IFRS 18 Presentation and Disclosure in Financial Statements – Best read

IFRS 18 Presentation and Disclosure in Financial Statements

The IASB’s newly issued standard IFRS 18 mainly deals with the presentation of the income statement, balance sheet and certain footnotes. At the same time, certain aspects of the cash flow statement are modified. IFRS 18 does not change the recognition and measurement of the components of financial statements; therefore, the amounts reported as shareholders’ equity and net income are both unchanged. However, it will have a significant impact on the presentation and disaggregation of what is reported (primarily in the income statement and footnotes), including what subtotals companies must provide and how these are defined.

There are five main areas where we think the new standard will help investors as users of IFRS Financial Statements:IFRS 18 Presentation and Disclosure in Financial Statements

Operating–Investing–Financing classification

IFRS 18 aims to establishes a structured statement of profit or loss by implementing the following measures:

  • It introduces three defined categories for income and expenses: operating, investing, and financing.
    • Operating – income/expenses resulting from the company’s main business operations.
    • Investingincome/expenses from:
      • investments in associates, joint ventures and unconsolidated subsidiaries;
      • cash and cash equivalents;
      • assets that generate a return individually and largely independently (e.g. rental income from investment properties).
    • Financing – consisting of:
      • income/expenses from liabilities related to raising finance only (e.g. interest expense on borrowings); and
      • interest income/expenses and effects of changes in interest rates from other liabilities (e.g. interest expense on lease liabilities).
  • It mandates to present new defined totals and subtotals, including operating profit, thereby enhancing the clarity and consistency of financial reporting.

Entities primarily engaged in investing in assets or providing finance to customers are subject to specific categorisation requirements. This entails that additional income and expense items, which would typically be classified as investing or financing activities, are instead categorised under operating activities. Consequently, operating profit reflects the outcomes of an entity’s core business operations. Identifying the main business activity involves exercising judgment based on factual circumstances.

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Cash flows from discontinued operations IFRS 5 – 2 Detailed Examples

 Cash flows from discontinued operations – Detailed Examples

IAS 7 requires an entity to include all of its cash flows in the statement of cash flows, including those generated from both continuing and discontinued activities.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations requires an entity to disclose its net cash flows derived from operating, investing and financing activities in respect of discontinued operations. There are two ways in which this can be achieved:

===1) Presentation in the statement of cash flows

Net cash flows from each type of activity (operating, investing and financing) derived from discontinued operations are presented separately in the statement of cash flows.

===2) Presentation in a note

Cash flows from discontinued operations are included together with cash flows from continuing operations in each line Cash flows from discontinued operationsitem in the statement of cash flows. The net cash flows relating to each type of activity (operating, investing and financing) derived from discontinued operations are then disclosed separately in a note to the financial statements.

When a disposal group that meets the definition of a discontinued operation is classified as held for sale in the current period, and has not been realised/disposed of at the entity’s reporting date, the closing balance of cash and cash equivalents presented in the statement of cash flows will not reconcile to the cash and cash equivalents balances that are included in the statement of financial position at the reporting date.

This is because the cash and cash equivalents related to the disposal group are subsumed into the assets and liabilities of the disposal group and presented within the single line item in the statement of financial position.

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Convertible instruments in EPS calculations – 2 good to read

Convertible instruments in EPS calculations

Convertible instruments are instruments other than stand-alone options that by their terms may be converted in whole or in part into the ordinary shares of an entity, such as convertible bonds or convertible preference 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).

If these instruments fall in the scope of IAS 32 Financial Instruments: Presentation, then they can contain a derivative recognised at fair value through profit or loss, a financial liability and/or equity components, depending on their terms. For example, a bond with an embedded option to convert it into ordinary shares of the issuer is a compound instrument, containing a financial liability and an equity component, if the conversion option is classified as equity. [IAS 32.26–32]

Although this is less common, a convertible instrument may fall in the scope of IFRS 2 Share-based Payment if it is issued in exchange for goods or services. In this case, the convertible instrument is generally regarded as a share-based payment with a choice of settlement. If the entity has the settlement choice, then the instrument is classified as either equity-settled or cash-settled, depending on whether the entity has a present obligation to settle in cash. If the holder has the settlement choice, then the instrument is classified as a compound instrument. [IFRS 2.34–43]

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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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Contingently issuable POSs

Contingently issuable POSs

Contingently issuable POSs are not specifically defined in IAS 33, but they are closely related to contingently issuable ordinary shares (see Other contingencies in EPS and Contingently issued ordinary shares). These are POSs that are issuable for little or no cash or other consideration on the satisfaction of specified conditions. An example is a contingently issuable convertible instrument. [IAS 33.57]

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).

