IFRS 18 Presentation and Disclosure in Financial Statements – Best read

07/05/2024 by 75385885

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:

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.
- Investing – income/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.

IFRS 2022 update – Classification of non-current liabilities with covenants – Best read

18/03/202317/12/2022 by 75385885

Overview – IFRS 2022 update – Classification of non-current liabilities with covenants

In October 2022, the IASB issued amendments that clarify that only covenants with which an entity must comply on or before the reporting date will affect a liability’s classification as current or non-current. IFRS 2022 update – Classification of non-current liabilities with covenants

Additional disclosures are required for non-current liabilities arising from loan arrangements that are subject to covenants to be complied with within twelve months after the reporting period.

The amendments will be effective for annual reporting periods beginning on or after 1 January 2024, with early application permitted. IFRS 2022 update – Classification of non-current liabilities with covenants

Why this change?

In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 (the 2020 amendments) to specify the requirements for classifying liabilities as current or non-current. A key requirement of the 2020 amendments was that entities with liabilities that are subject to covenants to be complied with at a date subsequent to the reporting period (“future covenants”) do not have the right to defer settlement of the liabilities at the end of the reporting period if they do not comply with the covenants at that date. IFRS 2022 update – Classification of non-current liabilities with covenants

Stakeholders were concerned about the impact of this proposal and, as a result, the IFRS Interpretations Committee (the Committee) published a tentative agenda decision (TAD) in December 2020 explaining how to apply the proposal to three fact patterns. The Committee agreed with the concerns raised in comment letters responding to the TAD about the consequences of the 2020 amendments for certain scenarios and reported them to the Board. On that basis, the Board proposed amendments in November 2021, which, after further adjustments, resulted in the amendments issued in October 2022 (the 2022 amendments). IFRS 2022 update – Classification of non-current liabilities with covenants

Control of an economic resource

04/01/202204/01/2022 by 75385885

Control of an economic resource – This is all about: A present economic resource controlled by the entity as a result of past events. Two very simple examples to start with: Pat Co has purchased a patent for $20,000. The patent gives the company sole use of a particular manufacturing process which will save $3,000 a year for the next five years. This is an asset, albeit an intangible one. There is a past event, control and future economic benefit (through cost savings). Baldwin Co (the company) paid Don Brennan $10,000 to set up a car repair shop, on condition that priority treatment is given to cars from the company’s fleet. This cannot be classified as an asset. Baldwin Co … Read more

Example accounting policies

21/09/202107/06/2021 by 75385885

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 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.

The Statement of Cash Flows

16/09/202111/09/2019 by 75385885

Statement of Cash Flows

IAS 7.10 requires an entity to analyse its cash inflows and outflows into three categories:

Operating;
Investing; and
Financing.

IAS 7.6 defines these as follows:

‘Operating activities are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.’

‘Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.’

‘Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.’

1. Operating activities

It is often assumed that this category includes only those cash flows that arise from an entity’s principal revenue producing activities.

However, because cash flows arising from operating activities represents a residual category, which includes any cash flows that do not qualify to be recorded within either investing or financing activities, these can include cash flows that may initially not appear to be ‘operating’ in nature.

For example, the acquisition of land would typically be viewed as an investing activity, as land is a long-term asset. However, this classification is dependent on the nature of the entity’s operations and business practices. For example, an entity that acquires land regularly to develop residential housing to be sold would classify land acquisitions as an operating activity, as such cash flows relate to its principal revenue producing activities and therefore meet the definition of an operating cash flow.

2. Investing activities

An entity’s investing activities typically include the purchase and disposal of its intangible assets, property, plant and equipment, and interests in other entities that are not held for trading purposes. However, in an entity’s consolidated financial statements, cash flows from investing activities do not include those arising from changes in ownership interest of subsidiaries that do not result in a change in control, which are classified as arising from financing activities.

It should be noted that cash flows related to the sale of leased assets (when the entity is the lessor) may be classified as operating or investing activities depending on the specific facts and circumstances.

