Communicating

Financial Information

Better Financial Communication

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 Problems & Challenges
• Financial reports are big and information is poorly organised
• FR should not be a compliance exercise – think “useful”
• Materiality
• Disclosure
• But, prepares are scared
• Irrelevant and generic (boilerplate) information is disclosed
• Not all relevant information is provided and effectively communicated
• Not clear how difficult material decisions are made – estimates,
policy choices, judgement
• Contradictory comments appear
• No one size fits all – have to apply your mind and tell the story

Good Communication Principles

• It should be easy to navigate information
• Clearly set out
• Traditional print: Cross referencing
• Electronic: Navigation bars / hyperlinks / back buttons
• Graphic depictions – graphs and charts
• Re-ordering note disclosures logically
• Bring NB notes to the beginning
• Group themes together
• Accounting policies – significant vs less important
• Augmenting and link with logical management commentary and
disclosure
• Tailor the story – what is actually done
• Step back and ask, “Is it useful?”
• Reorder, reformat, add, delete, clarify, until it is

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 The Objective of Financial Statements

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 Practical Application
• Are IFRS financial statements prepared for the company’s?
• Management?
• Employees?
• Customers and suppliers?
• Shareholders?
• Bank

• How is useful information achieved?

Characteristics of Useful Information

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 Relevance (CF 2.5 – .11)

• Can change a user’s decision
• Tells what happened (confirmatory)
• Assists in making future predictions (predictive)
• Application
• Historical account of what happened (tell the story)
• Where appropriate
• Fair value measurements – financial instruments, land
• Estimates – revenue, provisions, depreciation, revaluations
• Policy choices
• Changes in operations
• What happened that had a big impact?
• What was difficult? What was amazing?
• What is expected to have a big impact?
• We don’t avoid these – proportions

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 Materiality (part of relevance)
• Leaving it out or not stating it could change a decision (CF 2.11)
• Entity specific, not set threshold, judgement
• IFRS Practice Statement 2 – non-binding guidance on applying materiality
• IFRS requirements only applied when material
• Examples
• Not capitalising amounts below R500 to PPE?
• Are all disclosure requirements required?
• Information proportionate to importance
• Boilerplate information
• Materiality not a way to achieve misstatement
• Don’t focus only on existing users and specific users
• 4 Step materiality process: Identify info, assess, organise, review
• (In this course, assume material unless mentioned / obvious)

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 Faithful Representation (truth)

(CF 2.12 – 22)
• Must report the reality, the substance
• Legal form often does, but not necessarily
• Examples:
• Lease financing (loans)
• Extreme estimates and judgements
• Multiple transactions embedded in one
• Complete, neutral, free from error
• Prudence
• Examples:
• Ethics – no predetermined result

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 Balance Between
Relevance & Faithful Representation (2.20 – 22)

• Both are needed

• Trade-offs
• Material vs complete
• Estimates vs free from error

• Recognition criteria (CF chapter 5) for assets and liabilities are

the fundamental characteristics

• “Perfection is seldom, if ever, achievable” (CF 2.13)

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Other Applications of Useful Information

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 Disclosure (CF 7.1 – 7.6)
• Effective communication focuses on
• Objectives not following rules
• Grouping similar items, separating dissimilar items
• Not under or over aggregating
• Systematic manner and presentation (IAS 1.113 & 114)
• Disclose significant estimates and judgements (IAS 1.122 & 125)
• Look at cost benefit and proportions
• IASB’s “Better Communication” initiative

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Management Commentary
IFRS Practice Statement 2
• Context to interpret financial report → key for useful information
• Forward looking, relevant, material, faithfully represented
• Clear and logical, supporting other information

• Examples
• Nature of business, risks, strategy, KPIs, important resources
not in IFRS financials, influence of non-financial factors
• (looks like integrated reporting?)

