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ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

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Page 1: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

ICPAK

The Financial Reporting WorkshopKisumu

November 20, 2014

The application of IFRS: IFRS basic principles

The application of IFRS: IFRS basic principles

Page 2: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

ICPAK

Content: The framework;

The application of IFRS: IFRS basic principles

Page 3: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

• Framework sets out agreed concepts that underlie IFRS financial reporting– the objective of general purpose financial reporting– qualitative characteristics– elements of financial statements– recognition– measurement– presentation and disclosure

Other concepts all flow from the objective

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ICPAK

The IASB’s Conceptual Framework

Page 4: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

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Principles RulesConcepts

• Relates IFRS requirements to the concepts in the Conceptual Framework

• Reasons why some IFRS requirements do not maximize those concepts (e.g. application of the cost constraint or inherited requirements)

ICPAK

Framework-based understanding

Page 5: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

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• a cohesive understanding of IFRSs – Framework facilitates consistent and logical

formulation of IFRSs

• a basis for judgement in applying IFRSs – Framework established the concepts that underlie

the estimates, judgements and models on which IFRS financial statements are based

• a basis for continuously updating IFRS knowledge and IFRS competencies

ICPAK

Framework-based understanding provides…

Page 6: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

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Does the Framework help me apply IFRSs?• Yes, Framework is in IAS 8 hierarchy

– Preparers use the Framework to make the judgements that are necessary to apply IFRSs

– Auditors and regulators assess those judgements

– Investors, lenders and others consider those judgements when using IFRS financial information to inform their decisions

6

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Framework’s role in applying IFRSs

Page 7: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

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• Use judgement to– develop a policy that results in relevant

information that faithfully represents (ie complete, neutral and error free)

– Hierarchy:

1st IFRS dealing with similar and related issue

2nd Framework definitions, recognition crit. Etc.

Can also in parallel refer to GAAPs with similar Framework

7

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If no specific IFRS requirement

Page 8: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

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Framework-based approach would ask:• What is the economics of the phenomenon

(e.g. transaction or event)?• What relevant information using the accrual

basis of accounting faithfully present that economic phenomenon to inform decisions of investors and lenders (potential and existing)?

• Is there anything in IFRSs that prevents me from providing that information?

8

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In other words, if no IFRS requirement…

Page 9: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

ICPAK

Content: The framework;

The application of IFRS: IFRS basic principles

Page 10: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

ObjectiveTo 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.

ScopeApplies to all general purpose financial statements prepared andpresented in accordance with IFRS. However, the scope of the standard Excludes the presentation of ‘interim financial statements’ which isCovered by IAS 34 – Interim Financial Reporting

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Objective and Scope

Page 11: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

To provide information about:• Financial position• Financial performance• Cash flows• Management’s stewardship of resources entrusted to

them

To meet these objectives financial statements provideinformation about an entity's assets, liabilities, equity,income & expenses, including gains & losses, other changesin equity & cash flows. The above assists users in predicting the entity's future cash flows (timing & certainty).

Purpose of Financial Statements

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Page 12: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

A complete set of financial statements comprises:

• a statement of financial position as at the end of the financial year i.e. a balance sheet

• a statement of comprehensive income for the period i.e. an income statement

• a statement of changes in equity showing either • all changes in equity or• changes in equity other than those arising from with equity holders acting in their capacity as equity holders;

• a cash flow statement; and

• notes, comprising a summary of significant accounting policies and other explanatory notes.

Note: Reports and statements presented outside FS are outside the scope of IFRSs eg financial review by management, environmental reports.

Components of financial statements

ICPAK

Page 13: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

The overall considerations of IAS 1 can be categorized into:

• Fair presentation and compliance with IFRSs• Going Concern• Accrual basis of accounting• Materiality and aggregation• Offsetting• Frequency of reporting• Comparative information• Consistency of presentation

Overall Considerations

ICPAK

Page 14: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

The following are covered under the structure andcontent of financial statements:

1. Identification2.Statement of financial position (balance sheet)3.Statement of comprehensive income (income

statement)4.Statement of changes in equity5.Statement of cash flows6.Notes

Structure and Content

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Page 15: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

1. Identification The financial statements need to be clearly identified anddistinguished from other information in the same document.

