The Financial Reporting Framework

THE FINANCIAL REPORTING
FRAMEWORK
Two fundamental qualitative characteristics-
• Relevance & Reliability, also
• Faithful Representation
• comparability, verifiability, timeliness,
• understandability, reliability
• IFRSs in your pocket 2012.pdf 39
• Financial_Accounting_Elliot.pdf pg165
• ..\..\Desktop\IFRS Training
material\Module_2_Concepts_and_Perva
1
FRAMEWORK
Traditional Model:
Historical,
• Matching,
• Prudence,
• Realisation,
• Going Concern
• Accruals
2
FRAMEWORK
SOFP:
IASB & FASB definitions
• Fair Values, IFRS 13
• No realisation,
• No historic costs,
• wider comprehensive definitions of
income and expenses
3
FRAMEWORK
Fair Value-definition,
• Liability Specific valuations;
counterpartys’ asset fair value
• Valuation techniques; market(price),
income(NPV), cost (replacement)
• Fair value hierarchy: Observable
(Quoted), Observable (not quoted)
Unobservable, unquoted
4
FRAMEWORK
CRITIQUES-
Global standards and developing countries
• absence/inadequacy of deep capital
markets
• social/political/cultural/technological
landscapes differences
• competence, training, regulation/laws
5
REPORTING THE FINANCIAL
PERFORMANCE OF ENTITIES
Performance reporting
• Prepare reports relating to corporate
performance for external stakeholders.
• Discuss the issues relating to the
recognition of revenue.
• Evaluate proposed changes to reporting
financial performance.
6
Non-current assets
Applicable standards;
• PPE (IAS 16)
• GG (IAS 20)
• BC (IAS 23)
• Intangibles (IAS 38)
• Investment Properties (IAS 40)
• Assets held for resale (IFRS5)
7
Definitions:
Asset- control, past events, future economic
benefits
CA- Realisation (< 12 months) , sale,
consume, normal operations, trading
purposes, Cash or cash equivalent
NCA- not classified as current, long term
use (>12 months)
8
Classifications:
1. Intangible-e.g. goodwill
2. Tangible-e.g. P&M
3. Investment properties-
• held for rentals, capital appreciation,
not for production, supply, use, not for
sale in ordinary course of business
9
IAS 16-Property, Plant & Equipment

• Recognition
• Measurement
• Valuation
• Depreciation
• Disclosure
• Definition
10
• Recognition
 Probability, Future economic
benefits, Reliable measurement
• measurement
 Cost -pp+direct cost in making it
ready for use (
 Borrowing costs (IAS 23): only on
qualifying assets
11
Borrowing costs (IAS 23): only on

