Example accounting policies

Example accounting policies

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.Example accounting policies

Example accounting policies guidance

Whether to disclose an accounting policy

1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]

2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.

3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.

Change in accounting policy – new and revised accounting standards

4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]

5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]

6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.

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Employee benefits accounting policies

Employee benefits accounting policies

This is a separated part of the example accounting policies, it is separated because of the size of this note and the specific nature of employee benefits.

Example accounting policies – Introduction

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. Here is a section providing guidance on what the requirements are, below a comprehensive example is provided, easy to tailor to the specific needs of your company.

Employee benefits Guidance

Presentation and measurement of annual leave obligations

RePort Plc has presented its obligation for accrued annual leave within current employee benefit obligations. However, it may be equally appropriate to present these amounts either as provisions (if the timing and/or amount of the future payments is uncertain, such that they satisfy the definition of ‘provision’ in IAS 37) or as other payables.

For measurement purposes, we have assumed that RePort Plc has both annual leave obligations that are classified as Employee benefits accounting policiesshort-term benefits and those that are classified as other long-term benefits under the principles in IAS 19. The appropriate treatment will depend on the individual facts and circumstances and the employment regulations in the respective countries.(IAS19(8),(BC16)-(BC21))

To be classified and measured as short-term benefits, the obligations must be expected to be settled wholly within 12 months after the end of the annual reporting period in which the employee has rendered the related services. The IASB has clarified that this must be assessed for the annual leave obligation as a whole and not on an employee-by-employee basis.

Share-based payments – expense recognition and grant date

Share-based payment expenses should be recognised over the period during which the employees provide the relevant services. This period may commence prior to the grant date. In this situation, the entity estimates the grant date fair value of the equity instruments for the purposes of recognising the services received during the period between service commencement date and grant date.(IFRS2(IG4))

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Written put options and forwards for EPS calculations

Written put options and forwards

Written puts and forwards, as discussed in this narrative, are those that may require an entity to purchase its ordinary shares. Typically, these instruments are in the scope of IAS 32 Financial Instruments: Presentation.

This narrative builds on the basic principles introduced in EPS or earnings per share, and sets out the specific basic and diluted EPS implications of the following types of instrument(s).

Under IAS 32, a written put or forward that contains an obligation for an entity to purchase its own ordinary shares in cash or other financial assets generally gives rise to a financial liability for the present value of the redemption amount. Subsequent to initial recognition, the liability is measured in accordance with IFRS 9 Financial instruments. [IAS 32.23]

This narrative covers written put options over an entity’s own shares. For additional considerations about written put options over NCI in the consolidated financial statements of the parent entity, see Written puts over NCI.

EPS implications

Generally, in general shares that are subject to written puts or forwards are not regarded as outstanding in basic EPS but do impact diluted EPS. Understanding the accounting for these instruments is also relevant, because it determines whether their assumed conversion would have a consequential effect on profit or loss.

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IAS 33 EPS Impact of share-based payments

EPS Impact of share-based payments

Because share-based payments are common and they impact EPS, it is important to understand how IFRS 2 interacts with IAS 33. Accordingly, this narrative starts with an alternative IFRS 2 perspective and discusses the EPS implications of each type of arrangement under IFRS 2.

This narrative builds on the basic principles introduced in EPS or earnings per share, and sets out the specific basic and diluted EPS implications of the following types of instrument(s).

For details on the specific EPS implications of particular types of instrument, this chapter may need to be read in conjunction with the chapter on those specific instruments. For example, for a number of the instruments described in other chapters, the treasury share method is used in calculating diluted EPS. The general principles underlying the treasury share method are explained in detail in here, and the additional implications of applying the treasury share method to share-based payment instruments are further explained in 1.3 below.

Simply put, share-based payments are generally transactions in which an entity acquires goods or services (including employee services) in exchange for its (or another group entity’s) equity instruments or a liability that is based on the price or value of its (or another group entity’s) equity instruments. There are three main factors to be considered in assessing how a share-based payment will affect EPS.

IFRS 2 Conditions

Analysis

Settlement alternatives that drive the classification as equity- or cash-settled share-based payments under IFRS 2

They determine whether and how EPS is affected – e.g. if a share-based payment is a POS.

See 1 below

Vesting conditions

They impact how a share-based payment is dealt with in EPS – e.g. as an option or as a contingently issuable share.

See 2 below

Form of the instrument

It determines which other considerations might be necessary to understand the EPS implications – e.g. dividend entitlements for non-vested shares or exercise prices for options.

See 2 below

1. IFRS 2 Settlement alternatives

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EPS Calculation – IAS 33 Best complete read

EPS Calculation

Here is full example of an EPS Calculation. This narrative builds on the basic principles introduced in the narrative EPS, and sets out the specific basic and diluted EPS calculation rules as per IAS 33 Earnings per share.