• Name of the reporting entity• Whether the financial statements are of an individual

entity or group• Period covered by the financial statements• Date at the end of the reporting period• Presentation currency• Level of rounding used

Structure and Content

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Page 16: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

2. Statement of financial position – balance sheet

As a minimum, the following must be disclosed:• Property, plant and equipment• Investment property• Intangible assets• Financial assets• Investments accounted for using the equity method of accounting• Biological assets• Inventories• Trade and other receivables• Cash and cash equivalents• Total assets held for sale• Trade and other payables• Provisions• Financial liabilities• Current tax• Deferred tax• Non-controlling interests, presented within equity

• Issued capital and reserves attributable to owners of the parent

Structure and Content

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Page 17: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

2. Statement of financial position – balance sheet (continued)

Additional line items and headings can be presented.

The balance sheet can be presented in two formats:• current/non-current• assets/liabilities

The assets/liabilities format can only be used if this format provides information that is reliable and more relevant. However, all assets and liabilities must be presented in order of liquidity.

Structure and Content

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Page 18: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

2. Statement of financial position – balance sheet (continued)

Current liabilities: An entity shall classify a liability as current when:

• It expects to settle the liability in its normal operating cycle• It holds the liability primarily for the purpose of trading• The liability is due to be settled within 12 months after the

reporting date• The entity does not have an unconditional right to defer

settlement of the liability for at least 12 months after the reporting period

All other liabilities are classified as non-current.

Structure and Content

ICPAK

Page 19: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

2. Statement of financial position – balance sheet cont..Information that can be presented either on the balance sheet or in the notes:•Property, plant and equipment disaggregated into classes in accordance with IAS 16•Receivables disaggregated into amounts receivable from trade customers, related parties, prepayments and other amounts•Inventories are disaggregated into classes in accordance with IAS 2•Provisions disaggregated into provisions for employee benefits and other items•Equity capital and reserves disaggregated into various classes, such as paid-up capital, share premium and reserves

Structure and Content

ICPAK

Page 20: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

2. Statement of financial position – balance sheet cont…

Information that can be presented either on the balance sheet, statement of changes in equity or in the notes:

• For each class of share capital• Number of shares authorised• Number of shares issued and fully paid, and issued but not fully paid• Par value of shares, or that the shares have no par value• A reconciliation of the number of shares outstanding at the beginning and

end of the period• Rights, restrictions and preferences attaching to each class• Shares in the entity held by the entity, by its subsidiaries and associates

• Shares reserved for issue under options and contracts • Nature and purpose of each reserve within equity

Structure and Content

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Page 21: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

3. Statement of comprehensive income – income statement

As a minimum, the following must be disclosed:

• Revenue

• Finance costs

• Share of profit/loss of associates and joint ventures accounted for using the equity method

• Tax expense

• A single amount comprising:

• The post tax profit/loss of discontinued operations

• The post tax gain/loss on the measurement to fair value less costs to sell or on the disposal of assets consisting of discontinued operations

• Profit or loss

Structure and Content

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Page 22: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

3. Statement of comprehensive income – income statement

Information to be presented in the income statement or notes:

• Material items need to be disclosed separately

• Impairment provisions

• Restructuring costs

• Disposals of property, plant and equipment

• Disposals of investments

• Discontinued operations

• Litigation settlements

• Reversals of provisions

Expenses need to be presented using either of the following classifications:

• By nature i.e purchases, depreciation, employment costs

• By function i.e distribution costs, cost of sales, administrative costs

Structure and Content

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Page 23: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

4. Statement of changes in equity

As a minimum, the following must be disclosed:

• Total comprehensive income showing separately amounts attributable to the owners and to non-controlling interests (minority)

• For each component of equity, the effects of retrospective adjustments• For each component of equity, a reconciliation between the carrying amount at the

beginning and end of the period, separately disclosing changes from:• Profit or loss• Each item of comprehensive income• Transactions with owners in their capacity as owners

• Dividends recognised as distributions to owners

5. Statement of cash flows

Dealt with by IAS 7 on Cash Flow Statements.

Structure and Content

ICPAK

Page 24: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

6. Notes

The notes have to:

• Present information about the basis of preparation and specific accounting policies

• Disclose the information required by IFRSs that is not presented elsewhere in the financial statements

• Provide information that is not presented elsewhere in the financial statements, but is relevant to understanding them.

IAS 1 requires the notes to be presented in a systematical manner with cross references to the income statement, balance sheet, statement of changes in equity and cash flow statement.

Structure and Content

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Page 25: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

6. Notes

Disclosure of accounting policies:

Significant accounting estimates, assumptions and judgements have to be disclosed.

