IFRS for SMEs IFRS Foundation-World Bank

Transcription

1 International Financial Reporting Standards 1 IFRS for SMEs IFRS Foundation-World Bank 9 13 January 2011 Almaty, Kazakhstan Copyright 2010 IFRS Foundation. All rights reserved.

2 The IFRS for SMEs 2 Topic 1.5 Sections 3 8, 10, 30, 32 and 33 Financial Statement Presentation Michael Wells

3 Overview of financial statement presentation 3 Section 3 specifies general requirements for financial statement presentation Sections 4 8 cover the presentation of each component of financial statements Section 10 covers accounting policies, estimates and errors Section 30 covers foreign currency translation

4 Overview of financial statement presentation 4 Section 32 covers events after the end of the reporting period Section 33 covers related party disclosures the main principles in these sections are generally the same as full IFRSs

5 Illustrative financial statements Accompanies the IFRS for SMEs issued by IASB a fictional candle manufacturer group see and+related+material/ifrs+for+smes+and+related+material.htm available in English, Chinese, Italian, Romanian, Portuguese and Spanish Issued by PwC (not reviewed by IASB/IASCF) a fictional first-time adopter fruit grower, wine and fruit producer, wholesale and retail group see 5

6 Disclosure checklist 6 Accompanies the IFRS for SMEs issued by IASB see d+related+material/ifrs+for+smes+and+related+materi al.htm available in English, Chinese, Italian, Romanian, Portuguese and Spanish

7 The IFRS for SMEs 7 Section 3 Financial Statement Presentation

8 Section 3 scope 8 Section 3 explains fair presentation of financial statements what compliance with the IFRS for SMEs requires what is a complete set of financial statements

9 Section 3 fair presentation Fair presentation is 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 The application of the IFRS for SMEs (with additional disclosure when necessary) is presumed to result in a fair presentation of the financial position, financial performance & cash flows of an entity that is not publicly accountable 9

10 Section 3 compliance An entity whose financial statements comply with the IFRS for SMEs must make an explicit and unreserved statement of such compliance in the notes Financial statements shall not be described as complying with the IFRS for SMEs unless they comply with all the requirements of the IFRS for SMEs 10

11 Section 3 compliance statement Ex 1*: An entity prepares its consolidated financial statements for the year ended 31 December 20X2 in accordance with the IFRS for SMEs. Note 2 Basis of preparation and accounting policies These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standard (IFRS ) for Small and Medium-sized Entities issued by the International Accounting Standards Board. * 2010 see IFRS Foundation. example 30 Cannon 1 Street in Module London EC4M 6XH 3 of UK. the IFRS Foundation training material 11

12 Section 3 compliance statement? 12 Can either of the following entities assert compliance with the IFRS for SMEs? Ex 5*: A has public accountability. It uses the IFRS for SMEs. Ex 6*: B does not have public accountability. It uses local GAAP. The local GAAP is based mainly on the IFRS for SMEs but has some material differences. * see example with the same number in Module 3 of the IFRS Foundation training material

13 Section 3 going concern 13 An entity is a going concern unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so When preparing financial statements, the management of an entity must make an assessment of the entity s ability to continue as a going concern

14 Section 3 going concern disclosures 14 Disclose material uncertainties related to events or conditions that cast significant doubt upon the entity s ability to continue as a going concern If financial statements are not prepared on a going concern basis disclose: that fact the basis of preparation the reason why the entity is not regarded as a going concern

15 Section 3 consistency of presentation 15 Same presentation and classification each year unless: significant change in the nature of the entity s operations or review of presentation and find another presentation or classification more appropriate (ie reliable and more relevant), or the IFRS for SMEs requires a change in presentation. If change, restate comparatives and disclose (nature, amount and reason)

16 Section 3 comparative information 16 Disclose 1 year s comparative amounts comparative information for narrative and descriptive information when relevant to understanding current period s financial statements

17 Section 3 materiality and aggregation 17 Material if could, individually or collectively, influence economic decisions of users depends on size and nature of the omission or misstatement judged in the surrounding circumstances Present separately each material class of similar items items of a dissimilar nature or function unless they are immaterial Materiality threshold is lower for notes

