
⚫ Stock exchange regulations
⚫ Accounting standards - international (IASs, IFRSs)
⚫ Accounting standards – UK & ROI (FRS 100 -102, FRS 105)

⚫ Conceptual Framework
⚫ Generally accepted theoretical principles which form a frame of
reference for financial reporting, and provide the basis for the
development of new accounting standards, and the evaluation of
those already in existence
⚫ The IASB issued a revised version of its Conceptual Framework
for Financial Reporting on 29 March 2018

Regulatory Framework
- International
⚫ The International Accounting Standards Board (IASB) is
responsible for setting accounting standards, namely
IFRS’s, and amending / replacing the older IAS’s

⚫ All EU listed companies are required to prepare their

consolidated financial statements in accordance with
international accounting standards

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 Regulatory Framework
- UK & ROI
⚫ The Financial Reporting Council (FRC) is the UK’s
independent regulator for accounting, audit and actuarial
professions

⚫ The majority of Irish / UK companies are small or

medium-sized – hence full convergence with IASs/IFRSs
never materialised

⚫ In 2013, the FRC published a ‘new Irish/UK GAAP’, of

which FRS 102 The Financial Reporting Standard
Applicable in the UK & ROI is the most prominent

The Conceptual Framework

⚫ Sets out the fundamental concepts of financial reporting
that guide the IASB in developing IFRS Standards.

⚫ Helps to ensure that the Standards are conceptually

consistent and that similar transactions are treated the
same way, providing useful information for investors and
others.

⚫ Assists companies in developing accounting policies

when no IFRS Standard applies to a particular
transaction; and it helps stakeholders more broadly to
understand the Standards better.

Substance Over Form

⚫ No specific international (or national) reporting standard
deals with the topic of ‘substance over form’

⚫ Guidance must be sought from the ‘Framework’

⚫ The framework recommends that transactions and events should

be faithfully represented, i.e. representation of the substance of
an economic phenomenon instead of its legal form
⚫ Preparers of financial statements should use the definitions of
‘asset’ & ‘liability’ (as per the Framework) before deciding
whether or not to recognise an asset/liability in the SoFP

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 Substance Over Form
⚫ The legal form of a transaction may sometimes be very
different from its substance. This situation might be
deliberately contrived, for example:

Liabilities may not be reported in FS → reduces gearing ratio

→ the market perceives shares to be less risky

⚫ Substance over form scenarios:

⚫ Consignment stock, sale & repurchase, debt factoring

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 Accounting Policies,
Changes in Accounting
Estimates & Errors

IAS 8

Accounting Policies
Specific principles, bases, conventions, rules & practices
applied in preparing & presenting financial statements

 Accounting policies normally remain unchanged to aid

comparison. They are only changed, if the change:
 Is required by an IFRS
 Results in more reliable and/or relevant financial statements
 If an IFRS does not exist: accounting policies should be applied
to ensure that financial statements are relevant, reliable, unbiased &
materially complete
 Examples of policies: Measurement of inventory (e.g. FIFO,
LIFO), Presentation of depreciation (e.g. cost of sales, admin costs),
Measurement of PPE (cost or re-valued amount)

Changes in Accounting
Policies
Accounting Treatment
Unless a IFRS has specific provisions for the change, apply
the change retrospectively (i.e. to prior periods):

 Adjust comparative figures as if the policy had always

been applied, and;
 Restate prior year opening Statement of Financial
Position, if affected components existed before last
year

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Accounting Estimates
 Many items in financial statements cannot be measured
with precision but can only be estimated
 Estimations involve judgements based on latest
available, reliable information
 Examples of estimates include: Bad debts, inventory
obsolescence, useful lives of assets

Reasons for changes in estimates

 Changes in circumstances affecting the estimate
 New information or more experience

Changes in Accounting
Estimates

Accounting Treatment
 A change in accounting estimate does not relate to prior
periods and is not a correction of an error
 The effect is dealt with prospectively, i.e. in the current
period (& future periods if required)
 Prior periods (i.e. comparative figures) are not adjusted

Errors
 Errors can arise in respect of Recognition, Measurement,
Presentation or Disclosure
 E.g. mathematical errors, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud

 Prior Period Errors are material omissions/misstatements

in respect of financial statements for one or more prior
periods arising from a failure to use, or misuse of, reliable
information that was:
 available when financial statements for those periods were
issued, or;
 could reasonably be expected to have been obtained & taken into
account

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 Correction of Errors
Accounting Treatment

 Current year error – correction is made in the current year

before financial statements are issued

 Last year error – comparative figures are restated as if the

error had never occurred

 Previous year error

- a revised SoFP at the start of last year is prepared
- last year’s opening ‘retained earnings’ are adjusted
- comparative figures are restated

Impracticability – Retrospective
Application / Restatement
 In some circumstances, it may be impracticable to
adjust comparative information, e.g. data may not
have been collected in prior periods and may be
impracticable to recreate the information

 Retrospectively applying a new accounting policy or

correcting a prior period error requires distinguishing
from other information, information that,
 Provides evidence of circumstances that existed at the
date at which the transaction, etc occurred, and;
 Would have been available when FS for prior period issued

Hindsight should not be used!