Estimates and assumptions:

Biological assets: In arriving at the fair valuation of biological assets, the management estimate the success rate of planting at 78%. Based on the managements past experience the success rate should not fall below 75%. Should the success rate fall by 5% from the estimate assumed by the management, the fair valuation of biological assets would decrease by Shs. XX.

Judgements:

Revenue recognition: The company enters into contracts for most of its sales made. As stipulated in the contracts, the buyer has the right to return the goods, within 100 days from the date of delivery, in the event of dissatisfaction with regards to the quality, provided that such a complaint is justified. In such an event, the company shall replace the spoilt plants to the ratio of one to one (1:1). Based on the company management's past experience when undertaking similar contracts, the dissatisfaction rate cannot be established due to factors beyond their control. Accordingly, the revenue on the said transactions has been recognised.

Structure and Content

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Page 26: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

For financial periods beginning on or after 1 January 2007, entities need to disclose information to enable users to evaluate the entity’s objectives, policies and processes for managing capital.

• Qualitative information about its objectives, policies and processes for managing capital, including:

• A description of what it manages as capital

• Externally imposed capital requirements: nature of these requirements and how these are incorporated into the management of capital

• How the entity is meeting its objectives for managing capital

• Summary quantitative data about what it manages as capital e.g. ratio’s

• Any changes in the above from the previous period

• Whether the entity complied with the externally imposed capital requirements and the consequences of non-compliance, if any

Capital Disclosures

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Page 27: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Notes:

•amounts of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution and the related amount per share

• any amounts of cumulative preference dividends not recognised

Anywhere:

• Domicile and legal form

•Country of incorporation

•Address of its registered office

•Address of its principal place of business (if different from above)

•Description of the nature of the entity’s operations and its principal activities

•The name of the parent and ultimate parent of the group.

Other Disclosures

ICPAK

Page 28: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

ICPAK

Content: The framework;

The application of IFRS: IFRS basic principles

Page 29: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Objective and scope of IAS 8• Selecting and applying accounting policies• Accounting for changes in:

– Accounting policies– Accounting estimates

• Corrections of prior period errors

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Page 30: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Accounting policies

• Accounting policies– Specific principles, bases, conventions, rules and

practices applied by an entity in preparing and presenting financial statements

ICPAK

Page 31: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Selection and application of accounting policies

• Accounting policy determined by – Applying a specific IFRS– Considering any relevant implementation guidance

• In absence of a specific IFRS– Use judgement to develop an accounting policy that results

in relevant and reliable information• First, refer to IFRSs dealing with similar and related issues and

second, to framework • Consider pronouncement of other setters or industry practices if

consistent with above

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Page 32: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Consistency of accounting policies• Select and apply accounting policy consistently for

similar transactions, other events and conditions– Example: equity method for all jointly controlled entities

• May adopt different policies– When an IFRS requires or permits categorisation of

items for which different policies may be appropriate– But accounting policy selected and applied should be

consistent to each category

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Page 33: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Disclosure – Judgment and estimation

• Disclose the judgements made by management – that have the most significant effect

• Disclose information about key assumptions – concerning the future, and other key sources of estimation

uncertainty – disclose for those assets and liabilities

• their nature; and• their carrying amount at the end of the reporting period

ICPAK

Page 34: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Changes in accounting policies• Consistency is important• Change an accounting policy only if the change:

– is required by an IFRS; or– results in the financial statements providing reliable and more

relevant information

ICPAK

Page 35: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Applying changes in accounting policies

Changes in accounting policies

Application of a standard

or interpretation

Voluntary change in

accounting policy

Specific transitional provisions

Apply specific

transitional provisions

Apply change

retrospectivelyYes

No

ICPAK

Page 36: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Applying changes in accounting policies (continued)

Retrospective application is impracticable

Period-specific effects Cumulative effect at the beginning of the current period

Apply new accounting policy

as at the beginning of the

earliest period for which retrospective application is

practicable

Financial statements are adjusted as at the beginning of the earliest period from which

retrospective adjustment is practicable

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Page 37: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Retrospective application - Impracticability

• Use only information that– Provides evidence of circumstances at the time; and– Would have been available when the financial

statements of that period were authorised for issue

• If a significant estimate requires the use of information that does not meet these criteria then– Retrospective application is impracticable

ICPAK

Page 38: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Changes in accounting policies –Disclosure