qualifying assets
-specific vs general
-commencement and cessation
-piecemeal completion, suspension of
capitalisation
12
Measurement ; Subsequent expenditure
 capitalise at HC or Re-valued
amount Surplus or impairement
 Surplus>RR except if
previously impaired, then SOCI
up to value of earlier
impairment
 Impairment>first W/O to RR
equivalent to earlier surplus 13
Measurement ; Subsequent expenditure
 If no surplus nor RR,
impairment to SOCI
 After impairment review,
valued at lower of revalued
amount and recoverable
amount
14
Depreciation;
 cost less estimated scrap value
 Method to reflect usage, review
regularly
 Regular review of estimated useful
life
15
IAS 20-Government Grants
Recognition: Capital or Income
 Capital;
 credit deferred income
account or deduct from asset
cost
 If credited to deferred
income, annual transfer to
SOCI
16
 If deducted from cost, CV
automatically affects
depreciation & income
 Disclosure:
 Shown on SOCI separately or
Deducted from related expense
item
17
Recognition:
 only if certain of meeting criteria
and that grant will be received
 Be recognised through SOCI in the
same period as the expense they
are compensating
 If repayable, (IAS 18)
18
Measurement:
 Reduce any balance on “deferred
income” account, excess to
expense
 Charge to either asset account
or deferred income
19
IAS 23 Borrowing Costs
 Recognition
 Capitalised only for improvement of
a qualifying asset
 If borrowing for various uses,
apportion by weighted average
principles
20
IAS 23 Borrowing Costs
 Recognition
 If investment income, reduce BC
accordingly
 Applied only when expenditure on
the asset is being incurred
 Disclosure required;
 Accounting policy
 Amount
 Capitalisation rate 21
IAS 36 Impairment of Assets
 Principle: under SOFP model, assets s
not carried at a value greater than their
recoverable amount
 impairment should be recognised fairly
 Management to review impairment
 Market driven
 Internally driven,
 obsolescence
22
 Write down to its recoverable
amount
No asset to be reduced below its RA
23
 Applies to all assets not specifically
subject to other IAS’s
 Recoverable amount is the lower of
value in use and net selling price
 Value in use =NPV of future cash
flows from continued use
24
In calculating Value in use
 Discount rate =market rate
 Exclude finance costs
 Exclude taxation
 Ignore costs not yet committed
Net selling price=arm’s length
realisable value
25
Recognition of impairment
 At HC=expense to SOCI
 At RA=first eliminate any
revaluation reserve associated
with the asset, balance to SOCI
 Depreciation and remaining
useful life may be adjusted
26
Recognition of impairment
 At HC=expense to SOCI
 At RA=first eliminate any
revaluation reserve associated
with the asset, balance to SOCI
 Depreciation and remaining
useful life may be adjusted
27
 Reversals
 Opposite treatment to recognition
as above
 Must be shown that
I. specific external event of most
unusual nature not expected
to recur
28
 Reversals
I. Subsequent external events have
reversed the impairing event
II. Any reversal not bring back the
asset in excess of what it would
have been but for the impairment
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1AS 38 Intangible assets
recognition
 Probability of future economic
benefit flow
 Benefit attributable to asset
 reliable measurement
30
Purchased IA
 At FV if part of business
combination, assessed at date of
acquisition
Goodwill,
 use provisions of IFRS3
31
Internally generated IA
 Research=expense through
SOCI
 Development=capitalise subject
to criteria
 Subsequent measurement; either
 Cost less accumulated
amortisation/impairment or
32
 Revalued amount less
amortisation/impairment
 Amortisation should be charged
systematically over useful life
 Useful life assumed to be not
more than 20 years
 Review amortisation period and
method at least annually
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IAS 40 Investment properties
Definition;
 held for either capital appreciation or
rental earning capacity.
 Cashflows therefore independent of
the rest of the entity’s operations
 Not used, in progress
34
 Valuation
 HC less depreciation
 FV:
 current prices on an active
market for similar properties,
location and condition
35
Valuation
FV:
 If not active market; make
adjustments for differences, less
active market,
 PV of future Cashflows capable
of reliable measurement
36
Valuation
Leased IP
 A lease under an operating lease
may treat leased property as IP
 Treat the lease as a finance lease
and adopt FV model
37
 Change in use/classification
 Use FV at date of change
 Increase in valuation credited to
RR
 Decrease to SOCI
38
 Disclosure
 All models
 Rental income
 Operating expenses
 Restrictions and obligations
 HC model
Depreciation method, useful lives,
movements
39
 Disclosure
 HC model
 Explanation why FV cannot be
determined
 FV model
 Method. Assumptions in
determining FV
 ID and qualifications of valuers
40
 Disclosure
 FV model
 Movements
 Net gains or losses from FV
adjustments
 Transfers to and from IP
41
42
IFRS 5 Non-Current Assets held for sale
 Definition:
 Those whose carrying value will be
recovered primarily through sale
rather than use
 Criteria for classification
Available for immediate sale
Sale highly probable within 12 months
Actively marketed
43
 Criteria for classification
 Management committed to the sale
 Withdrawal of sale unlikely
 If purchased solely for sale at
acquisition
 Not merely closed down or
abandoned
 if already closed down, requires
disclosure as “discontinued operation”
44
 Measurement
 FV less costs to sale or
 Carrying value whichever is lower
 AHFS not depreciated
 Anticipated tax charge not part of selling
cost
45
 Disclosure
 Description of Asset/s
 Description of sale or expected sale
 Impairment losses or reversals
 Segment in which asset held
46
IAS 9 Financial Instruments
 Definitions
 Any contract that gives rise to both a
financial asset of one entity and a
financial liability/equity instrument of
another entity
 Financial asset:
 Cash
 Contractual right to cash or other
financial asset
47
 Definitions
 Financial asset:
 Contractual right to exchange
financial instruments that are
potentially favourable
 Equity instrument of another
 Financial liability:
 Contractual obligation to Deliver
cash, financial asset
48
 Definitions
 Financial liability:
 Contractual right to exchange
financial instruments that are
potentially unfavourable
 Equity instrument: any contract that
shows evidence of residual interest in
an asset after deducting all its liabilities
49
 Initial measurement
 FV including transaction costs (new
rule)
 Subsequent measurement
Financial assets & liabilities subdivided into