• Say that it is management commentary

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 Use of Non-IFRS Measures
• IFRS specifies assets, liabilities, P/L and OCI
• What about other line items and sub-totals?
• No such thing in IFRS as “EBIT”, “EBITDA”, “core earnings” etc.
• Can lead to comparability difficulties
• IASB Primary financial statement project
• Difficult project
• Are some items more important than others?
• Mixed measurement?
• Appropriate groupings?
• Disclosure initiative to bring more concepts to disclosure

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Difficult Financial Reporting Decisions

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9
 IAS 8 Scope

• 1. Changes in accounting policies

• 2. Changes in estimates
• 3. Prior period errors

• 4. Selecting accounting policies / appropriate accounting

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Look to IAS 8 and the Conceptual

Framework
• IAS 8 & The Conceptual Framework is never the starting point
• Specific before general

• Used when a material transaction / event and:

• There isn’t an applicable IFRS standard,
• Outside scope of any IFRS standard,
• IFRS gives a choice of accounting, or
• IFRS isn’t clear / precise
• Different people may account for transaction differently

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 Examples to come back to
• There isn’t an IFRS standard that applies (scope issues)
• Gross physically settled derivatives
• Crypto currency
• Telecommunication towers

• Policy selection choices

• IAS 16 PPE: Cost model vs revaluation model
• IAS 40 Inv prop: Cost model vs fair value model
• IFRS 15 Revenue: Practical expedients
• A new IFRS standard may be adopted early
• How to lay out / organise financial statements

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Examples to come back to

• Judgement
• Separating performance obligations, revenue at a point vs over time
• Is there a lease in substance?
• Is the company controlled
• Financial instrument “business model”

• Estimates
• Provision estimates
• Depreciation – residual values, estimated useful lives
• Revenue – variable consideration, rights of return, warrantees
• Fair value determination
• Net realisable values
• Value in use

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 How to select a policy / treatment
(IAS 8.10 – 12)
• ‘Accounting hierarchy’: Select a policy that is:
• Relevant to users’ decision-making needs
• Provides reliable / faithfully represented information
• Reflects economic substance and is
• Neutral, prudent and complete
• Tools (most to least important):
1. IFRSs dealing with similar issues (analogy)
2. The Conceptual Framework
3. Other standards setting bodies
• US GAAP
4. Accounting literature and industry practice
• Big 4 guidance
• Textbooks
• Tell the story

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CF Chapter 6 – Asset / Liability

Measurement
• IFRS does not say always use fair value
• Tell the story – what gives the best information in the context
• Materiality
• Cost benefit
• Financial asset example
• What gives most relevant and faithfully represented info?
• Price – historic cost
• With impairment
• Current value
• Fair value
• Value in use
• Impacts expense / income that flows

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 Disclosure
• Disclose significant estimates and judgements (IAS 1.122 & 125)
• Explain what happened
• What may have been different?
• Why / how was this decided?

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If REALLY unsure
• Write to the IFRIC for an interpretation

• IFRIC with either:

• Reject – saying IFRS is clear / provides significant guidance
• Issue an IFRIC if the issue is widespread and significant
divergence in practice
• Based on Conceptual Framework
• If so big that an IFRIC won’t solve, recommends board
consideration

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 IAS 8 Changes in Accounting Policies

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Event General Accounting

Treatment

Change in estimate Prospective

Change in accounting policy Retrospective

Prior period error Retrospective

• Only other time retrospective accounting allowed

• Business combinations, initial accounting (IFRS 3.45)

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 Changes in Accounting Policies
(IAS 8.14 – 22)
• Must consistently apply policies – can’t cherry pick
• Can only change policy if:
• Required by an IFRS
• Voluntarily if results in more useful info (relevant and reliable)
• Generally changes in policy retrospective
• Adjust all prior period accounting as if always applied the new
accounting policy (comparability)
• Based on assumptions and information from prior period (IAS 8.53)
• Exception: When a new IFRS requires change
• IFRS Appendix C Transitional arrangements (not examinable)
• Including dates applied by
• e.g. Applying IAS 16 & IAS 38 revaluation model for first time →
prospective

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Limits on Retrospective Application

(IAS 8.23 – 25)
• Going back to determine how something should have been
• May be impossible / “impracticable” (IAS 8.5)
• Not possible after making every reasonable effort
• Info may not be determinable
• Must apply retrospective change as far back as is practicable
• May mean that change is only made in the current year

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 Adjusting Prior Period Items
• Current year
• Dr Cost of Sales (P/L) 100
• Cr Inventory (FP) 100
• Same journal entry, but in year before, inventory sold
• Dr Cost of Sales (P/L) Retained Earnings (EQ) 100
• Cr Inventory (FP) Cost of Sales (P/L) 100
• Same journal entry, but in year before
• Dr Cost of Sales (P/L) Retained Earnings (EQ) 100
• Cr Inventory (FP) Cost of Sales (P/L) Retained Earnings (EQ) 100
• Flow of information
• T0 = SoFP
• T-1 = P/L
• T-2 = RE