• When an entity restates, IAS 1 requires an entity to prepare an additional statement of financial position as at the beginning of the comparative period

• When initial application of a standard or an interpretation has an effect, disclose– Change in accordance with transitional provisions– For current period and each prior period presented the amount of the

adjustment for each financial line item affected and for basic and diluted earnings per share, if IAS 33 applies

– The amount of the adjustment relating to periods before those presented, to the extent practicable

– If retrospective application is required but impracticable, the circumstances and a description

• Need not repeat these disclosures in subsequent periodsICPAK

Page 39: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Changes in accounting policies –Disclosure (continued)

• When a voluntary change:– Has an effect on the current period or any prior period– Would have such an effect except that it is impracticable to determine

the amount of the adjustment; or– Might have an effect on future periods

• Then we are required to disclose:– Why the change provides reliable and more relevant information– For current period and each prior period presented the amount of the

adjustment for each line item affected– The amount of the adjustment relating to periods before those

presented– If retrospective application is impracticable, the circumstances and a

description• Need not repeat these disclosures in subsequent periods

ICPAK

Page 40: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Changes in accounting policies -Disclosure (continued)

• When not applying a new IFRS that has been issued but is not yet effective, disclose– This fact– Known or reasonably estimable information relevant to

assessing the possible impact that application of the new IFRS will have on the financial statements in the period of initial application

ICPAK

Page 41: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Changes in accounting estimates • Include the effect of a change in an accounting estimate

in net profit or loss in– The period of the change, if the change affects the period

only, or– The period of the change and future periods, if the change

affects both

• If difficult to distinguish between change in accounting estimate and in accounting policy – Treat the change as a change in accounting estimate

ICPAK

Page 42: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Changes in accounting estimates (continued)

• Disclose the nature and amount of a change in an estimate: – That has an effect in the current period, or – Is expected to have an effect in the future periods

• If impracticable to quantify the amount, disclose that fact

ICPAK

Page 43: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Prior period errors• Errors in respect of recognition, measurement,

presentation or disclosure• Prior period errors

– Omission and misstatements for one or more prior periods arising from a failure to use, or misuse of, reliable information

• Such errors include – The effects of mathematical mistakes in applying accounting

policies – Oversights or misinterpretations of facts– Fraud

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Page 44: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Correction of material prior period errors

• Correct material prior period errors retrospectively in the first set of financial statements authorised for issue after discovery by:– Restating the comparative amounts for the prior period

presented in which the error occurred; or– If the error occurred before the earliest prior period

presented, restating the opening balances for the earliest prior period presented

ICPAK

Page 45: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Correction of material prior period errors (continued)

Retrospective application is impracticable

Period-specific effectsCumulative effect at the

beginning of the current period

Restate the opening balances of assets and liabilities and

equity for the earliest period for which retrospective

restatement is practicable

Restate comparative information to correct the error prospectively from the earliest

date practicable

Revised IAS 1 requirements ICPAK

Page 46: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Disclosure of prior period errors correction

• When an entity restates, IAS 1 requires an entity to prepare an additional statement of financial position as at the beginning of the comparative period

• Extensive disclose requirements– Disclose the nature of the prior period error– For each prior period presented the amount of the correction– The amount of the correction at the beginning of the earliest prior

period presented– If retrospective restatement is impracticable, the circumstances that led

to the existence of that condition and a description of how and from when the error has been corrected

• Need not repeat these disclosures in subsequent periods

ICPAK

Page 47: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

ICPAK

Content: The framework;

The application of IFRS: IFRS basic principles

Page 48: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Objective and scope• The objective of the Standard is to prescribe:

– When an entity should adjusts its financial statements for events after the balance sheet date.

– The disclosures that an entity should give about the date when the financial statements were authorized for issue and about events after the balance sheet date.

• Scope– This standard shall be applied in the accounting for,

and disclosure of, events after the balance sheet date. ICPAK

Page 49: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Definitions• Events after the balance sheet date are those events,

favorable and unfavorable, that occur between the balance sheet date and the date when the financial statements are authorized for issue. Two types of events can be identified:

• Those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and

• Those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the balance sheet date).