2 categories
 Those measured at amortised cost
SOFP
 Those measured at FVTPL 50
 Classification determined at date of initial
recognition
 Debt instruments (BOTH ASSETS OR
LIABILITIES),
• at amortised cost if
 Held for realisation of cash flows (use),
not for early resale
 Held for future interest & principle cash
flows at specific dates
51
 Debt instruments at FVTPL if not any of
above
 Equity instruments
 At FV in SoFP
 Changes in value through SoI/SoCI-
(choice irreversible)
 Only dividend shown in SoI
52
 Presentation
 As equity or debt
 Substance rather than form
 Interest, dividends, gains and losses
arising therefrom charged to SoCI
 Distributions to holders of equity
financial instruments charged to equity
53
 Disclosure
 IAS 32 encourages narrative explanations
of all FI, categorised by risk
 Price: currency, interest,
 market risks
 credit,
 liquidity or funding;
 cash flow risks;
54
IAS 17 Leases
Definition: Finance and Operating
Recognition & Measurement
 Finance lease> Asset for lessee
 Lower of PV of minimum lease
payments or FV
 Finance lease> liability for lessor
 Calculate finance charges to give a
constant rate on the balance o/s
 Split instalments between capital and
finance elements 55
IAS 17 Leases
Definition: Finance and Operating
Recognition & Measurement
 Operating lease
 No asset nor liability
 Repayments through SOCI accrual
basis
 Sale and Leaseback
 Finance leases
 No transfer of risk and reward, gain on
sale deferred, recognised over lease life 56
IAS 17 Leases
 Operating leases
 Transfer of risk and reward, therefore
gain to be recognised
 Three values to be considered;
• Sell Price (SP)
• Carrying value (CV)
• Fair value (FV)
57
IAS 17 Leases
 Operating leases
 SP=FV-CV; recognise profit immediately
 SP<FV-CV;recognise loss immediately
unless not arm’s length in which case
defer and spread over asset use
 SP>FV; spread the excess over period of
use, again not arm’s length therefore
deemed loan.
58
IAS 17 Leases
 Treatment of incentives to lessee by lessor
 Treat as reduction in overall repayments
under operating lease
 benefit spread over lease period
59
IAS 17 Leases
 Disclosure: Finance Leases
 ASSETS: As short or long term for each
class of asset, at net carrying amounts
 LIABILITIES:
Maturity analysis
≤ 12 months
> 12 months ≤5 years
> 5 years
60
IAS 17 Leases
 Reconciliation between
1. PV of minimum lease payments and
2. FV
 Gross presentation method
Within 12 months
>12 months≤5 years
> 5 years
Less finance charges not yet accrued
61
IAS 17 Leases
 net presentation method
Within 12 months
>12 months≤5 years
> 5 years
62
IAS 17 Leases
 Depreciation
 Separately that charged on leased assets
 Disclosure: Operating leases

 Future minimum lease payments
 Maturity analysis as above
63
Segment Reporting (IFRS 8)
 Definition
 Component of an entity engaging in
business activity
 Earns revenues and incurs expenses
 Whose results are reviewed regularly by
COO
 For which discrete information is
available
64
 Classification; information to be reported
for any segment meeting below criteria
 revenues ≥10% of total entity revenues
 Profit /loss ≥ 10% of greater of gross
aggregate profits /losses
 Assets ≥10% of combined assets of
entity
 If revenue< 75% of entity’s revenue,
additional segments reported until at
least 75% reached
65
 Disclosure:
 Sufficient to enable evaluation of nature
and financial effects of the types of
business activities and environments in
which entity operates
 How segments are are identified, types of
products/services
 Interest revenue and expense
66
 Disclosure:
 Specified revenues and expenses, assets
and liabilities and basis of measurement
 Reconciliation between segment and entity
reported figures
 Product or service information
 Geographical area analysis of certain non-
current assets
 Transactions with major customers where
revenue is >10% of total revenues
67
Employee Benefits IAS 19
 The Principle is that an employer receives