IAS 8
Definitions
Retrospective Application
 Applying a new accounting policy to transactions, other events &
conditions as if that policy had always been applied

Retrospective Restatement
 Correcting the recognition, measurement & disclosure of amounts
of elements of FS as if a prior period error had never occurred

Prospective Application
 Applying a new accounting policy to transactions, etc occurring
after the date as at which the policy is changed, or
 Recognising the effect of the change in the accounting estimate in
the current & future periods affected by the change

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 Fair Value Measurement

IFRS 13

Measurement
⚫ If an item is to be recognised in financial statements, it
must be ‘measured’, for example:
⚫ historic cost – cash paid at date of acquisition
⚫ current cost – cost required to replace an asset
⚫ realisable cost – cash expected from selling item
⚫ present value – value of discounted future cash flows

⚫ Some IFRSs require items to be measured at ‘fair value’

⚫ Recurring basis – e.g. Investment property (IAS 40)
⚫ Non-recurring basis – e.g. Assets held for sale (IFRS 5)
⚫ Initial recognition – e.g. Net assets acquired as part of a business
combination (IFRS 3)

Determining Fair Value

⚫ Identify the relevant asset or liability or group, e.g. CGU
⚫ Consider age / condition / location / restrictions
⚫ Assume transaction takes place in either the ‘principal
market’ or (in the absence of a principal market) the ‘most
advantageous market’
⚫ Assume an orderly transaction (i.e. not forced - liquidation,
distress sale) under current market conditions
⚫ Adjust for transport costs but not transaction costs

Fair Value
The price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date – i.e. the ‘exit price’ (not the price to buy the asset or to incur the liability)

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 Definitions
Active Market
A market in which transactions for the asset or liability take
place with sufficient frequency and volume to provide
information on an ongoing basis

Principal Market
The market with the greatest volume and level of activity for
that asset or liability

Most Advantageous Market

The market in which the entity could achieve the most
beneficial price

Fair Value Hierarchy

IFRS 13 seeks to increase consistency and comparability
of measurement by using a three-level hierarchy:

Level 1 Inputs – Quoted prices in active markets for

identical assets or liabilities

Level 2 inputs – Quoted prices in active markets for similar

(not identical) assets or liabilities, or prices in inactive
markets for identical assets or liabilities

Level 3 inputs – Unobservable inputs for assets or

liabilities based on best information available

Fair Value Measurement

Techniques
IFRS 13 sets out 3 approaches for determining fair value:

Market approach – uses prices and other relevant

information generated by market transactions involving
identical or comparable assets or liabilities

Income approach – converts future cash flows to a single

discounted present value amount

Cost approach – amount that would currently be required

to replace the service capacity of an asset, i.e. current
replacement cost

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 Presentation of Financial
Statements

IAS 1

Objective & Scope

⚫ Prescribes basis for preparation of financial statements to
ensure comparability with previous periods & other entities
⚫ Sets out requirements for presentation, guidelines for
structure and minimum requirements for content

Scope:
⚫ Applies to general purpose financial statements

⚫ Other IFRSs set out the recognition, measurement &

disclosure requirements for specific transactions/events
⚫ Not-for-profit entities may amend terminology used

Components of Financial
Statements
⚫ Statement of financial position
⚫ Statement of profit or loss & other comprehensive
income
⚫ Statement of changes in equity
⚫ Statement of cash flows
⚫ Accounting policies & other explanatory notes

⚫ Statement of financial position at start of the prior year

(if an accounting policy is applied retrospectively or an error is
corrected, per IAS 8)

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 Overall Considerations
Going concern
⚫ A going concern basis is used unless management intends to
liquidate or cease trading, or has no realistic alternative but to do so

Accruals basis of accounting

⚫ Used to prepare statements, except for cash flow information

Consistency of presentation
⚫ Consistency of presentation and classification of items from one
period to the next - unless an alternative would be more appropriate
or an IFRS requires a change

Overall Considerations
Materiality & aggregation
⚫ Similar items can be aggregated and each class presented
separately. Dissimilar items must be presented separately.