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Page 50: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Events after the balance sheet date

Start of the reporting period

Information made public

Financial statements authorised

Balance sheet date

Events covered by the financial statements

Events after the balance sheet date covered by IAS 10

Shareholdermeeting

Events after the balance sheet datenot covered by IAS 10

ICPAK

Page 51: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Example The management of an enterprise completes draft financial

statements for the year to 31 December 2013 on 28 February 2014. On 18 March 2014, the board of directors reviews the financial statements and authorizes them for issue. The enterprise announces its profit and selected other financial information on 19 March 2014. The financial statements are made available to shareholders and others on 1 April 2014. The annual meeting of shareholders approves the financial statements on 15 May 2014 and the approved financial statements are then filed with a regulatory body on 17 May 2014.

The financial statements are authorized for issue on 18 March 2014 (date of Board authorization for issue).

ICPAK

Page 52: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Adjusting and non-adjusting events• Adjusting events:

– Provide evidence of conditions that existed at the balance sheet date

– Should adjust amounts recognised in the financial statements

• Non-adjusting events:– Indicate conditions that arose after the balance sheet date– Should not adjust amounts recognised in the financial

statements • disclosure requirements for material non-adjusting events

ICPAK

Page 53: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Examples of adjusting events (1)1. The settlement after the balance sheet date of a court case that confirms

that the entity had a present obligation at the balance sheet date. The entity adjusts any previously recognized provision related to this court case in accordance with IAS 37 or recognizes a new provision.

2. The determination after the balance sheet date of the cost of assets purchased, or the proceeds from assets sold, before the balance sheet date.

3. The determination after the balance sheet of the amount of profit-sharing or bonus payments.

4. The discovery of fraud or errors that show that the financial statements are incorrect.

ICPAK

Page 54: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Examples of adjusting events (2)5. The receipt of information after the balance sheet date

indicating that an asset was impaired at the balance sheet date, or that the amount of previously recognized impairment loss for that asset need to be adjusted. For example:

The bankruptcy of a customer that occurs after the balance sheet date usually confirms that a loss existed at the balance sheet date on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable; and

The sale of inventories after the balance sheet date may give evidence about their net realisable value at the balance sheet date.

ICPAK

Page 55: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Examples of non-adjusting events (1)

1. Decline in market value of investments between the balance sheet date and the date when the financial statements are authorized for issue. The decline in market value does not normally relate to the condition of the investments at the balance sheet date, but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognized in its financial statements for the investments. However, it may need to give additional disclosure.

ICPAK

Page 56: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Examples of non-adjusting events (2)

2. A major business combination after the balance sheet date or disposing of a major subsidiary.

3. Announcing a plan to discontinue an operation.4. Major purchases of assets, classification of assets as held for

sale in accordance with IFRS 5, other disposal of assets.5. The destruction of a major production plant by a fire after

the balance sheet date. 6. Abnormally large changes after the balance sheet in asset

prices or foreign exchange rates.

7. Announcing, or commencing the implementation of, a major

restructuring.

ICPAK

Page 57: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Examples of non-adjusting events (3)

8. Changes in tax rates or tax laws announced after the balance sheet date that have significant effect on current and deferred tax assets and liabilities.

9. Commencing major litigation arising solely out of events that occurred after the balance sheet date.

ICPAK

Page 58: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Dividends and going concern• Dividends

– Dividends declared after the balance sheet date should not be recognised as a liability at the balance sheet date but should be disclosed in notes

– If dividends are declared (ie the dividends are appropriately authorized and no longer at the discretion of the entity) after the balance sheet date but before the financial statements are authorized for issue, the dividends are not recognized as a liability at the balance sheet date because they do not meet the criteria of present obligation in IAS 37. Such dividends are disclosed in the notes (IAS 1) .

ICPAK

Page 59: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Going concern• If the going concern assumption becomes

inappropriate after the balance sheet date, the financial statements should not be prepared on a going concern basis for example:

• Deterioration in operating results and financial position after the balance sheet date may indicate a need to consider whether the going concern assumption is still appropriate.

