Università degli studi di Pavia Facoltà di Economia a.a

Università degli studi di Pavia Facoltà di Economia a.a. 2014-2015
Lesson International Accounting Lelio Bigogno, Stefano Santucci

Contents Section 1: History of IAS 1 Section 2: Financial Statements
Section 3: Statement of Financial Position (Balance Sheet) Section 4: Statement of Comprehensive Income Section 5: Statement of Changes in Equity Section 6: Disclosures

Section 1: HISTORY OF IAS 1

History of IAS 1 March 1974 Exposure Draft E1 Disclosure of Accounting Policies January 1975 IAS 1 Disclosure of Accounting Policies June 1975 E5 Information to Be Disclosed in Financial Statements October 1976 IAS 5 Information to Be Disclosed in Financial Statements July 1978 E14 Current Assets and Current Liabilities November 1979 IAS 13 Presentation of Current Assets and Current Liabilities 1994 IAS 1, IAS 5, and IAS 13 were reformatted July 1996 E53 Presentation of Financial Statements August 1997 IAS 1 (1997) Presentation of Financial Statements superseded IAS 1 (1975), IAS 5, and IAS 13 (1979) 1 July 1998 Effective date of IAS 1 (1997)

History of IAS 1 18 December 2003 Revised version of IAS 1 (2003) issued by the IASB 1 January 2005 Effective date of IAS 1 (2003) 18 August 2005 IAS 1 amended to add disclosures about capital 16 March 2006 Exposure Draft of Proposed Amendments to IAS 1 Presentation of Financial Statements–A Revised Presentation 1 January 2007 Effective date of August 2005 amendments to IAS 1 6 September 2007 Revised IAS 1 (2007) issued 1 January 2009 IAS 1 (2007) is effective for annual periods beginning on or after 1 January 2009 22 June 2006 Exposure Draft of proposed amendments to IAS1 32 relating to Puttable Instruments and Obligations Arising on Liquidation would add new disclosure requirements to IAS 1 14 February 2008 IAS 1 amended to add New Disclosure Requirements for puttable instruments and obligations arising on liquidation

History of IAS 1 1 January 2009 Effective date of February 2008 amendments for puttable instruments and obligations arising on liquidation 22 May 2008 IAS 1 amended for Annual Improvements to IFRSs 2007 in regards to classification of derivatives as current or non-current 1 January 2009 Effective date of May 2008 amendment to IAS 1 16 April 2009 IAS 1 amended for Annual Improvements to IFRSs 2009 about classification of liabilities as current 1 January 2010 Effective date of the April 2009 revisions to IAS 1 6 May 2010 IAS 1 amended for Annual Improvements to IFRSs 2010 27 May 2010 Exposure Draft of proposed amendments to IAS 1 relating to Presenting Comprehensive Income 1 January 2011 Effective date of May 2010 amendment to IAS 1 16 June 2011 Amendments to IAS 1 issued. 17 May 2012 Amended by Annual Improvements Cycle (comparative information) - Effective for annual periods beginning on or after 1 July 2013

History of IAS 1 RELATED INTERPRETATIONS
IAS 1 (2003) supersedes SIC 18 Consistency - Alternative Methods IFRIC 17 Distributions of Non-cash Assets to Owners SIC 27 Evaluating the Substance of Transactions in the Legal Form of a Lease SIC 29 Disclosure - Service Concession Arrangements AMENDMENTS UNDER CONSIDERATION IAS 1 — Disclosures about going concern IAS 1 — Classification of liabilities Disclosure initiative — IAS 1 amendments Disclosure initiative — Principles of disclosure (research project) Disclosure initiative — Materiality (research project)

Section 2: Financial Statements

Financial Statements Objective of IAS I
The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities.

Financial Statements IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations.

Financial Statements The objective of financial statements
The objective of financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions.

Financial Statements To meet that objective, financial statements provide information about an entity's: Assets Liabilities Equity Income and expenses, including gains and losses Contributions by and distributions to owners Cash flows

Financial Statements Those information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

Financial Statements – Components of FS
A complete set of financial statements should include: Statement of financial position (balance sheet) period end; Statement of profit and loss and other comprehensive income (presented ad a single statement , or by presenting the profit or loss section in a separate statement of profit and loss immediately followed by a statement of comprehensive income beginnig with profit or loss). Statement of changes in equity for the period; Statement of cash flows for the period (regulated by IAS 7); Notes, including summary of accounting policies and other explanatory notes Comparative information

Financial Statements – Components of FS
When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period. FIRST BIG DIFFERENCE WITH ITAGAAP!

Financial Statements -Fair Presentation and Compliance with IFRs
The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity; Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework; The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.

IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs (including Interpretations); Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material.

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure.

Financial Statements -Going Concern
An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures.

Financial Statements -Accrual basis of Accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting.