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IAS 8 Prior Period Errors

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 Complying With & Departing from IFRS
• IFRS compliance means complying with every statement
• ‘Explicit unreserved statement’ (IAS 1.16)
• Subject to materiality
• Can depart from IFRS if complying
• Gives info in conflict with overall objectives of financials
• i.e. Does not provide useful information
• “Fair presentation override”
• Stringent disclosure requirements
• ‘Extremely rare circumstances’
• IAS 1.19 – 24
• Full disclosure of where and why non-compliance occurred
• What would have resulted if IFRS had been applied
• What if we discover we have not complied in prior year?

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Prior Period Errors .41 - .49

• Financial statements don’t comply with IFRS if contain
• Material errors and intentional immaterial errors
• Errors can be in
• Recognition, measurement, presentation and disclosure
• Accounting similar to changes in policy → retrospective
• Except no impact on current year
• Only correct for errors made in published prior years
• Error corrected in current year so no error to published
information
• Immaterial errors changed prospectively

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 More Communication Tools
IFRS 8, IAS 34, IAS 24 & IAS 33

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What else gives useful information?

• Shortcomings of financial reports
• Annual
• Aggregated
• Agency
• Application
• Solutions
• CF characteristics of useful information – neutral, faithfully represented
• IAS 8 decision making hierarchy (a bit in IAS 1)
• Other general IFRS communication tools
• IFRS 8 Operating Segments – disaggregated
• IAS 34 Interim reporting – more frequent
• IAS 24 – Related Parties – skewed decisions?
• IAS 33 – Analysis assistance
• Only scope examinable (except IAS 24)
• General communication – marketing, relationships etc

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 IFRS 8 – Disaggregation

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IFRS 8 Operating Segments

• Reports in the way business is managed
• Through the eyes of management (groundbreaking standard)
• Disclosure only standard
• Core purpose to evaluate
1. Different business activities (nature and financial effect)
2. Economic environments / locations
• Process
• Identify operating segments
• Identify reportable segments
• Prepare disclosure
• Only required for listed entities

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 IAS 34 Interim Financial Reporting
• Operations constantly change
• Provides more frequent communication
• Update on latest complete set of financials
• Same accounting policies as annual report
• Assuming users has most recent annual report (.15A)
• Focus on material changes and news
• Avoid repetition (.6)
• Examples of material events (.15B)
• Interim report = A period shorter than 12 months
• Usually condensed (IAS 34.4 definition)
• IAS 34 gives minimum allowed
• Same statements, fewer line items
• Only applicable to listed companies
• IAS 34 encourages at least 1 interim report per year
• Requirement up to regulators
• South Africa, JSE – 1 annual report, 1 interim
• US, Quarterly – 3 interim reports, 1 annual

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IAS 24 Related Party Disclosure

• Drawing attention to transactions with related parties (aka “connected persons”)
•  Identifying related parties
• What is a related party? (IAS 24.9)
• Entity: An entity with control, joint control or significant influence
• Person: “Key management personnel”
• “Close family members”
•  What should be disclosed?
• A parent’s subsidiaries → irrespective of transactions (.13 - .16)
• For groups, intercompany transactions eliminated
• Key management personnel compensation
• All IAS 19 employee benefits & share-based payment (.17)
• Material transactions, outstanding balances and future commitments (.18 - .23)
• Even if at arms length
• ITC June 2015 – 10 marks on related party disclosure

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 IAS 33 Earnings Per Share (EPS)
• Not accounting → Ratio for analysis
• Logic:
• More shares (capital) should create proportionally more profit
• EPS: How much P/L is generated per unit of capital (share)
• Calculation
• P/L attrib to parent ÷ Weighted average shares for the year (WANOS)
• Presented at bottom of P/L (excludes OCI)
• Basic earnings per share
• Diluted earnings per share (potential shares)
• Headline earnings per share (JSE requirement)
• MAF valuations: Used in PE multiples (Share price ÷ HEPS)
• IAS 33 only required for listed companies

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