Offsetting
⚫ Assets & liabilities, or income & expenditure cannot be offset (unless
required or permitted by an IFRS)

Comparative information
⚫ Previous period information for all amounts reported in the current
year (unless an IFRS permits or requires otherwise)

Compliance with IFRSs

Other Matters
Accounting Policies Note
⚫ Describe measurement bases used & significant accounting polices

Uncertainty
⚫ Disclose any key assumptions or estimates used

Reclassification Adjustments
⚫ Disclose amounts reclassified on the face of SoPoL or in the notes

Dividends
⚫ Disclose (ordinary) dividends within SoCE or in the notes

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Some Key Points Regarding Financial Statements
.....you can add more of your own

RECOGNITION (WHEN & WHAT) – Are there any recognition criteria (criteria that must be met
before the item can be included in the financial statements)?

If these criteria are met, how will the item be recognised? (Asset, liability, income, expense, capital)

If these criteria are not met, how will the item be recognised?

Examples:
 Leases – right- of-use asset or expense
 Provisions & contingent liabilities – liability or not?
 Intangible items – asset or expense?
 Costs in relation to purchase/construction of PPE or inventory – asset or expense?
 Events after the reporting period – should they be recognised?

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MEASUREMENT (HOW MUCH) – How is the item to be measured?

Examples:
 Should you use historic cost, market value, net realisable value, present value, replacement
cost, etc. to measure the item?
 How do you measure ‘fair value’?
 Should you use ‘present values’ to calculate values for Leases, Provisions, etc.?
 Can you determine and explain which costs can be included within PPE, Inventory,
Intangibles, etc. and which should be expensed?

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PRESENTATION (WHERE) – Where should the item be presented?

Examples:
 Lease liability – split between current and non-current liabilities
 Provisions – are they current and/or non-current liabilities?
 Expenses – are they best included within cost of sales, administrative expenses, distribution
costs, other expenses, finance costs?
 Building – PPE, Investment property, inventory, NCA held for sale? Owned, leased, rented?

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DISCLOSURE (NOTES) – Are there any disclosure requirements relating to the item?

Examples:
 Can you prepare the disclosure note for PPE (only one figure is presented in the SoFP)?
 What about related party disclosures
 Contingent liabilities, commitments need to be disclosed, if material
 Earnings per share must be disclosed by all publicly traded entities

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DOUBLE ENTRY – Can you prepare the appropriate double-entry journals?
 Interim Financial Reporting

IAS 34

Interim Financial Report

“A financial report containing either a complete set of
financial statements… or a set of condensed
financial statements…for an interim period”

Interim Financial Report

⚫ Not required by accounting standards
⚫ May be required by the stock exchange
⚫ May be prepared voluntarily by some entities

IAS 34 applies if an entity publishes an interim financial report

that is stated to comply with international standards

Interim Financial Report

⚫ If an entity publishes a full set of financial
statements…they should comply fully with IAS 1

⚫ If an entity publishes a condensed set of financial

statements…they should include all the headings
and sub-totals used in the most recent annual
financial statements

⚫ Basic and diluted EPS should be presented

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 Minimum Requirements
Condensed financial statements should include:

⚫ Condensed statement of financial position (SoFP)

⚫ Condensed statement of profit or loss and other
comprehensive income (SoPoL)
⚫ Condensed statement of changes in equity (SoCE)
⚫ Condensed statement of cash flows (SoCF)
⚫ Selected explanatory notes

Significant Events &

Transactions
⚫ An explanation of events/transactions that are
significant to an understanding of the changes in
financial position and performance of the entity
since the last year-end should be included, e.g.

⚫ Inventory write-downs to NRV or reversal of write-downs

⚫ Impairment losses (FA, PPE, IA) or reversal of losses
⚫ Acquisition / disposal of PPE
⚫ Litigation settlements
⚫ Correction of prior period errors
⚫ Related party transactions

Recognition & Measurement

Accounting policies
⚫ The same accounting policies should be used as for the
annual financial statements (except for an accounting policy
change which will be reflected in next annual financial statements)

Revenues received seasonally or occasionally

⚫ Should not be anticipated or deferred unless that
treatment would be appropriate at the year-end (e.g.
seasonal revenue, government grants, dividend revenue)

Costs incurred unevenly during the financial year

⚫ Should not be anticipated or deferred – as above