Financial Statements -Accrual basis of Accounting
Definition ABA (Accrual Basis of Accounting) is a system of accounting that matches revenues and expenses, respectively, to the period they were earned and incurred. Under accrual basis accounting, revenue is recorded when product is shipped or services provided. Similarly, accrual basis accounting requires expenses be recorded in the period in which the related revenues were recognized. Accrual basis accounting differs from cash basis accounting, where revenue and expense are recorded when cash is received or paid. [SAME UNDER ITALIAN GAAP]

Fianancial Statements - Consistency of Presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS.

Fianancial Statements -Materiality and Aggregation
Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial.

Financial Statements - Offsetting
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS.

Financial Statements - Comparative Information
IAS 1 requires that comparative information to be disclosed in respect of the previous period for all amounts reported in the financial statements, both on the face of the financial statements and in the notes, unless another Standard requires otherwise. Comparative information is provided for narrative and descriptive where it is relevant to understanding the financial statements of the current period. [IAS 1.38]

Financial Statements -Comparative information
An entity is required to present at least two of each of the following primary financial statements: [IAS 1.38A] statement of financial position* statement of profit or loss and other comprehensive income separate statements of profit or loss (where presented) statement of cash flows statement of changes in equity related notes for each of the above items.

Financial Statements -Comparative information
* A third statement of financial position is required to be presented if the entity retrospectively applies an accounting policy, restates items, or reclassifies items, and those adjustments had a material effect on the information in the statement of financial position at the beginning of the comparative period. [IAS 1.40A]

Financial Statements -Structure and Content
IAS 1 requires an entity to clearly identify: the financial statements, which must be distinguished from other information in a published document each financial statement and the notes to the financial statements. In addition, the following information must be displayed prominently, and repeated as necessary…………

Financial Statements -Structure and Content
(a) the name of the reporting entity or other means of identification, and any change in that information from the end of the preceding reporting period; (b) whether the financial statements are of an individual entity or a group of entities; (c) Information about the reporting period (d) the presentation currency, as defined in IAS 21; and (e) the level of rounding used in presenting amounts in the financial statementS.

Financial Statements - Reporting Period
There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the entity must disclose the reason for the change and a warning about problems of comparability

Section 3: Statement of Financial Position (Balance Sheet)

Statement of Financial Position (Balance Sheet)
An entity must normally present a classified statement of financial position, separating current and non current assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted.

In either case, if an asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. Under ITAGAAP this information is required for figures.

Some definitions: Current assets are cash, cash equivalent, assets held for collection, sale, or consumption within the entity's normal operating cycle, or assets held for trading within the next 12 months. All other assets are non-current. Current liabilities are those expected to be settled within the entity's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are non-current.

Statement of Financial Position (Balance Sheet) - Current vs
Statement of Financial Position (Balance Sheet) - Current vs. Non-current Current liability: Expected to be settled within entity’s normal operating cycle Held primarily for trading purposes Expected to be settled within 12 months after balance sheet date No unconditional right to defer settlement for at least 12 months after balance sheet date Now some examples Current asset: Expected to be realised, sold or consumed within entity’s normal operating cycle Held primarily for trading purposes Expected to be realised within 12 months after balance sheet date Unrestricted cash or cash equivalent Now some examples

When a long-term debt is expected to be refinanced under an existing loan facility and the entity has the discretion the debt is classified as non-current, even if due within 12 months.

If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the approval of the financial statements, not to demand payment as a consequence of the breach. VERY IMPORTANT FOR COVENANTS

However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

Statement of financial position Minimum line items
Property, plant and equipment Investment property Intangible assets Financial assets (other than those shown on other line items) Investments accounted for using the equity method Biological assets Inventories Trade and other receivables Cash and cash equivalents Held for sale assets and assets included in disposal groups Trade and other payables Provisions Financial liabilities (other than those shown on other line items) Current tax assets and liabilities Deferred tax assets and liabilities Liabilities included in disposal groups Non controlling interest Issued capital and reserves attributable to owners of the parent

Additional line items may be needed to fairly present the entity's financial position

Statement of Financial Position (Balance Sheet)- format
IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then non current, or vice versa, and liabilities and equity can be presented current then non current then equity, or vice versa; A net asset presentation (assets minus liabilities) is allowed; The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable.

