Recognition and measurement

IFRS 18 Presentation and Disclosure in Financial Statements – Best read

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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.
    • 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.

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Example accounting policies

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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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Accounting for mergers – Best 2 Read

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Accounting for mergers

Mergers and acquisitions (business combinations) can have a fundamental impact on the acquirer’s operations, resources and strategies. For most entities such transactions are infrequent, and each is unique. IFRS 3 ‘Business Combinations’ contains the requirements for accounting for mergers, which are challenging in practice.

This narrative provides a high-level overview of IFRS 3 and explains the key steps in accounting for business combinations in accordance with this Standard. It also highlights some practical application issues dealing with:

  • how to avoid unintended accounting consequences when bringing two businesses together, and
  • deal terms and what effect they can have on accounting for business combinations.

The acquisition method in accounting for mergers

IFRS 3 establishes the accounting and reporting requirements (known as ‘the acquisition method’) for the acquirer in a business combination. The key steps in applying the acquisition method are summarised below:

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Equity – 2 understand it all at best

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Equity

There are, at least, two ways to discuss equity:

  • Equity is the residual interest in the assets of the entity after deducting all its liabilities, or
  • An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

But also:

1. Equity the residual interest in the assets of the entity after deducting all its liabilities

1. Statement of Financial Position

Assets

Equity and liabilities

1. Non-current assets

2. Current assets

Help

Help

A – TOTAL ASSETS [1 + 2] = B

3. Non-current liabilities (including Provisions)

4. Current liabilities (including Provisions)

5. Equity [1 + 2 -/- 3 -/- 4]

Help

B – TOTAL EQUITY AND LIABILITIES [3 + 4 + 5] = A

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Definition of provision – IAS 37 Complete easy read

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Definition of provision

The definition of provision is key to IAS 37. A provision is a liability of uncertain timing or amount, meaning that there is some question over either how much will be paid or when this will be paid. In the past, these uncertainties may have been exploited by companies trying to ‘smooth profits’ in order to achieve the results they believe that their various stakeholder may want.

As part of the attempt of IASB to further restrict this type of earnings management within IFRSs, IASB adopted an update of IAS 37 in April 2001 originating from September 1998. IAS 37 was further updated for Onerous contracts – Costs of fulfilling a contract in May 2020.

IAS 37: ‘Onerous Contracts – Cost of Fulfilling a Contract’

lAS 37 defines an onerous contract as one in which the unavoidable costs of meeting the entity’s obligations exceed the economic benefits to be received under that contract. Unavoidable costs are the lower of the net cost of exiting the contract and the costs to fulfil the contract. The amendment clarifies the meaning of ‘costs to fulfil a contract’.

The amendment explains that the direct cost of fulfilling a contract comprises:

The amendment also clarifies that, before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract.

The amendment could result in the recognition of more onerous contract provisions, because previously some entities only included incremental costs in the costs to fulfil a contract.

The key definition of provision

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11 Best fair value measurements under IFRS 13

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11 Best fair value measurements under IFRS 13

Several IFRS standards provide guidance regarding the scope and application of the fair value option for assets and liabilities. Here they are from 1 to 11…….

1 Investments in associates and joint ventures

Investments held by venture capital organizations and the like are exempt from IAS 28’s requirements only when they are measured at fair value through profit or loss (FVPL) in accordance with IFRS 9. Changes in the fair value (FV) of such investments are recognized in profit or loss in the period of change.

The IASB acknowledged that FV information is often readily available in venture capital organizations and entities in similar industries, even for start-up and non-listed entities, as the methods and basis for fair value measurement are well established. The IASB also confirmed that the reference to well-established practice is to emphasize that the exemption applies generally to those investments for which fair value is readily available.

2 Intangible assets

Subsequent to initial recognition of intangible assets, an entity may adopt either the cost model or the revaluation model as its accounting policy. The policy should be applied to the whole of a class of intangible assets and not merely to individual assets within a class11 Best fair value measurements under IFRS 13, unless there is no active market for an individual asset.

The revaluation model may only be adopted if the intangible assets are traded in an active market; hence it is not frequently used. Further, the revaluation model may not be applied to intangible assets that have not previously been recognized as assets. For example, over the years an entity might have accumulated for nominal consideration a number of licenses of a kind that are traded on an active market. 11 Best fair value measurements under IFRS 13

The entity may not have recognized an intangible asset as the licenses were individually immaterial when acquired. If market prices for such licenses significantly increased, the value of the licenses held by the entity would substantially increase. In this case, the entity would be prohibited by IAS 38 from applying the revaluation model to the licenses, because they were not previously recognized as an asset.

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EPS in IAS 33

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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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What Is Fintech reporting IFRS 15

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What Is Fintech or Financial Technology And Its Benefits?

New and fast-growing technologies like Financial Technology or Fintech have the potential benefits to collect and process data in real-time. This transforms how all businesses are working, how products and services are creating in the new economy, and how customers are engaging in this process. Every professional and commercial industry is affecting due by this change in workflows and business processes. The financial and economic sector is no exception.

Financial Technology or Fintech?

Fintech, short for Financial Technology, is a growing field and is now an economic revolution by the tech-savvy. It is the development of new technology to transform traditional institutions such as banks and insurance companies by uplift how they handle their finances and economic services. The process is not only digitizing money but also monetizing data to fit into the digitized world.

FinTech solutions have huge potential benefits for all businesses, especially new and existing small businesses. Small and medium-sized enterprises (SMEs) are essential for economic maturity and employment. However, others may find it difficult to get the financing they need to survive and thrive.

Example

Automated drafting of portfolio management commentaries – Analytics & Reporting (October 2018, Societe Generale Securities Services)

Addventa Fintech exclusive partnership for automated drafting of portfolio management commentaries based on artificial intelligence solutions.

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Disclosure Financial risk management

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Disclosure Financial risk management

Disclosure financial risk management provides the guidance on the need for disclosure of the management policies, procedures and measurement practices in place at the operations within the reporting entity’s group of companies and an actual example of disclosures for financial risk management.

Disclosure Financial risk management guidance

Classes of financial instruments

Where IFRS 7 requires disclosures by class of financial instrument, the entity shall group its financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. The classes are determined by the entity and are therefore distinct from the categories of financial instruments specified in IFRS 9. Disclosure Financial risk management

As a minimum, the entity should distinguish between financial instruments measured at amortised cost and those measured at fair value, and treat as separate class any financial instruments outside the scope of IFRS 9. The entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet. Guidance on classes of financial instruments and the level of required disclosures is provided in Appendix B to IFRS 7. [IFRS 7.6, IFRS 7.B1-B3]

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