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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Disclosure Corporate Income Tax

Disclosure Corporate Income Tax

– provides guidance on the disclosure requirements under IFRS for IAS 12 income tax and provides a comprehensive example of a potential disclosures for these income taxes/corporate income tax.

Disclosure corporate income tax – Guidance

Relationship between tax expense and accounting profit

Entities can explain the relationship between tax expense (income) and accounting profit by disclosing reconciliations between: [IAS 12.81(c), IAS 12.85]

  1. tax expense and the product of accounting profit multiplied by the applicable tax rate, or
  2. the average effective tax rate and the applicable tax rate.

The applicable tax rate can either be the domestic rate of tax in the country in which the entity is domiciled, or it can be determined by aggregating separate reconciliations prepared using the domestic rate in each individual jurisdiction. Entities should choose the method that provides the most meaningful information to users.

Where an entity uses option (a) above and reconciles tax expense to the tax that is calculated by multiplying accounting profit with the applicable tax rate, the standard does not specify whether the reconciliation should be done for total tax expense, or only for tax expense attributable to continuing operations. While RePorting Co. Plc is reconciling total tax expense, it is equally acceptable to use profit from continuing operations as a starting point.

Initial recognition exemption – subsequent amortisation

The amount shown in the reconciliation of prima facie income tax payable to income tax expense as ‘amortisation of intangibles’ represents the amortisation of a temporary difference that arose on the initial recognition of the asset and for which no deferred tax liability has been recognised in accordance with IAS 12.15(b). The initial recognition exemption only applies to transactions that are not a business combination and do not affect either accounting profit or taxable profit.

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Notes to the financial statements

Notes to the financial statements that contain information in addition to the statement of financial position, of financial performance, of changes in equity

Disclosure of operating segments

Disclosure of operating segments – The disclosures regarding operating segments focus on the information that management believes is important when running the business. The disclosure requirements are summarised below.

Information required

Disclosures

General information

  • Factors used to identify the reportable segments. Disclosure of operating segments
  • Types of product/service from which each reportable segment derives its revenue.

Information about the reportable segment; profit or loss, revenue, expenses, assets, liabilities and the basis of measurement

  • A measure of profit or loss and total assets. Disclosure of operating segments
  • A number of specific disclosures, such as revenues from external customers if they are included in segment profit or loss and presented regularly to the CODM. Disclosure of operating segments
  • Explanation
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What are Alternative performance measures?

What are Alternative performance measuresWhat are Alternative performance measures – Alternative performance measures (APMs) may supplement Generally Accepted Accounting Principles (GAAP) reporting, and often represent an effective way of communicating important entity specific developments.

However, APMs need to be defined using appropriate descriptions and disclosures to avoid the risk of misleading the users of the financial reports.

Regulators in many jurisdictions have issued guidelines for the use of APMs that are helpful benchmarks when developing communication strategies and preparing financial reports. Entities can use these guidelines, both for compliance purposes and to facilitate effective communication.

Background

Financial statements are the cornerstone of financial reporting for entities. In addition to GAAP measures, management often uses a variety of other financial measures to communicate information about Read more

Presentation Insurance contracts

Presentation Insurance contractsPresentation Insurance contracts – IFRS 17 specifies minimum amounts of information that need to be presented on the face of the statement of financial position and statement of financial performance. These are supplemented by disclosures to explain the amounts recognized on the face of the primary financial statements (see ‘Disclosure of Insurance contracts’).

IFRS 17 requires separate presentation of amounts relating to insurance contracts issued and reinsurance contracts held in the primary statements. There is nothing to prevent an entity from providing further sub-analysis of the required line items (which may make the relationship of the reconciliations to the face of the statement of financial position more understandable).

Indeed, IAS 1 Presentation of Financial Statements requires presentation of additional line Read more

Disclosure recognised insurance amounts

Disclosure recognised insurance amountsDisclosure recognised insurance amounts

or the clarification and explanation of recognised insurance amounts for a complex industry – insurance. An entity is required to disclose the following:

  • Reconciliations that show how the net carrying amount of contracts within the scope of IFRS 17 changed during each period (see 1 below)
  • Disclosures for contracts other than those to which the entity applies the premium allocation approach:
    • Analysis of insurance revenue recognized in the period for contracts (see 2 below) Disclosure recognised insurance amounts
    • Analysis of the effect of contracts initially recognized in each period (see 3 below) Disclosure recognised insurance amounts
    • Explanation of when the entity expects to recognize the contractual service margin (CSM) at
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Disclosure requirements IFRS 4 and IFRS 17

Disclosure requirements IFRS 4 and IFRS 17 – Explanation of recognized amounts from IFRS 4 to IFRS 17

1 Introduction Disclosure requirements IFRS 4 and IFRS 17

[IFRS 17 (98), IFRS 17 (93)-(96)]

Disclosure requirements IFRS 4 and IFRS 17IFRS 4 requires an entity to disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts. In order to comply with this objective, IFRS 4 outlines what should be disclosed regarding reconciliations, policies, methods and processes but provides limited guidance on how these disclosure requirements should be met.

IFRS 17 requirements are much more extensive. It requires the entity to provide specific reconciliations showing how the net carrying amounts of insurance contracts changed during the period as a Read more

First time adoption IFRS Introduction

First time adoption IFRS IntroductionFirst time adoption IFRS Introduction – It is not only about IFRS 1 when an entity prepares its first IFRS financial statements, but also about some other IFRS because IFRS 1 references to these IFRS standards. Therefore, entities will need to consider the following standards in their first time adoption review process:

IFRS 1 sets out detailed rules that entities must follow when adopting IFRS for the first time. The standard also sets out a number of exemptions that may be applied when adopting IFRS.

If an entity wishes to apply either of these exemptions a full audit Read more

Disclosures in First IFRS Financial statements

Disclosures in First IFRS Financial statements – A first-time adopter must apply all of the presentation and disclosure requirements in IFRSs. IFRS Reference: [IFRS 1, paras 20, 23 – 27A, 29 – 31B]

The first-time adopter must also explain how the transition from previous GAAP to IFRSs affected its reported financial position, financial performance and cash flows. As a result, an entity’s first IFRS financial statements must include the following reconciliations:

Note that the dates presented are examples for an entity with a calendar year end (adopting IFRS in 20X3) that presents only one comparative period.

Nature of disclosure

Comparative year ended December 31, 20×2

Opening as at January 1, 20×2

Reconciliation of equity as at:

  • the date of transition
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