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.

Accounting for Business combinations cash flows

17/09/2021 by 75385885

Accounting for Business combinations cash flows

1. Presentation and disclosure of cash paid/acquired in a business combination

When an entity acquires a business and part or all of the consideration is in cash or cash equivalents, part of the net assets acquired may include the acquiree’s existing cash balance. This results in different amounts being presented in the statement of cash flows and the notes to the financial statements.

IAS 7.39 and 42 require the net cash flows arising from gaining or losing control of a business, to be classified as arising from investing activities. Consequently, the statement of cash flows will not include the gross cash flows arising from the acquisition, and will instead show a single net amount. IAS 7.40 then requires the gross amounts to be disclosed in the notes.

The disclosures required by IFRS 3 Business Combinations include:

The acquisition date fair value of total consideration transferred, analysed into each major class of consideration including the cash element (IFRS 3.B64(f)(i))
Major classes of assets and liabilities acquired, of which cash and cash equivalents would be a class (IFRS 3.B64(i)).

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.

Cash flows from discontinued operations IFRS 5 – 2 Detailed Examples

16/09/202116/09/2021 by 75385885

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 item 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.

Initial measurement financial instruments

10/09/2021 by 75385885

Initial measurement Financial instruments

IFRS 9 requires an entity to recognise a financial asset or liability on its balance sheet only when it becomes a party to the contractual provisions of the instrument.

Under IFRS 9 the requirements, on initial recognition, are that financial assets and financial liabilities are measured at (IFRS 9.5.1.1):

IFRS 9 classes	Fair value	Fair value plus eligible transaction costs
*Amortised cost*		√
*Fair value through other comprehensive income*		√
*Fair value though profit or loss*	√

IFRS 9 retained the guidance from IAS 39 that – the best evidence of fair value at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received for the financial instrument. (IFRS 9.5.1.1A, IFRS 9.B5.1.2A)

However, if this is not the case, any difference is accounted for in accordance with the substance of the transaction. If there is a difference between the entity’s estimate of fair value at initial recognition and the transaction price, then:

if the estimate of fair value uses only data from observable markets, then the difference is recognised in profit or loss; or
in all other cases, the difference is deferred as an adjustment to the carrying amount of the financial instrument.

The ‘which’ and ‘how’ of fair value measurement

Accounting for mergers – Best 2 Read

26/07/202117/06/2021 by 75385885

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:

Equity – 2 understand it all at best

06/07/2021 by 75385885

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:

For the purposes of IFRS 3, equityinterests is used broadly to mean ownership interests of investor-owned entities and owner, member or participant interests of mutual entities.
The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income.
An equity-settled share-based payment transaction is a share-based payment transaction in which the entity:
1. receives goods or services as consideration for its own equity instruments (including shares or share options), or
2. receives goods or services but has no obligation to settle the transaction with the supplier.

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

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

Change in ownership in a subsidiary – IFRS 10 Best complete read

30/06/2021 by 75385885

Change in ownership in a subsidiary

Accounting for a subsequent change in ownership in a subsidiary, i.e. a change in the parent’s ownership interest in a subsidiary may result from a purchase or sale of shares by the parent or from transactions between the subsidiary and non-controlling interests.

This narrative discusses the accounting for changes in ownership interests that:

do not result in loss of control of the subsidiary
do result in loss of control of the subsidiary

Change in ownership in a subsidiary that do not result in loss of control

Non-controlling interests (NCI) in a subsidiary are presented as a separate component of equity in the consolidated statement of financial position. Consequently, changes in a parent’s ownership interest in a subsidiary that do not result in loss of control are accounted for as equity transactions.

Parent’s accounting treatment:

When the NCI in a subsidiary changes but the same parent retains control: (IFRS 10.23, IFRS 10.B96)

no gain or loss is recognised when the parent sells shares (so increasing NCI)
a parent’s purchase of additional shares in the subsidiary (so reducing NCI) does not result in additional goodwill or other adjustments to the initial accounting for the business combination
in both situations, the carrying amount of the parent’s equity and NCI’s share of equity is adjusted to reflect changes in their relative ownership interest in the subsidiary. Any difference between the amount of NCI adjustment and the fair value of the consideration received or paid is recognised in equity, attributed to the parent [IFRS 10.B96]
the parent should also take the following into consideration:
- the allocated amounts of accumulated OCI (including cumulative exchange differences relating to foreign operations) are adjusted to reflect the changed ownership interests of the parent and the NCI. The re-attribution of accumulated OCI is similarly treated as an equity transaction (ie a transfer between the parent and the NCI)
- for a partial disposal of a subsidiary with foreign operations, the parent must re-attribute the proportionate share of cumulative exchange differences recognised in OCI to NCI in that foreign operation [IAS 21.48C]
- IFRS 10 has no specific guidance for costs directly related to changes in ownership interests. In our view, costs that are incremental should be deducted from equity (consistent with IAS 32’s rules on other types of transaction in the entity’s own equity).

Examples

Onerous

29/06/2021 by 75385885

This is an overview of the use of onerous in the IFRS Standards, the major Standard being IAS 37 (see below).

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

IAS 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. If an entity has a contract that is onerous the present obligation under the contract should be recognized and measured as a provision. An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.

The amendment to IAS 37, that will become effective 1 January 2022, clarifies the meaning of ‘costs to fulfil a contract’. Contract costs Contract costs The amendment was part of some narrow-scope amendments issued by IASB in May 2020.

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

the incremental costs of fulfilling that contract (for example, direct labour and materials); and
an allocation of other costs that relate directly to fulfilling contracts (for example, an allocation of the depreciation charge for an item of PP&E used to fulfil the contract). (IAS 37.68A)

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.

Excellent Study IFRS 9 Eligible Hedged items

18/06/202119/02/2021 by 75385885

IFRS 9 Eligible Hedged items

the insured items of business risk exposures

Although the popular definition of hedging is an investment taken out to limit the risk of another investment, insurance is an example of a real-world hedge.

Every entity is exposed to business risks from its daily operations. Many of those risks have an impact on the cash flows or the value of assets and liabilities, and therefore, ultimately affect profit or loss. In order to manage these risk exposures, companies often enter into derivative contracts (or, less commonly, other financial instruments) to hedge them. Hedging can, therefore, be seen as a risk management activity in order to change an entity’s risk profile.

The idea of hedge accounting is to reduce (insure) this mismatch by changing either the measurement or (in the case of certain firm commitments) recognition of the hedged exposure, or the accounting for the hedging instrument.

The definition of a Hedged item

A hedged item is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that

exposes the entity to risk of changes in fair value or future cash flows and
is designated as being hedged

The hedge item can be:

a single item, or
a group of items (provided the specific requirements are met).

Only assets, liabilities, firm commitments and forecast transactions with an external party qualify for hedge accounting. As an exception, a hedge of the foreign currency risk of an intragroup monetary item qualifies for hedge accounting if that foreign currency risk affects consolidated profit or loss. In addition, the foreign currency risk of a highly probable forecast intragroup transaction would also qualify as a hedged item if that transaction affects consolidated profit or loss. These requirements are unchanged from IAS 39.