a benefit from employees services for
which the employer promises to pay
employee on employees’ retirement
 That the acknowledgement of this

obligation be recognised as a liability in the
employer’s books
68
 Basically;
 Short term: wages, bonuses, salaries,
BIK’s
 Long term: pensions
 Two types of Pension schemes;
 Defined benefit;
 Defined Contribution;
69
 Restrictions
 the value of a DBS asset shall not exceed
aggregate of;
1. PV of refunds from the plan and
2. PV of any reductions in future
contributions
70
 Disclosure;
 SOFP:
 PV of Future Obligations
 FV of Planned Assets
 Deficit in funding
71
 Disclosure;
 SOI:
 Current Service Cost (CSC)
 Past Service Cost (PSC)
 Settlements
 Curtailments
 Net Interest Cost
 SOCI: Re-measurements
72
Income taxes IAS 12
 Temporary differences
 taxable or allowable in different periods
from those in which recognised in the
financial statements (GG, revaluations)
 Permanent differences
 not taxable or allowable e.g. depreciation,
entertainment expenses
 Short term differences, accrued but
received in next period e.g. royalties,
accelerated capital allowances
73
Income taxes IAS 12
 Alternative bases of computation
 Nil basis or flow through
 No liability recognised as over
time all differences will reverse
 Tax based on taxable profit not
accounting profits
Generally accepted as not
satisfactory
74
Income taxes IAS 12
 Alternative bases of computation
 Partial provision
 Calculated on the net amount
of temporary difference which
will reverse in the foreseeable
future
 Full provision
 Temporary differences
provided in full
IAS 12 requires full provision 75
Income taxes IAS 12
 Alternative methods of computation
 Deferral method
 Calculates the tax effect of
temporary differences using tax
rates which apply when the
differences arise with no
adjustment for tax rate changes
76
Income taxes IAS 12
 Alternative methods of computation
 Liability method
 Deferred tax balance is adjusted as
tax rates change to equate it to
actual liability expected
 Two methods
SoCI
SoFP (IAS 12 required )
77
Income taxes IAS 12
 Deferred tax assets and liabilities
 Arise as a result of deductible timing
differences e.g. unused tax losses
 Can only offset assets against liabilities
if;
 Legally enforceable right exists
 Levied by the same tax authority
78
Income taxes IAS 12
 Disclosure
 Non current
 Tax expense relating to ordinary
activities (on the face of the SOCI)
 Major components separately
disclosed
 reconciliation between tax charge
and accounting charge
 comparisons of tax rate changes
between periods
79
Income taxes IAS 12
 Disclosure
 amount and expiry date of
deductible temporary timing
differences, unused tax losses and
credits
 amount of deferred tax asset and
evidence to support recognition
80
Provisions, contingencies and events
after the reporting date (IAS 37)
 Defines liability
 A present obligation arising from
past events, the settlement of which
is expected to result in an outflow
of economic resource from the
entity
 Defines provision
 A liability of uncertain timing or
amount
81
 Defines a constructive obligation
 An obligating event where the entity
has no realistic alternative other than
settling the obligation, and this will
involve the outflow of economic
resources
82
 Future losses not a provision
 Onerous contracts
 Provide the lower of
1. Loss as a result of continuing
with the contract and
2. Cost of terminating the
contract
83
 Restructuring
 Finalised plan
 Decision announced
 Only costs necessary to be
incurred
 Not costs associated with
continuing activities
84
 Disclosure
 Brought forward
 Increases
 Decreases
 Carried forward
85
 Narrative description giving full details
of circumstances giving rise to the
provision
 Contingent liabilities
 Nature
 Why unpredictable
 Quantification of possible
 Explanation why quantification
not possible
86
Related parties IAS 24
 Definition, who is a related party
 Controlling or controlled entity
 Joint control
 Associates and JV’s
 Key management personnel, directors
and their close family members
 Post-employment benefit plans of entity
 Common influence of directors
87
 Related party transactions include
 Intra-group sales not at arm’s length
 Substantial portion of entity’s
production bought by group coy
 Entities under common control