18 Section 3 materiality decisions Is the error material? Ex 13*: Before its 20X8 FS approved for issue discovered depreciation expense for 20X8 overstated by CU150. Ignored the error (reported profit for 20X8 at CU600,000, ie understated by CU150). Ex 15*: Same as Ex 13, except had the error been corrected the entity would have breached a borrowing covenant on a significant long-term liability. * see example with the same number in Module 3 of the IFRS Foundation training material 18

19 Section 3 financial statements 19 Complete set of financial statements Statement of financial position (Section 4) Either single statement of comprehensive income or two statements an income statement and a statement of comprehensive income (Section 5) Statement of changes in equity (Section6) Statement of cash flows (Section 7) Notes (Section 8) Present each with equal prominence

20 Section 3 optional alternative formats 20 Statement of income and retained earnings (instead of statement of comprehensive income (SOCI) and statement of changes in equity) if only changes in equity arise from: profit or loss; payment of dividends; correction of prior period errors; and changes in accounting policies Income statement (instead of SOCI) if no items of other comprehensive income

21 Section 3 other comprehensive income The only other comprehensive income (OCI) items are some foreign exchange gains and losses (see Section 30) some changes in fair values of hedging instruments (see Section 12) some actuarial gains and losses (see Section 28) 21

22 Section 3 identification 22 Clearly identify each of the financial statements and notes and distinguish them from other information in the same document Display prominently (and repeat when necessary) name individual or group financial statements presentation currency and level of rounding reporting date

23 The IFRS for SMEs 23 Section 4 Statement of Financial Position

24 Section 4 scope 24 The statement of financial position (SOFP) (sometimes called the balance sheet) presents an entity s assets, liabilities and equity as of a specific date the end of the reporting period. Section 4: sets out the information to be presented in a statement of financial position and how to present it

25 Section 4 line items Specifies minimum line items sufficiently different in nature or function for separate presentation (see 4.2) Requires additional line items headings and subtotals when relevant to an understanding of the entity s financial position. Sequencing, format, and titles are not mandated Some items may be presented in the SOFP or in the notes (see ) 25

26 Section 4 line items continued 26 Provide information that is relevant to an understanding of the entity s financial position In making aggregation/disaggregation judgements consider the amounts, nature and liquidity of assets the function of assets within the entity the amounts, nature and timing of liabilities

27 Section 4 current/non-current distinction 27 Make current/non-current distinction unless liquidity presentation is reliable and more relevant In liquidity presentation present assets and liabilities in order of liquidity Current assets and current liabilities are defined All other assets and liabilities are noncurrent Deferred tax balances are non-current

28 Section 4 current assets 28 Current asset if expect to realise, sell or consume in entity s normal operating cycle held for trading expects to realise in next 12 months cash or equivalent, unless restricted for +12 months

29 Section 4 examples current assets 29 Ex 3*: A produces whisky from barley, water and yeast in a 24-month distillation process. Inventories include barley and yeast raw materials, partly distilled whisky and distilled whisky. Current assets expected to be realised (ie turned into cash) in the entity s normal operating cycle. * see example 3 in Module 4 of the IFRS Foundation training material

30 Section 4 examples continued 30 Ex 7*: On 1/1/20X7 B invested CU900,000 in corporate bonds. Fixed interest of 5% per year is payable on 1 January each year. Capital is repayable in 3 annual instalments of CU300,000 each starting 31/12/20X8. * see example 7 in Module 4 of the IFRS Foundation training material

31 Section 4 examples continued 31 Ex 7 continued: At 31/12/20X7 A presents current assets CU45,000 accrued interest & CU300,000 capital repayable on 31/12/20X8 expected to be realised within 12 months non-current asset CU600,000 in +12 months

32 Section 4 current liabilities 32 Current liability if expect to settle in entity s normal operating cycle held for trading due to be settled in next 12 months entity does not have an unconditional right to defer settlement for at least 12 months after reporting date

33 Section 4 examples current liabilities 33 Ex 9*: An obligation to suppliers for the purchase of raw materials. Current liability expected to settle (ie pay) the supplier in the entity s normal operating cycle. * see example 9 in Module 4 of the IFRS Foundation training material