ICPAK

Page 60: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Disclosure• Date of authorisation for issue of financial statements (FS)• Who gave authorisation• Eventual power of someone to amend the FS after

issuance• Updating of disclosures about conditions existing at the

balance sheet date• Material non-adjusting events:

– nature of the event– an estimate of its financial effect, or that such an

estimate cannot be made

ICPAK

Page 61: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

ICPAK

Content: The framework;

The application of IFRS: IFRS basic principles

Page 62: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

IAS 21 definitions

Presentation currency

The currency in which the financial statements are presented

Foreign currency

A currency other than the functional currency of an entity

Functional currency

The currency of the primary economic environment in which the entity operates

ICPAK

Page 63: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Determination of functional currency – Primary factors

Reflects the primary economic environment in whichthe entity operates

Currency that influences sales prices

(often denomination currency)

Currency that influences sales prices

(often denomination currency)

Currency of the country whose economy

determines sale pricesof goods and services

Currency of the country whose economy

determines sale pricesof goods and services

Currency in which operating cash receipts

are retained

Currency in which operating cash receipts

are retained

Currency in which fundsfrom financing activities

are generated

Currency in which fundsfrom financing activities

are generated

Currency that influenceslabour, material,

other costs

Currency that influenceslabour, material,

other costs

But also…

ICPAK

Page 64: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Determination of functional currency – Additional factors for foreign operations

Degree of operational

independence from parent

Degree of operational

independence from parent

Financial autonomy

compared with parent

Financial autonomy

compared with parent

Influence of cash flows on parent’s

cash flows

Influence of cash flows on parent’s

cash flows

Proportion of transactions with

parent

Proportion of transactions with

parent

Foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are

based or conducted in a country or currency other than those of the reporting entity.

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Page 65: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Choice of functional currency?• An entity does not have a free choice of

functional currency• An entity cannot change functional currency

unless facts and circumstances relevant to its determination change

• Change should be applied prospectively

ICPAK

Page 66: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

IAS 21 functional currency – Summary

Currency in which financing funds are

received and operating receipts are retained

Extent of integration with reporting entity

(foreign operations only)

Supporting evidence

Mixed indicators? Use judgement to choose FC that most faithfully presents

economic effects of underlying transactions

Primary economic environment:

Currency and economy influencing sales prices and operating costs

Primaryindicator

ICPAK

Page 67: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Example• Company A is a manufacturer of steel products. The majority of products

are sold into the local market using the international price for steel, quoted in U.S. dollars. Competitive forces in the country also influence the local sales price.

• The majority of raw material purchases are from local suppliers, denominated in local currency, based on the price of steel, quoted in U.S. dollars, on the London Metal Exchange.

• These sales and raw material purchases are invoiced and settled in local currency. Most other expenses are in local currency as well.

• A significant amount of financing is in U.S. dollars to match the currency in which the sales are priced, while cash reserves are held in local currency.

• What is the functional currency of the company?

ICPAK

Page 68: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Reporting foreign currency transactions in the functional currency – Initial recognition

• Recognise transaction at the rate at the transaction date

• May use e.g. average rate for week or month as a practical approximation– Average rates not reliable if currency fluctuates

significantly

ICPAK

Page 69: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Monetary assets• Cash• Cash equivalents• Debt securities• Accounts receivable• Notes receivable

Items that will be received in a fixed or determinable amount of cash

ICPAK

Page 70: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Non-monetary assets• Inventory• Prepaid expenses• Equity securities• Investment property• Property, plant, and equipment• Intangible assets (e.g. goodwill)

Items that will not be received in a fixed or determinable amount of cash

ICPAK

Page 71: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Monetary liabilities• Accounts payable• Notes payable• Bonds payable• Leases payable• Accruals• Deferred tax (usual classification)

Items that will be paid out in a fixed or determinable amount of cash

ICPAK

Page 72: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Non-monetary liabilities

• Deferred income• Government grant

Items that will not be paid out in a fixed or determinable

amount of cash

ICPAK

Page 73: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Reporting foreign currency transactions in the functional currency – Subsequent measurement

Non-monetary items at

historical cost

Rate at the date of transaction

Revalued non-monetary

items

Rate at date of valuation

Monetaryitems

Rate at the reportingdate

ICPAK

Page 74: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Reporting foreign currency transactions in the functional currency – “Impaired assets”

Costor

Carrying amount

Net realisable valueor

recoverable amount

Carrying amountdetermined

by comparison

Historical rate OR rate at the date of the measurement /

valuation

Rate at the date thatthe amount is

determined (e.g. reporting date)

ICPAK

Page 75: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Monetary items – Exchange gains and losses

Monetary items

Realisedexchange differences

Unrealisedexchange differences

Recognised in P/L(both gains and

losses)

ICPAK

Page 76: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Non-monetary items – Exchange gains and losses