EPS implications

Generally, by their nature contingently issuable POSs do not impact basic EPS. However, these instruments generally do impact diluted EPS and, similar to contingently issuable ordinary shares, their impact depends on the extent to which the specified conditions are met at the reporting date.

Potential impact on basic EPS

Potential impact on diluted EPS

The numerator is not affected, the denominator might or might not be affected.

The numerator might or might not be affected, the denominator is affected.

By their nature, contingently issuable POSs are generally ignored in basic EPS. This is because, on satisfying the specified conditions, POSs – as opposed to ordinary shares – will be issued, and these would not generally result in outstanding ordinary shares until they are exercised or otherwise converted. However, if any options that are contingently issuable can be exercised immediately for little or no further consideration, then the resulting options are included in the denominator from the vesting date (see EPS Implications).

IAS 33 prescribes a two-step approach for determining whether a contingently issuable POS is included in diluted EPS. [IAS 33.57]

Step i. Should the contingently issuable POS be assumed to be issuable?

This is the same assessment as that for contingently issuable ordinary shares (see EPS Implications and How to apply the test for different conditions in a contingent share agreement) – i.e. if the reporting date were the end of the contingency period, then would the POS be issuable? If the instrument passes the test in Step (i), then Step (ii) is applied.

Step ii. What is the impact on diluted EPS?

This is different from the requirements for contingently issuable ordinary shares. As opposed to including in the denominator the number of ordinary shares that would be issuable, the impact is determined based on the relevant guidance in IAS 33 for the type of POS in question – that is:

Dilutive or anti-dilutive?

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Ordinary shares issued and EPS

Ordinary shares issued and EPS

Ordinary shares issued and EPS summarises the effects of three events involving share issued on EPS calculations including comprehensive examples:

Ordinary shares issued to settle liabilities

This chapter deals with ordinary shares issued to fully or partially extinguish a financial or non-financial liability, as a result of a renegotiation of the terms of the liabilities.

This chapter does not deal with:

EPS implications

Generally, ordinary shares issued to settle liabilities impact only basic EPS.

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Preference shares in EPS Calculations

Preference shares in EPS Calculations

Preference shares may in accordance with IAS 32 Financial Instruments: Presentation be classified as a whole or by their component parts into a financial liability and/or an equity instrument, depending on their terms. They may be convertible into 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).

An entity needs to consider whether equity-classified preference shares are a class of ordinary shares. If the entity has more than one class of ordinary shares, then it is required to present EPS for each class. Ordinary shares of the same ‘class’ are those shares that have the same right to receive dividends or otherwise share in the profit for the period. Additional considerations for classes of ordinary shares are set out below in classes of ordinary shares. [IAS 33.5–6]

EPS implications

Generally, how preference shares are dealt with in EPS depends on their accounting classification as liabilities or equity instruments, and whether they are convertible into ordinary shares.

Preference shares in EPS Calculations

Potential impact on basic EPS

Potential impact on diluted EPS

The numerator might or might not be affected and the denominator is not affected.

The numerator and the denominator might or might not be affected.

Preference shares that are wholly classified as liabilities under IAS 32 are not ordinary shares. The returns to the holders of these shares – e.g. post-tax amounts of preference dividends – have generally been recognised in profit or loss and therefore no further adjustment to the numerator is necessary. [IAS 33.13]

For preference shares that are wholly or partly classified as equity instruments under IAS 32, the numerator is adjusted for any returns to the holders of these shares, which include the post-tax amounts of preference dividends and any differences arising on settlement. For additional considerations and examples of adjustments for equity-classified preference shares in basic EPS. [IAS 33.12]

In addition, separate disclosure of EPS amounts is required for equity-classified preference shares that form a separate class of ordinary shares. [IAS 33.66]

Preference shares that are convertible into ordinary shares, other than those that are mandatorily convertible, are POSs (see Convertible instruments).

For equity-classified convertible preference shares, the potential adjustment:

  • to the numerator includes the returns to the holders of these shares adjusted in the calculation of basic EPS (see left); and
  • to the denominator is based on the additional ordinary shares resulting from the assumed conversion.

Conversion is assumed to have occurred at the beginning of the period (or, if later, the date of issuance of the convertible preference shares).