34 Section 4 examples continued Ex 10*: At 31/12/20X7 A was in breach of a covenant in a loan that is otherwise repayable 3 years later. The breach entitles (but does not oblige) the bank to require immediate repayment. At 31/12/20X7 the loan is a current liability at 31/12/20X7 A does not have an unconditional right to defer settlement for at least 12 months. * see example 10 in Module 4 of the IFRS Foundation training material 34

35 Section 4 examples continued 35 Ex 11*: Same as in Ex 10 except after the end of the reporting period (31/12/20X7) and before the financial statements were approved for issue, the bank formally agreed not to demand early repayment of the loan. At 31/12/20X7 the loan is a current liability at 31/12/20X7 A does not have an unconditional right to defer settlement for at least 12 months. * see example 11 in Module 4 of the IFRS Foundation training material

36 The IFRS for SMEs 36 Section 5 Statement of Comprehensive Income and Income Statement

37 Section 5 scope 37 The statement of comprehensive income presents an entity s financial performance (ie its income and expenses) for the period. Section 5 requires financial performance be presented in a single statement or two statements (an accounting policy choice) sets out the information to be presented in those statements

38 Section 5 line items Specifies minimum line items (see 5.5) Requires additional line items, headings and subtotals when relevant to an understanding of the entity s financial performance an analysis of expenses based on either the nature of expenses or the function of expenses segregation of discontinued operations Prohibits use of the descriptor extraordinary items 38

39 Section 5 disclose allocations 39 Profit or loss and total comprehensive income are before allocating those amounts to non-controlling interests and owners of the parent Disclose the allocations of those amounts to the non-controlling interests the owners of the parent

40 Section 5 presentation alternatives 40 Accounting policy choice 1 performance statement or 2 Single statement of comprehensive income includes all income and expenses separate line items include (among others) profit or loss (unless no items of OCI) each item of other comprehensive income displayed below profit or loss total comprehensive income

41 Section 5 two statements 41 Two statements income statement statement of comprehensive income Income statement ends with profit or loss Statement of comprehensive income starts with profit or loss present each item of other comprehensive income separately ends with total comprehensive income

42 The IFRS for SMEs 42 Section 6 Statement of Changes in Equity and Statement of Income and Retained Earnings

43 Section 6 scope The statement of changes in equity presents all changes in equity in the reporting period, detailing those arising from transactions with owners in their capacity as owners. Section 6 sets out requirements for presenting the changes in an entity s equity for a period, either in a statement of changes in equity or, if specified conditions are met and an entity chooses, in a statement of income and retained earnings 43

44 Section 6 statement of changes in equity Shows all changes to equity including total comprehensive income (and the allocation to owners of the parent and NCI) for each component of equity the effects of retrospective application and retrospective restatement (see Section 10) reconciliation between the carrying amount at the start & end of the period showing profit or loss; each item of OCI; transactions with owners as owners; & changes in ownership interests in subsidiaries that do not result in loss of control. 44

45 Section 6 statement of income and retained earnings 45 A statement of income and retained earnings can be presented (optional) instead of statement of comprehensive income and statement of changes in equity) if only changes in equity arise from: profit or loss; payment of dividends; correction of prior period errors; and changes in accounting policies.

46 Section 6 statement of income and retained earnings 46 Shows all the information required by Section 5 (comprehensive income) retained earnings at the beginning and at the end of the period dividends recognised in the period restatements of retained earnings for correction of prior period errors and changes in accounting policies

47 The IFRS for SMEs 47 Section 7 Statement of Cash Flows

48 Section 7 scope 48 The statement of cash flows provides information about the changes in cash and cash equivalents of an entity for a reporting period, showing separately changes from operating activities, investing activities and financing activities. Section 7 sets out the information that is to be presented in a statement of cash flows and how to present it

49 Section 7 cash equivalents Cash equivalents are short-term, highly liquid investments held to meet shortterm cash commitments rather than for investment or other purposes Cash equivalents include investments with a short maturity (say 3 months or less from the date of acquisition) bank overdrafts only if they are repayable on demand and form an integral part of an entity s cash management, bank overdrafts 49

50 Section 7 cash equivalents 50 Present the components of cash and cash equivalents reconciliation to the amounts in the statement of financial position (unless identical and similarly described) Disclose commentary by management the amount of significant cash and cash equivalents that are not available for use by the entity examples: foreign exchange controls or legal restrictions