Statement of Financial Position (Balance Sheet)- Equity
Regarding issued share capital and reserves, the following disclosures are required: numbers of shares authorised, issued and fully paid, and issued but not fully paid and related value; reconciliation of shares outstanding at the beginning and the end of the period; description of rights, preferences, and restrictions treasury shares, including shares held by subsidiaries and associates; shares reserved for issuance under options and contracts a description of the nature and purpose of each reserve within equity

Statement of Financial Position (Balance Sheet) – Summary of key issues
Minimum line items prescribed Order not prescribed May amend descriptions according to the nature of the entity May include additional line items where relevant Current/non-current classification or liquidity basis Classes of assets/liabilities with different measurement bases, would generally require presentation as separate line items

Statement of Financial Position (Balance Sheet) – Summary of key issues
Liquidity basis if more relevant Choice driven by type of business Manufacturers and retailers → current/non-current basis Financial institutions → liquidity basis Disclose assets and liabilities to be recovered or settled With 12 months of balance sheet date More than 12 months from balance sheet date

Statement of Financial Position (Balance Sheet) – Summary of key learning points
Current/non-current status based on condition at balance sheet date Post year end covenant breaches: - Classification not affected Pre-year end covenant breaches on long term loans: - Current classification generally required, unless lender agrees to period of grace agreement occurs before balance sheet date agreement postpones required repayment until at least 12 months from balance sheet date

Section 4: Statement of Comprehensive Income

Statement of comprehensive income
Single statement or two statement approach If a single statement: a statemement of profit or loss and other comprehensive income, with profit or loss and other comprehensive income presented in two sections, - Items of profit or loss (income statement) If two statements: a separate statement of profit or loss a statement of comprehensive income, immediately following the statement of profit or loss and beginning with profit or loss Minimum line items Presentation of items as “extraordinary” is prohibited

Profit or loss is defined as "the total of income less expenses, excluding the components of other comprehensive income” Other comprehensive income is defined as comprising "items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs Total comprehensive income is defined as "the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners"

Comprehensive income for the period = Profit or loss + Other Comprehensive income

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise; Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income.

Examples of items recognised outside of profit or loss Changes in revaluation surplus where the revaluation method is used under IAS 16Property, Plant and Equipment and IAS 38 Intangible Assets; Remeasurements of a net defined benefit liability or asset recognised in accordance withIAS 19 Employee Benefits Exchange differences from translating functional currencies into presentation currency in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates

Gains and losses on remeasuring available-for-sale financial assets in accordance withIAS 39 Financial Instruments: Recognition and Measurement The effective portion of gains and losses on hedging instruments in a cash flow hedge under IAS 39 or IFRS 9 Financial Instruments Gains and losses on remeasuring an investment in equity instruments where the entity has elected to present them in other comprehensive income in accordance with IFRS 9 The effects of changes in the credit risk of a financial liability designated as at fair value through profit and loss under IFRS 9.

In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the correction of errors and the effect of changes in accounting policies to be recognised outside profit or loss for the current period

Statement of comprehensive income -Presentation of minority interest
The following items must also be disclosed in the statement of comprehensive income as allocations for the period: profit or loss for the period attributable to non-controlling interests and owners of the parent; total comprehensive income attributable to non-controlling interests and owners of the parent

Statement of comprehensive income -Presentation of minority interest
Minority interest should NOT be presented as if it is an expense INCORRECT presentation Profit before minority interests Less: Minority interest (10) Net Profit CORRECT presentation Profit for the year 100 Attributable to: Owners of the parent 90 Minority interest 10 100

Statement of comprehensive income - Minimum line items
Revenue Finance costs Share of profit or loss of associates and joint ventures Tax expense Discontinued operations Profit or loss Profit or loss attributable to: Minority interest Owners of the parent Each component of other comprehensive income by nature Share of other comprehensive income of associates and joint ventures Total comprehensive income attributable to: Minority interest Owners of the parent

Statement of comprehensive income- Additional line items, headings and sub-totals
Required when relevant to an understanding of performance Description and order of line items amended where necessary to explain elements of performance Framework qualitative characteristics of financial statements - Understandability - Relevance - Reliability - Comparability Undefined terms may be used where relevant to an understanding (subject to meeting qualitative characteristics)

Statement of comprehensive income- Additional line items, headings and sub-totals
Operating profit is not a required sub-total, although often presented If operating profit is presented - must include all operating items - whether or not they occur frequently - whether or not they involve cash flows Other sub-totals and line items – follow common understanding of terms used

Statement of comprehensive income -Application of the requirement to analyse expenses
IAS1 encourages analysis from the perspective of the income statement Expenses should be analysed by: - Nature, or - Function Choose most relevant presentation method, do not mix

Statement of comprehensive income -Analysis of expenses – types of expense
By FUNCTION: Cost of sales Distribution costs Administrative expenses Research and development By NATURE: Raw materials and consumables Employee benefit costs Depreciation Amortisation Rent and utility costs

Statement of comprehensive income -Application of the requirement to analyse expenses
Choose most relevant presentation analysis method; by: Function - usually used by manufacturers, retailers Nature - usually used by financial institutions If analysis by function is provided, additional note disclosures analysing the nature of expenses is required