Acquisitions and mergers as per IFRS 3

14/09/2021 by 75385885

Acquisitions and mergers

Acquisitions and mergers are becoming more and more common as entities aim to achieve their growth objectives. IFRS 3 ‘Business Combinations’ contains the requirements for these transactions, which are challenging in practice.

This narrative sets out how an entity should determine if the transaction is a business combination, and whether it is within the scope of IFRS 3.

Identifying a business combination

IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.

An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see case below).

Case – Straightforward business combination

Entity T is a clothing manufacturer and has traded for a number of years. Entity T is deemed to be a business.

On 1 January 2020, Entity A pays CU 2,000 to acquire 100% of the ordinary voting shares of Entity T. No other type of shares has been issued by Entity T. On the same day, the three main executive directors of Entity A take on the same roles in Entity T.

Consider this…..

Entity A obtains control on 1 January 2020 by acquiring 100% of the voting rights. As Entity T is a business, this is a business combination in accordance with IFRS 3.

However, a business combination may be structured, and an entity may obtain control of that structure, in a variety of ways.

Purchased and originated credit-impaired financial assets – IFRS 9 Best Read

04/09/202126/02/2019 by 75385885

Purchased and originated credit-impaired financial assets

Purchased and originated credit-impaired financial assets are those for which one or more events that have a detrimental impact on the estimated future cash flows have already occurred. If these financial assets had been originated or purchased before becoming credit impaired, they would be in Stage 3 and lifetime expected losses would be recognised.

Purchased and originated credit-impaired financial assets Indicators that an asset is credit-impaired would include observable data about the following events:

Significant financial difficulty of the issuer or the borrower
Breach of contract,
The lender has granted concessions as a result of the borrower’s financial difficulty which the lender would not otherwise consider,
It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation,
The disappearance of an active market for that financial asset because of financial difficulties,
The financial asset is purchased or originated at a deep discount that reflects the incurred credit losses.

It may not be possible to identify a single discrete event. It could be the combined effect of several events may have caused financial assets to become credit-impaired.

Food for thought – Interaction between definitions of ‘credit-impaired’ and ‘default’

The definition of ‘credit-impaired’ under IFRS 9 may differ from the entity’s definition of ‘default’ (see explanation here). However, an entity’s definition of default should be consistent with its credit risk management, and should consider qualitative factors. For example, many financial institutions apply regulatory definitions of default for accounting and regulatory purposes – e.g. those issued by the Basel Committee on Banking Supervision under which a default is considered to have occurred when it is unlikely that the obligor will be able to repay its obligation. The assessment of whether such a definition is met may be based on similar criteria to those used for assessing whether an asset is credit-impaired. In these cases, the asset would be considered to be in default when it is credit-impaired. (IFRS 9.5.5.37)

Employee share purchase plans

08/07/2021 by 75385885

In an ESPP, the employees are usually entitled to buy shares at a discounted price. The terms and conditions can vary significantly and some ESPPs include option features. (IFRS 2.IG17)

In my view, the predominant feature of the share-based payment arrangement determines the accounting for the entire fair value of the grant. That is, depending on the predominant features, a share purchase plan is either a true ESPP or an option plan.

All of the terms and conditions of the arrangement should be considered when determining the type of equity instruments granted and judgement is required. The determination is important because the measurement and some aspects of the accounting for each are different (see below).

Options are characterised by the right, but not the obligation, to buy a share at a fixed price. An option has a value (i.e. the option premium), because the option holder has the benefit of any future gains and has none of the risks of loss beyond any option premium paid. The value of an option is determined in part by its duration and by the expected volatility of the share price during the term of the option.

In my view, the principal characteristic of an ESPP is the right to buy shares at a discount to current market prices. ESPPs that grant short-term fixed purchase prices do not have significant option characteristics because they do not allow the grant holder to benefit from volatility. I believe that ESPPs that provide a longer-term option to buy shares at a specified price are, in substance, option plans, and should be accounted for as such. (IFRS 2.B4-B41)

Examples of other option features that may be found in ESPPs are: (IFRS 2.IG17)

ESPPs with look-back features, whereby the employees are able to buy shares at a discount, and choose whether the discount is applied to the entity’s share price at the date of the grant or its share price at the date of purchase;
ESPPs in which the employees are allowed to decide after a significant period of time whether to participate in the plan; and
ESPPs in which employees are permitted to cancel their participation before or at the end of a specified period and obtain a refund of any amounts paid into the plan.