51 Section 7 unrealised gains and losses 51 Unrealised gain and losses are not cash flows However, unrealised exchange rate gain/loss on foreign currency cash and cash equivalents are shown in CFS separate from operating, investing and financing activities ie in the reconciliation of cash and cash equivalents

52 Section 7 operating activities 52 Operating activities are the principal revenue-producing activities of the entity Operating activity cash flows include cash receipts from customers cash payments to suppliers & employees cash flows of income tax, unless specifically identified with financing and investing activities cash flows from investments, loans and other contracts held for dealing or trading purposes

53 Section 7 direct or indirect method Accounting policy choice to present operating cash flows indirect method profit or loss is adjusted for the effects of non-cash transactions, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows direct method major classes of gross cash receipts & gross cash payments are presented 53

54 Section 7 investing activities Investing activities are the acquisition & disposal of long-term assets & other investments not included in cash equivalents. Investing activity cash flows include cash payments to acquire (cash receipts from sale of) long-term assets (eg PP&E) cash payments to acquire (cash receipts from the sale) equity or debt instruments of other entities and interests in joint ventures (other than payments/receipts for those instruments classified as cash equivalents or held for dealing/trading) 54

55 Section 7 financing activities Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of an entity Financing activity cash flows include cash proceeds from issuing shares or other equity instruments and cash payments to owners to acquire or redeem the entity s shares cash proceeds from borrowings and cash repayments of amounts borrowed cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease 55

56 Section 7 investing and financing Present separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities. The aggregate cash flows arising from acquisitions and from disposals of subsidiaries or other business units shall be presented separately and classified as investing activities. 56

57 Section 7 example 57 Ex 1: In 20X7 A acquires 50% of the equity of B for CU110 when B s cash and cash equivalents = CU10. From 1/1/20X7 A controls B (ie B is a subsidiary of A) Scenarios (i) A settles the purchase price in cash (ii) A buys on credit (will settle next year) (iii) A settles by issuing its own equity to the seller (iv) A borrows CU110 from the bank and uses cash borrowed to settle

58 Section 7 example 1 continued 58 The group (A & B consolidated) would present a cash flow in the investing activities section for the purchase of a subsidiary of: scenario (i) CU100 outflow (ie CU110 less CU10) scenario (ii) CU10 inflow scenario (iii) CU10 inflow scenario (iv) CU100 outflow (in investing activities) & CU110 inflow in financing activities

59 Section 7 example 59 Ex 2: Same as Ex 1 except A has significant influence over B (ie B is an associate of A) A would present: scenario (i) CU110 outflow in investing activities scenario (ii) no cash flows scenario (iii) no cash flows scenario (iv) CU110 outflow in investing activities & CU110 inflow in financing activities

60 Section 7 interest and dividends 60 Interest and dividends CFs: show separately and classify consistently interest & dividends received = operating or investing activity interest paid = operating or financing activity dividends paid usually = financing activity

61 Section 7 foreign currency and hedging 61 Foreign currency: record CFs at the exchange rate on the date of the cash flow Hedge accounting: CFs of the hedging instrument are classified same way as CFs of hedged item

62 Section 7 non-cash transactions 62 Exclude from statement of cash flows however, disclose elsewhere in the financial statements (eg notes) Examples finance lease (initial recognition) issue own equity to acquire business convert debt into equity

63 The IFRS for SMEs 63 Section 8 Notes to the Financial Statements

64 Section 8 scope 64 Notes provide additional information narrative descriptions or disaggregations of items presented in statements and information about items that do not qualify for recognition. Section 8 sets out the principles for presenting note disclosures Other sections require note disclosures

65 Section 8 overview of notes Notes are presented systematically and cross-reference to FS Notes present information about basis of presentation specific accounting policies used information about judgements and key sources of estimation uncertainty Notes disclose the information required by the IFRS for SMEs that is not presented elsewhere other information that is relevant to an understanding of the FS 65

66 Section 8 order of presentation 66 1 st: statement of compliance (IFRS for SMEs) 2 nd: summary of significant accounting policies applied 3 rd: supporting information for items presented in FS, follow sequence in FS 4 th: other disclosures

67 Section 8 accounting policies Disclose: measurement bases used other relevant accounting policies used information about judgements made in applying accounting policies that have the most significant effect on the FS information about key sources of estimation uncertainty that have a significant risk of causing a material adjustment within 1 year (including their nature and carrying amount) 67

68 Section 8 examples of judgements in applying accounting policies 68 Whether outflow is more likely than not re a present obligation = recognise a liability? Whether a lease transfers substantially all risks and rewards of ownership = finance or operating lease? When risks and rewards transfer for goods sold = when to recognise revenue? Whether arrangement = sales of goods or financing? Whether controls exists = whether to consolidate?