Statement of comprehensive income -Capitalised expenses – operating items
Example: The entity capitalises $15 of its raw materials and employee benefit expense, all of which relate to the ‘cost of sales’ function. Functional analysis Sales Cost of sales: Raw materials (100) Employee benefits (50) Less: capitalised costs (135) Operating profit 265 Finance costs (25) Profit for the year 240 Natural analysis Sales 400 Raw materials used (100) Employee benefits (50) Work performed by the entity and capitalised 15 Operating profit 265 Finance costs (25) Profit for the year 240

Statement of comprehensive income -Capitalised expenses – finance costs
Example: In addition, the entity capitalises $10 of its finance costs. Functional analysis Sales Cost of sales Raw materials (100) Employee benefits (50) Less: capitalised costs (135) Operating profit Finance costs Interest and other charges (25) Less : capitalised interest (15) Profit for the year 250 Natural analysis Sales 400 Raw materials used (100) Employee benefits (50) Work performed by the entity and capitalised ? Operating profit ? Finance costs ? Profit for the year 250

Statement of comprehensive income - Capitalised expenses – finance costs
Example: In addition, the entity capitalises $10 of its finance costs. Functional analysis Sales Cost of sales Raw materials (100) Employee benefits (50) Less: capitalised costs (135) Operating profit Finance costs Interest and other charges (25) Less : capitalised interest (15) Profit for the year 250 Natural analysis Sales 400 Raw materials used (100) Employee benefits (50) Work performed by the entity and capitalised Operating profit 265 Finance costs (15) Profit for the year

Statement of comprehensive income -Material items of income and expense
Must be separately disclosed Examples in IAS 1: Inventory write downs Restructuring costs Profits/losses on disposal of PPE/investments Litigation settlements Reversals of provisions Disclosure to the statement can be problematic in functional analysis (ie where the item also impacts other functional categories).

Statement of comprehensive income -Finance costs and Derivative gains / losses
Examples: Interest payable Unwinding of discounts on financial liabilities Finance charges on finance leases Finance income Examples Interest income on cash and cash equivalents Unwinding of discounts on financial assets Finance income should not be netted against finance costs Derivative gains and losses

Statement of comprehensive income -Material items of income and expense
Usually presented after finance costs Net of tax and minority interests Major part of business – some flexibility in order of presentation Share of associate/joint venture revenue ≠ part of ‘Revenue’ International Accounting – Lesson 3

Statement of Comprehensive Income – Summary of key learning points
Single or two statement approach Minimum line items prescribed Additional line items, sub-totals and headings Flexibility not to be abused Regulatory requirements

Statement of Changes in Equity
Section Four – Statement of Changes in Equity Statement of Changes in Equity IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements.

Section 5: Statement of Changes in Equity

Section Four – Statement of Changes in Equity Statement of Changes in Equity The statement must show: total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests; the effects of retrospective application, when applicable, for each component ;

Section Four – Statement of Changes in Equity Statement of Changes in Equity reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing: profit or loss each item of other comprehensive income transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

Section Four – Statement of Changes in Equity Statement of Changes in Equity The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: amount of dividends recognised as distributable, and; the related amount per share.

Section 6: Disclosures

Disclosures Notes to the Financial Statements must:
present information about the basis of preparation of the financial statements and the specific accounting policies used; disclose any information required by IFRSs that is not presented elsewhere in the financial statements and provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them Notes should be cross-referenced from the financial statements to the relevant note

Disclosures - presentation
The notes should normally be presented in the following order: a statement of compliance with IFRSs; a summary of significant accounting policies applied, including: the measurement basis (or bases) used in preparing the financial statements; the other accounting policies used that are relevant to an understanding of the financial statements.

supporting information for items presented in the statement of financial position (balance sheet), statement of comprehensive income (and income statement, if presented), statement of changes in equity and statement of cash flows, with the same order that each statement and each line item is presented in the FS

other disclosures, including: contingent liabilities (see IAS 37) and unrecognised contractual commitments; non-financial disclosures, such as the entity's financial risk management objectives and policies (see IFRS 7)

Disclosures - Key judgements
“ An entity shall disclose, in the summary of significant accounting policies or other notes, the judgements…that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.”

Disclosures -Estimation uncertainty
“An entity shall disclose information about the assumptions it makes about the future, and other sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes shall include details of: their nature, and their carrying amounts as at the end of the reporting period. ”

Disclosures - Capital Information that enables users to evaluate the entity’s objectives, policies and processes for managing capital Qualitative information regarding objectives, policies, and processes for managing capital (what it manages as capital, externally imposed requirements, and how it meets its objectives) Quantitative data and other related disclosures; Changes from one period to another

Disclosures - Dividends
In addition to the distributions information in the statement of changes in equity, the following must be disclosed in the notes: "the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period, and the related amount per share and" the amount of any cumulative preference dividends not recognised.

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