Determination of grant date in IFRS 2

08/07/2021 by 75385885

Determination of grant date

The determination of grant date is important because this is the date on which the fair value of equity instruments granted is measured. Usually, grant date is also the date on which recognition of the employee cost begins. However, this is not always the case (Service commencement date and grant date in Determination of the vesting period).

‘Grant date’ is the date at which the entity and the employee agree to a share-based payment arrangement, and requires that the entity and the employee have a shared understanding of the terms and conditions of the arrangement. (IFRS 2.A)

In order for the employer and the employee to ‘agree’ to a share-based payment transaction, there needs to be both an offer and an acceptance of that offer. (IFRS 2.IG2)

Approval and communication by the employer

If the agreement is subject to an approval process, then the grant date cannot be before the date on which that approval is obtained. If a grant is made subject to approval – e.g. by a board of directors – then the grant date is normally when that approval is obtained.

The arrangement also needs to be communicated to the employees to achieve grant date.

In a broad-based unilateral grant of a share-based payment, there is often a period of time between board approval and communication of the terms of the award to individual employees. In some entities, the terms and conditions of the awards are communicated to each employee by their direct supervisor. Because of the varying schedules of employees and employers, it is possible that different employees may be informed of their awards on different dates.

Determination of the vesting period in IFRS 2

08/07/2021 by 75385885

Determination of the vesting period

Service commencement date and grant date – The ‘vesting period’ is the period during which all of the specified vesting conditions are to be satisfied in order for the employees to be entitled unconditionally to the equity instrument. Normally, this is the period between grant date and the vesting date. (IFRS 2.A)

However, services are recognised when they are received and grant date may occur after the employees have begun rendering services. Grant date is a measurement date only. If grant date occurs after the service commencement date, then the entity estimates the grant-date fair value of the equity instruments for the purpose of recognising the services from the service commencement date until grant date.

A possible method of estimating the fair value of the equity instruments is by assuming that grant date is at the reporting date. Once grant date has been established, the entity revises the earlier estimates so that the amounts recognised for services received are based on the grant-date fair value of the equity instruments. In our view, this revision should be treated as a change in estimate. (IFRS 2.IG4, IGEx1A, IGEx2)

Case – Service commencement date before grant date

Determination of the vesting period

On 1 January Year 1, Company B sets up an arrangement in which the employees receive share options, subject to a four-year service condition. The total number of equity instruments granted will be determined objectively based on B’s profit in Year 1. The total number of options will be allocated to employees who started service on or before 1 January Year 1.

Significant subjective factors are involved in determining the number of instruments allocated to each individual employee and B concludes that grant date should be postponed until the outcome of the subjective evaluations is known in April Year 2 – i.e. subsequent to the approval of the financial statements for the reporting period ending 31 December Year 1.

Because the subjective factors are determined only in April Year 2, grant date cannot be before this date. However, in this case there is a clearly defined performance period, commencing on 1 January Year 1, which indicates that the employees have begun rendering their services before grant date. Accordingly, B recognises the cost of the services received from the date on which service commences – i.e. 1 January Year 1.

The estimate used in the Year 1 financial statements is based on an estimate of the fair value, assuming that grant date is 31 December Year 1. This estimate will be revised in April Year 2 when the fair value at grant date is determined.

Assume that B estimates on 31 December Year 1 that the grant-date fair value of an equity instrument granted will be 10 and the actual fair value on grant date of April Year 2 is 9. Based on preliminary profit figures, B further estimates at 31 December Year 1 that the total number of equity instruments granted will be 100, which is confirmed by the final profit figure. If all instruments are expected to and actually do vest, then the accounting is as follows.

Determination of the vesting period

Notes

1. 100 x 10.
2. 100 x 9.
3. 1,000 x 1/4.
4. 900 x 2/4.
5. 900 x 3/4.
6. 900 x 4/4.