Chapter 3

Performance reporting and performance

appraisal

Outcome

By the end of this session you should be able to:

 critically discuss and apply the definitions of the elements of financial

statements and the reporting of items in the statement of profit or loss and other
comprehensive income

 discuss and apply the judgements required in selecting and applying accounting
policies, accounting for changes in estimates and reflecting corrections of prior
period errors

 outline the principles behind the application of accounting policies and

measurement in interim reports

and answer questions relating to these areas.

One of the PER performance objectives (PO7) is to prepare

external financial reports. You take part in preparing and reviewing
financial statements – and all accompanying information – and you
do it in accordance with legal and regulatory requirements. Working
through this chapter should help you understand how to
PER demonstrate that objective.

The underpinning detail for this chapter in your Integrated Workbook can
be found in Chapter 3 of your Study Text

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Chapter 3

Overview

Estimates and
policies
(IAS 8)

Discontinued
operations
Financial
(IFRS 5) statement
preparation

Presentation Interim reports

(IAS 1) (IAS 34)
PERFORMANCE
REPORTING

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 Performance reporting and performance appraisal

Presentation of financial statements

1.1 Components of financial statements

According to IAS 1 Presentation of Financial Statements a complete set of financial

statements includes:

 a statement of financial position

 a statement of profit or loss and other comprehensive income

 a statement of cash flows

 a statement of changes in equity

 disclosure notes.

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Chapter 3

1.2 Statement of financial position

IAS 1 says that an asset should be classed as current on the statement of financial
position if:

 it is realised or consumed during the entity’s normal trading cycle, or

 it is held for trading, or

 it will be realised within 12 months of the reporting date.

A liability should be classed as current on the statement of financial position if

 it is settled during the entity’s normal trading cycle, or

 it is held for trading, or

 it will be settled within 12 months of the reporting date.

A proforma statement of financial position for a single entity is provided on the next
page.

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 Performance reporting and performance appraisal

Statement of financial position as at 31 December 20X1

ASSETS $m $m
Non-current assets
Property, plant and equipment X
Investments X
Intangible assets X
–– X
Current assets
Inventories X
Trade and other receivables X
Cash and cash equivalents X
Non-current assets held for sale X
–– X
––
Total assets X
––
EQUITY AND LIABILITIES
Capital and reserves
Ordinary share capital X
Retained earnings X
Other components of equity X
––
Total equity X
Non-current liabilities
Long-term borrowings X
–– X
Current liabilities
Trade and other payables X
Short-term borrowings X
Current tax payable X
Provisions X
–– X
––
Total equity and liabilities X
––

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Chapter 3

1.3 Statement of profit or loss and other comprehensive income

A suggested format is included below:

Statement of profit or loss and other comprehensive income for

year ended 31 December 20X1
$m
Revenue X
Cost of sales (X)
––––
Gross profit/(loss) X/(X)
Distribution costs (X)
Administrative expenses (X)
––––
Profit/(loss) from operations X/(X)
Investment income X
Finance cost (X)
––––
Profit/(loss) before tax X/(X)
Income tax expense (X)
––––
Profit/(loss) for the period X/(X)
Other comprehensive income:
Items that will not be reclassified to profit or loss in future periods
Changes in revaluation surplus X/(X)
Income tax on the above (X)/X
Items that may be reclassified to profit or loss in future periods
Cash flow hedges X/(X)
Income tax on the above (X)/X
––––
Other comprehensive income for the period X/(X)
––––
Total comprehensive income X
––––

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 Performance reporting and performance appraisal

Other comprehensive income is incomes and expenses recognised

outside of profit or loss (as required by particular IFRS Standards)

Total comprehensive income is the total of an entity’s profit (or loss)

and other comprehensive income for the period.

Items of other comprehensive income must be presented under one of two

categories:

 Items that will not be reclassified to profit or loss in the future:

– changes in revaluation surplus (Chapter 5)

– remeasurement components (Chapter 9)

– remeasurements of investments in equity instruments (Chapter 12)

 Items that may be reclassified to profit or loss in the future:

– foreign exchange gains or losses on the translation of a foreign operation

(Chapter 20)

– gains and losses on cash flow hedges (Chapter 12)

– remeasurements of investments in debt instruments (Chapter 12)

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Chapter 3

1.4 Statement of changes in equity

A suggested format is included below:

Statement of changes in equity for the year ended 31 December 20X1

Share Share Revaluation Retained
capital premium reserve earnings Total
$m $m $m $m $m
Balance at 1 January 20X1 X X X X X
Changes in policy X X
––– ––– ––– ––– –––
Restated balance X X X X X
Changes in equity for 20X1:
Total comprehensive income X X X
Dividends (X) (X)
Issue of share capital X X X
Transfer to retained earnings (X) X X
––– ––– ––– ––– –––
Balance at 31 December 20X1 X X X X X
––– ––– ––– ––– –––

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 Performance reporting and performance appraisal

1.5 Statement of cash flows

The format of this statement is dictated by IAS 7 Statement of Cash Flows. It requires
that cash flows are presented under one of three headings:

 cash flows from operating activities

 cash flows from investing activities

 cash flows from financing activities.