where controller in a position to
influence activities of both
88
 Disclosure
 Existence of RPS, whether or not there
has been transactions
 Details of any transactions
 Details of any related doubtful debts
provisions
 Details of any write-offs
89
 Separate disclosure for
 Parent entity
 Jointly controlled entities or with
significant influence
 Subsidiaries, associates, JV’s
 Key management
 Other rps
90
 Exemptions
 Providers of finance
 Trade unions
 Utility providers
 Government departments (ZRA)
 Customers and suppliers
91
Share based payment IFRS 2
 Direct method:
 FV of goods of services received
 Indirect method;
 FV of equity shares issued, where
goods or services cannot be reliably
measured
92
 Recognition
 Expense or liability immediately in
respect of goods and services
 In respect of services, depends on
vesting terms
 Immediate vesting, then
immediate recognition
 If in future, spread over vesting
period
93
 Recognition
 Equity settled with directors and
employees
 Expense at FV at date of grant with
reference to vesting period, spread
over employee still employed
94
Reporting requirements of small and
medium-sized entities (SMEs)
Handouts
95
FINANCIAL STATEMENTS OF GROUPS
OF ENTITIES
Group Accounting (IFRS 10)
 Definitions (pg158 book)
 Subsidiary: an entity controlled by
another
 Control (IFRS 10) principles based
 Controller is exposed to, has
rights to variable returns
 ability to affect those returns
96
OF ENTITIES
 Definitions
 >50% of shares
 Majority of voting rights
 Contractual arrangement with
others giving control
97
OF ENTITIES
 Definitions
 <50% of voting rights but others
widely distributed
 Holds potential exercisable voting
rights
 Group: a parent and all its subsidiaries
 Parent: controls one or more entities 98
OF ENTITIES
 Contrast principal and agent relationships
 i.e. power from having substantive
rights,
 whether implicit or explicit!
 Determining substantive rights requires
skill and judgement of the facts and
circumstances: i.e. barriers, caveats,
onerosity, timing, practicability, legality etc
99
OF ENTITIES
 Identifying a business combination;
 control over net assets and operations
of another in exchange for the
 transfer of assets, or
 incurrence of liabilities or
 issue of equity
 by contract
 a combination of these
100
OF ENTITIES
 Non Business Combination
 Under IFRS3R, assets acquired and
liabilities assumed should constitute a
business, if not should be accounted for as
an asset acquisition
101
OF ENTITIES
 Disclosure:
Objective is to require an entity disclose
information that enables users of FS to
evaluate:
 Nature of and risks associated with
its interests in other entities
 Effects of those interests on its
financial position, performance and
cash flows
102
OF ENTITIES
 To meet these objectives, an entity
shall disclose information about its
interests in:
 Subsidiaries
 Joint arrangements and
associates
 Unconsolidated structured
entities
103
OF ENTITIES
Identifying an Associate IAS 28
Definition: in which there is
significant influence, but neither a
subsidiary nor JV
Significant influence; power to
participate in the financial and
operating policy decisions, but no
control over decisions; e.g.
104
OF ENTITIES
Significant influence;.
Board representation
Party to policy making process
Material transactions between the
parties
Interchange of managerial personnel
Provision of critical essential
technical help
≥20% investment 105
OF ENTITIES
Accounting Treatment-equity method
 Show at CV, two methods SOFP
1. Share of A’s assets + Any non
impaired goodwill, or
2. C.O.I.+ A’s share of Post Acq
profits-goodwill impaired since
acquisition
106
OF ENTITIES
Accounting Treatment
 In SOCI
1. Share of A’s profit as a single line
entry, immediately before PBT
107
OF ENTITIES
IFRS11 revises IAS 28
 Joint arrangement maybe classified as
JO, or JV
 In JO, each party accounts in their
separate books
 Separate entity not normally created
 In JV, separate entity established, in
which venturer’s hold shares
 Equity method of accounting 108
OF ENTITIES
109
OF ENTITIES
 Acquisition date;
 when acquirer obtains control, i.e.
closing deal date
 critical in determining pre and post-
acquisition reserves
 Acquisition related costs
 Necessary to effect a business
combination
110
OF ENTITIES
 Acquisition related costs