Non-monetary items

Gain or lossRecognised in other

comprehensive income e.g revaluations

Exchange componentRecognised in other

comprehensive income

Gain or lossRecognised in P/L

Exchange componentRecognised in P/L

ICPAK

Page 77: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Change in functional currency• Only if there is a change to the underlying transactions,

events and conditions• Translation procedures should be applied to the new

functional currency prospectively from the date of the change

ICPAK

Page 78: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Translation to the presentation currency

Assets and liabilities

Income and expenses

All resulting exchange differences classified as a separate component of equity

Rate at reporting date

Rate at date of transaction (or average rate)

Reclassify to P/L on disposal

Equity transactions Rate at date of transaction (or average rate)

ICPAK

Page 79: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Explanation of exchange rate difference

• Recalculation of the foreign exchange difference:

CR = Rate at year end (closing rate)

HR = Historical or average rate

Translation adjustment in other comprehensive income

Net asset changes from other equity transactions x (CR – HR)

Net asset changes from P/L x (CR – HR)

Opening equity components x CR – Opening equity components x HR

+

+

=

ICPAK

Page 80: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Translation of a foreign operation• Non-controlling interest allocated share of accumulated

exchange difference• Goodwill and fair value adjustments arising from a

business combination are treated as assets/liabilities of the foreign operation translated at the reporting date

• Exchange gains and losses on intra-group items are taken to P/L

• Different year-ends– 3 month lag permitted– Adjust for significant changes in exchange rates

between different year-endsICPAK

Page 81: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Exchange differences – Net investment in a foreign operation

• Net investment in a foreign operation – the amount of the entity’s interest in the net assets of that foreign operation

• If the settlement of monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, exchange differences on such item are recognised:– In profit or loss by both the reporting entity and the foreign

operation in their individual financial statements – In other comprehensive income and accumulated in a separate

component of equity in the consolidated financial statements• Accumulated exchange differences are reclassified from

equity to profit or loss on disposal of the foreign operation

ICPAK

Page 82: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

What is a hyperinflationary economy?

• No absolute rate at which hyperinflation is deemed to arise. Indicators:– Population keeps its wealth in a stable currency or in non-

monetary assets– Population regards monetary amounts not in local currency

but in terms of a stable currency e.g., prices quoted in a stable foreign currency

– Credit terms compensate for the expected loss of purchasing power during the credit period

– Interest rates, wages and prices are linked to a price index– The cumulative inflation rate over three years is approaching

or exceeds 100%ICPAK

Page 83: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

A matter of judgement!• IAS 29 does not give a definition of hyperinflation• Becoming or ceasing to be hyperinflationary is a trend, not a

discrete event• Quantitative factors are not decisive in their own right, but need

to be evaluated in the light of the economic circumstance and trends

• Judgement used in coordination with the local profession and local accounting standard setter, so that all companies in a country apply (or cease to apply) IAS 29 at the same time

ICPAK

Page 84: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Foreign operations – Hyperinflationary economy

• Assets and liabilities, equity items, income and expenses are translated into a different presentation currency:– Current year: Closing rate at the date of the most recent reporting

period presented– Comparatives: Closing rate at the most recent period only if

presentation currency is a currency of hyperinflationary economy. If not, comparatives should not be restated – i.e. retain the comparatives as they were reported in the previous period.

The entity’s functional currency is the currency of a hyperinflationary economy

Local FS are restated by inflation index according to IAS 29

Resulting gain/loss on net monetary position is recorded in P/L

ICPAK

Page 85: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Key disclosures• Exchange rate differences included in:

– P/L (except for financial instruments measured at FV through P/L)– Other comprehensive income

• Reminders– Refer to functional currency and presentation currency – In accounting policy note disclose that P/L items are translated at

rate at transaction dates

ICPAK

Page 86: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Additional disclosures • Reasons (if applicable):

– Why there has been a change in the functional currency– Why the presentation and functional currency are

different

• If entity’s presentation currency is different from its functional currency, its financial statements should be described as compliant with IFRSs only if all the requirements of IAS 21 are applied

ICPAK

Page 87: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Additional disclosures (continued)• If entity’s additional financial information is displayed in a

currency different from either its functional or its presentation currency and all the requirements of IAS 21 have not been met:– Clearly identify such information as supplementary– Disclose the currency of the supplementary information– Disclose the entity’s functional currency and the

method of translation used as a basis for presenting the supplementary information

ICPAK

Page 88: ICPAK The Financial Reporting Workshop Kisumu November 20, 2014 The application of IFRS: IFRS basic principles

Thank you

88ICPAK