Statements of cash flow are covered in more detail in Chapter 21.

1.6 Disclosure notes

IAS 1 says that entities must:

 disclose their compliance with IFRS Standards

 disclose the accounting policies used

 disclose key uncertainties

 present disclosure notes in a systematic order.

1.7 Materiality

Material items should be presented separately in the financial statements.

Immaterial items can be aggregated in the financial statements.

An item is material if its omission or misstatement might influence the

economic decisions of the users of the financial statements. Users are
assumed to have a reasonable knowledge of business.

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Chapter 3

Discontinued operations

2.1 Criteria

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations says that a
discontinued operation is a component of an entity that has been sold, or which is
classified as held for sale, and:

 is a separate line of business (either in terms of operations or location),

 is part of a plan to dispose of a separate line of business, or

 is a subsidiary acquired solely for the purpose of resale.

An asset or disposal group is held for sale if its value will be mainly
recovered through a sales transaction and the sale is highly probable.

2.2 Presentation

IFRS 5 requires that a single amount for discontinued operations is presented on

the face of the statement of profit or loss. This comprises:

 the profit or loss of the operation

 any profit or loss on disposal, or any loss on classification as held for sale.

In comparative figures, the operations are also presented as discontinued.

Analysis of this single amount should be provided in a disclosure note.

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 Performance reporting and performance appraisal

Proforma
Statement of profit or loss for year ended 31 December 20X2
(with comparatives).
20X2 20X1
$m $m
Continuing operations
Revenue X X
Cost of sales (X) (X)
–––– ––––
Gross profit/(loss) X/(X) X/(X)
Distribution costs (X) (X)
Administrative expenses (X) (X)
–––– ––––
Profit/(loss) from operations X/(X) X/(X)
Investment income X X
Finance cost (X) (X)
–––– ––––
Profit/(loss) before tax X/(X) X/(X)
Income tax expense (X) (X)
–––– ––––
Profit/(loss) for the period from continuing operations X/(X) X/(X)

Discontinued operations
Profit/(loss) from discontinued operations X/(X) X/(X)
–––– ––––
Profit/(loss) for the period X/(X) X/(X)
–––– ––––

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Chapter 3

Policies, estimates and errors

3.1 Accounting policies

Accounting policies are the principles and rules applied by an entity

which specify how transactions are reflected in the financial statements.

To increase comparability, IAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors says that accounting policies should be kept the same from
period to period. Changes should only be made if required by an IFRS Standard or if
they will result in more reliable or relevant presentation in the financial statements.

If an accounting policy is changed then it is adjusted retrospectively:

 Comparative information is re-stated as if the new policy had

always been applied

 The opening retained earnings balance in the statement of

changes in equity is adjusted.

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 Performance reporting and performance appraisal

3.2 Accounting estimates

Accounting estimates are assessments of the present status of assets

and liabilities as well as their expected future benefits and obligations.

Examples of accounting estimates include:

 depreciation

 amortisation

 provision measurement.

The effect of a change in an accounting estimate must be recognised

prospectively, by including it in the statement of profit or loss and other
comprehensive income for the current period and future periods.

3.3 Prior period errors

Prior period errors are misstatements and omissions in the financial

statements of prior periods as a result of not using reliable information
that should have been available.

Prior period errors can result from mistakes or fraud.

Prior period errors are corrected retrospectively (like changes in

accounting policy).

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Chapter 3

Example 1
Policies, estimates and errors

Zack has a reporting date of 30 November 20X3.

A review of depreciation schedules has resulted in Zack concluding that the

basis on which its assets are depreciated would better reflect the resources
consumed if calculations were on a diminishing balance basis, rather than a
straight-line basis. The revision would result in an increase in depreciation for
the year to 30 November 20X2 of $5 million, an increase for the year end 30
November 20X3 of $6 million and an estimated increase for the year ending
30 November 20X4 of $8 million.

Additionally, Zack has discovered that its accruals systems for the financial
year 30 November 20X2 processed certain accruals twice in the ledger. This
meant that expenses were overstated in the financial statements by $2 million.

Discuss how the above events should be shown in the financial

statements of Zack for the year ended 30 November 20X3

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 Performance reporting and performance appraisal

Interim reporting

4.1 Interim financial reports

IAS 34 Interim Financial Reporting says that an interim financial report is one which
covers less than a financial year.

The standard does not make interim reporting mandatory. However, company law in
some jurisdictions requires certain entities (e.g. listed entities) to produce interim
reports.

The standard sets out the requirements if an entity is required to produce an interim
financial report.

If produced, IAS 34 says that an interim financial report should include:

 a condensed statement of financial position

 a condensed statement of profit or loss and other comprehensive income

 a condensed statement of cash flows

 a condensed statement of changes in equity

 disclosure notes.

4.2 Accounting policies

The accounting policies used in interim financial reports and in the

annual financial statements should be the same.

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