 Includes advisory, legal, accounting,
valuation
 Recognise in the SOCI as costs
Except costs to issue debt or
equity (IAS 32 and IAS 9)
111
OF ENTITIES
 Contingent consideration
 Measured at acquisition date at FV and
included as part of the consideration
transferred
 Subsequent changes within 1 year will
adjust goodwill initially recognised
 Other post acquisition changes are not
periodic changes
112
OF ENTITIES
 Different reporting dates

 IAS 27 recommends same date, else
additional bridging statements
 Uniform accounting policies
 Valuing NCI
 NCI now forms part of goodwill
computation (IFRS 3R) measured
113
OF ENTITIES
 measured (option) at;

 FV or
 NCI’s proportionate share of
acquiree’s net identifiable assets+
the NCI’s share of changes in equity
reserves since acquisition, i.e. post-
acquisition profits
114
OF ENTITIES
 Goodwill arising is excess of;
 Aggregate of;
1. Consideration transferred +
2. NCI+
3. FV of acquirers previously held
equity interests in the acquiree,
and
 Net identifiable assets acquired and
liabilities assumed
115
OF ENTITIES
 Goodwill arising is excess of;

 Aggregate of;
1. Consideration transferred +
2. NCI+
3. FV of acquirers previously held
equity interests in the acquiree, and
 Net identifiable assets acquired and
liabilities assumed
116
OF ENTITIES
 Partial goodwill
 where NCI is valued at NCI’s
proportionate FV share of acquiree’s
identifiable net assets
 this is because goodwill relates only to
parent (acquirer)
117
OF ENTITIES
 Full goodwill
 Where NCI is valued at fair value
 Both parent and NCI recognised
 Increases the reported net assets
 Future impairment may be higher
 Problems of assessing FV if no market
prices
118
OF ENTITIES
 Bargain (Negative) Goodwill
A gain is recognised in the SOCI
119
OF ENTITIES
 Step acquisitions
 Two ways
 Increasing an existing investment
 Decreasing an existing investment
Examples increasing %
From 16% to say 60% (subsidiary
acquired)
From say 25% to say 70% (subsidiary
acquired) 120
OF ENTITIES
 Two ways
 Increasing an existing investment
 Decreasing an existing investment
Examples increasing %
From 16% to say 60% (subsidiary acquired)
From say 25% to say 70% (subsidiary
acquired)
121
OF ENTITIES
 In both the above, treat as if original
investment disposed of at FV and re-
acquired at FV
 The FV on re-acquisition plus the
extra consideration paid for
additional shares acquired is the cost
of increased investment
122
OF ENTITIES
 Deemed disposal at FV gives rise to
profit or loss to be reflected in SOCI
cost of additional investment
123
OF ENTITIES
Goodwill computation
cost of additional investment x
FV of original investment x
NCI at DOOC x
x
NA at DOOC
Shares (x)
retained earnings (x)
( x)
Goodwill x
124
OF ENTITIES
parents profit on deemed disposal
FV of existing holding at DOOC x
less CV of existing holding (x)
profit on deemed disposal x
125
OF ENTITIES
 From 55% to 80% ( 25% increase in
control)
 Not acquired a subsidiary
 No gain nor loss
 Adjustment to reflect the transfer
between owners
 ACCA Paper P2 December 2012

exams.pdf
126
OF ENTITIES
FV of consideration for additional investment x
NA at DOOC
Shares x
retained earnings x
25% x
x
x
share of NCI goodwill acquired (FV basis) (x)
adjustment to parent equity x
127
OF ENTITIES
128

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THE FINANCIAL REPORTING

IAS 16-Property, Plant & Equipment

Borrowing costs (IAS 23): only on

Financial assets & liabilities subdivided into

 Disclosure: Operating leases

 The Principle is that an employer receives

 That the acknowledgement of this

 Acquisition related costs

 Different reporting dates

 measured (option) at;

 Goodwill arising is excess of;

A gain is recognised in the SOCI

 ACCA Paper P2 December 2012

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