For liability-classified convertible preference shares, the potential adjustment:

  • to the numerator includes the post-tax amount of any dividends and other consequential changes in income or expense that would result from the assumed conversion; and
  • to the denominator is based on the additional ordinary shares resulting from the assumed conversion.

Conversion is assumed to have occurred at the beginning of the period (or, if later, the date of issuance of the convertible preference shares). For an example of adjustments for convertible instruments containing a liability component, see contracts settled in shares or cash.

Dilutive or anti-dilutive?

Generally, a convertible preference share is anti-dilutive whenever the amount of the dividend on such shares declared in or accumulated for the current period and any other required adjustment to the numerator per ordinary share obtainable on conversion exceeds basic EPS from continuing operations. [IAS 33.50]

Classes of ordinary shares

If an entity has more classes of ordinary shares, then EPS is disclosed for each class of ordinary shares that has a different right to share in the profit for the period. Therefore, for an entity that applies IAS 33, it is important to identify which of the instruments in issue are ordinary shares and to determine if there is more than one class of ordinary shares. (IAS 33.66)

IAS 33 defines an ‘ordinary share’ as ‘an equity instrument that is subordinate to all other classes of equity instruments’. It also explains that ordinary shares participate in profit for the period only after other types of shares such as preference shares have participated, and that ordinary shares of the same class are those shares that have the same right to receive dividends or otherwise share in the profit for the period. (IAS 33.5–6)

If an entity has shares with different rights, then it considers whether all of the shares are in fact ordinary shares. Consider the following contrasting examples.

Case – Two classes of ordinary shares

Company X has two classes of shares, A and B. The holders of class B shares are entitled to dividends equal to 50% of any dividends declared on the class A shares, but the shares are otherwise identical to class A shares. Both classes are subordinate to all other classes of equity instruments with respect to participation in profit.

In this case, X concludes that both class A and class B shares are ordinary shares despite the difference in entitlement to dividends. Disclosure of separate EPS amounts is therefore required for both class A and class B ordinary shares.

In general, an entity is not required to present separate EPS information for participating preference shares that are not considered to be a separate class of ordinary shares.

Case – Participating preference shares that are not ordinary shares

Company C has two classes of shares, X and Y. Shareholders of class X are entitled to a fixed dividend per share and have the right to participate in any additional dividends declared. The class Y shareholders participate equally with class X shareholders with respect to the additional dividends only.

In this example, C concludes that class X shares are not considered to be ordinary, because the fixed entitlement creates a preference over the class Y shares, and the class Y shareholders are subordinate to the class X shareholders. This is even if both classes participate equally in the residual assets of C on dissolution.

The class Y shares are the only class of ordinary shares, and therefore the only class of shares for which disclosure of EPS information is required. However, the participating rights of each class of these shares should be considered in determining earnings attributable to ordinary shareholders.

In general, puttable instruments that qualify for equity classification instead of financial liability classification under IAS 32 Financial Instruments: Presentation are not ordinary shares for the purposes of IAS 33. We believe that it is not appropriate to apply by analogy the limited scope exemption under IAS 32 for EPS calculation purposes. (IAS 32.16A–16F)

The EPS presentation is not required for, or as a result of the existence of, such instruments. However, when determining the earnings that are attributable to the ordinary shareholders, the terms of these instruments should be evaluated to determine if they are participating instruments.

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

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Preference shares in EPS Calculations

Contingently issuable ordinary shares for IAS 33 EPS

Contingently issuable ordinary shares

For EPS purposes, contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other consideration on the satisfaction of specified conditions in a contingent share agreement. [IAS 33 Definition]

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).

These conditions do not include service conditions under IFRS 2 Share-based Payment and the passage of time. Therefore, shares that are issuable subject only to the passage of time, and unvested shares and options that require only service for vesting, are not considered contingently issuable. A different set of requirements applies to shares that are subject only to a service condition for vesting (see Unvested ordinary shares and EPS). [IAS 33.21(g), IAS 33.24, IAS 33.48]

Contingently issuable ordinary shares, as discussed in this chapter, are commonly seen in the context of share-based payment arrangements with performance conditions (including market and non-market performance conditions), or contingent consideration in business combinations. Additional considerations in the context of share-based payment arrangements are set out in EPS Impact and Share-based payments.

Although it is not specifically defined in IAS 33, a related class of instruments is contingently issuable POSs (see Contingently issuable ordinary shares).

EPS implications

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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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