Case

Company P earns a consolidated net profit of 4,600,000 during the year ended 31 December Year 1 and 5,600,000 during the year ended 31 December Year 2. The total number of ordinary shares outstanding on 1 January Year 1 is 3,000,000.

Various POSs are issued before 1 January Year 1 and during the years ended 31 December Year 1 and Year 2. During this period, the outstanding number of ordinary shares also changes.

The statement of changes in equity below summarises only the actual movements in the outstanding number of ordinary shares, followed by detailed information about such movements and POSs outstanding during the periods.

EPS Calculation

Details of the instruments and ordinary share transactions during Year 1 and Year 2

1. Convertible preference shares

At 1 January Year 1, P has 500,000 outstanding convertible preference shares. Dividends on these shares are discretionary and non-cumulative. Each preference share is convertible into two ordinary shares at the holder’s option.

The preference shares are classified as equity in P’s financial statements.

On 15 October Year 1, a dividend of 1.20 per preference share is declared. The dividend is paid in cash on 15 December Year 1. Preference dividends are not tax-deductible.

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Stock dividends in IAS 33 EPS Calculations

Stock dividends

Stock dividends are dividends paid to the ordinary shareholders of an entity in the form of additional ordinary shares rather than in cash. They may also be referred to as ‘scrip dividends’, or ‘share dividends’, and they may or may not have a cash alternative. IAS 33 EPS Calculations

This narrative builds on the basic principles introduced in the narrative EPS, and sets out the specific basic and diluted EPS implications of the following types of instrument(s). IAS 33 EPS Calculations

EPS implications

Generally, how stock dividends are dealt with in EPS depends on whether the investor has a cash alternative.

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EPS in IAS 33

EPS (Earnings per share)

EPS measures are intended to represent the income earned (or loss incurred) by each ordinary share during a reporting period and therefore provide an indicator of reported performance for the period.

The EPS measure is also widely used by users of financial statements as part of the price-earnings ratio, which is calculated by dividing the price of an ordinary share by its EPS amount. This ratio is therefore an indicator of how many times (years) the earnings would have to be repeated to be equal to the share price of the entity.

Users of financial statements also use the EPS measure as part of the dividend cover calculation. This measure is calculated by dividing the EPS amount for a period by the dividend per share for that period. It therefore provides an indication of how many times the earnings cover the distribution being made to the ordinary shareholders.

Basic EPS and diluted EPS are presented by entities whose ordinary shares or potential ordinary shares (POSs) are traded in a public market or that file, or are in the process of filing, their financial statements for the purpose of issuing any class of ordinary shares in a public market. (IAS 33.2)

Basic EPS and diluted EPS for both continuing and total operations are presented in the statement of profit or loss and OCI, with equal prominence, for each class of ordinary shares that has a differing right to share in the profit or loss for the period. (IAS 33.66-67A)

Separate EPS information is disclosed for discontinued operations, either in the statement of profit or loss and OCI or in the notes to the financial statements. (IAS 33.66-68A)

Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. (IAS 33.10)

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Partly paid ordinary shares

Partly paid ordinary shares

This narrative builds on the basic principles introduced in EPS or earnings per share, and sets out the specific basic and diluted EPS implications of the following types of instrument(s).

Partly paid ordinary shares

This narrative deals with ordinary shares that are only partly paid-up in cash, with the balance of the subscription price required to be paid only as and when it is called for by the issuing entity. The rights of the holders of such shares to dividends, on winding-up or liquidation of the entity, and the rights of the entity if the balance is not paid when it is required, will differ depending on the applicable laws and/or the entity’s constitutional documents.

EPS implications

Generally, how partly paid ordinary shares are dealt with in EPS depends on their dividend participation relative to fully paid ordinary shares. This may not be the same as the percentage of the subscription price paid.

In short: the numerator is not affected, the denominator is

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IFRS vs US GAAP Employee benefits

IFRS vs US GAAP Employee benefits

The following discussion captures a number of the more significant GAAP differences under both the impairment standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area.

The significant differences and similarities between U.S. GAAP and IFRS related to accounting for investment property are summarized in the following tables.

Standards Reference

US GAAP1

IFRS2

715 Compensation – Retirement benefits

710-10 Compensation- General – Overall

712-10 Compensation – Nonretirement Postemployment Benefits – Overall

IAS 19 Employee Benefits

IFRIC 14 The limit on a defined benefit asset minimum funding requirements and their interaction

Introduction

The guidance under US GAAP and IFRS as it relates to employee benefits contains some significant differences with potentially far-reaching implications.

This narrative deals with employee benefits provided under formal plans and agreements between an entity and its employees, under legislation or through industry arrangements, including those provided under informal practices that give rise to constructive obligations.

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