69 Section 8 judgement in applying AP 69 Ex 3* lease classification In 20X3 A entered into an agreement (as lessee) for the use of an executive jet. It is not clear whether the lease transfers substantially all the risks and rewards incidental to ownership. However, management judge the lease to be an operating lease and therefore the lease is accounted for as an executory contract. Had the lease been judged to be a finance lease, the entity would have recognised the leased asset and a corresponding lease liability and it would have apportioned lease payments between finance costs and the repayment of the liability. It would also have depreciated the leased asset over its useful life. The entity s commitment to make future non-cancellable lease payments for the use of the jet is set out in note 40. * see example 3 in Module 8 of the IFRS Foundation training material

70 Section 8 key measurement assumptions 70 Ex 4* Fair value of financial instruments Financial assets and financial liabilities that are not basic financial instruments (see note 12) are carried at their fair value, with changes in fair value recorded in profit or loss. When no active market exists, or when quoted prices are not otherwise available, judgement is required in determining fair value. In these circumstances, fair value is determined using a variety of valuation techniques including present value methods, models based on observable input parameters, and models where some of the input parameters are unobservable. * see example 4 in Module 8 of the IFRS Foundation training material

71 Section 8 key measurement assumptions 71 Ex 4 continued: Valuation models are used primarily to value derivatives transacted in the over-the-counter market, including credit derivatives and unlisted securities with embedded derivatives. All valuation models are validated before they are used, and periodically reviewed thereafter, by independent qualified financial instrument valuation experts. Wherever possible, valuations derived from models are compared with quoted prices of similar financial instruments, and with actual values when realised, in order to further validate and calibrate our models.

72 Section 8 key measurement assumptions 72 Ex 4 continued: Our models incorporate information about the actual or estimated market prices and rates, time value, volatility, market depth and liquidity among others. When available, we use market observable prices and rates derived from market verifiable data. When such factors are not market observable, changes in assumptions could affect the reported fair value of financial instruments. The models are applied from one period to the next. However, estimating fair value inherently involves a significant degree of judgement. Management therefore establishes valuation adjustments to cover the risks associated with the estimation of unobservable input parameters and the assumptions within the models themselves.

73 Section 8 key measurement assumptions 73 Ex 4 continued: Valuation adjustments are also made to reflect such elements as aged positions, deteriorating creditworthiness (including country-specific risks), concentrations in specific types of instruments and market risk factors (interest rates, currencies etc), and market depth and liquidity. Although a significant degree of judgement is, in some cases, required in establishing fair values, management believes the fair values recorded in the statement of financial position and the changes in fair values recorded in the statement of comprehensive income are reflective of the underlying economics, based on the controls and procedural safeguards employed.

74 Section 8 key measurement assumptions 74 Ex 4 continued: Nevertheless, management have estimated the effect that a change in assumptions to reasonably possible alternatives could have on fair values where model inputs are not market observable. For all financial instruments carried at fair value which rely on assumptions for their valuation, we estimate that fair value could lie in a range from CU500,000 lower to CU500,000 higher than the fair values of CU2,000,000 (see note 12) recognised in the financial statements.

75 The IFRS for SMEs 75 Section 10 Accounting Policies, Estimates and Errors

76 Section 10 scope 76 Section 10 Provides guidance for selecting and applying the accounting policies Specifies accounting for changes in accounting estimates corrections of errors in prior period financial statements

77 Section 10 accounting policies hierarchy 77 If IFRS for SMEs addresses an issue, must follow IFRS for SMEs If not choose policy that results in most relevant and reliable information by 1 st try to analogise from requirements in other sections 2 nd use concepts/pervasive principles in Section 2 may also (not required) look to full IFRSs

78 Section 10 accounting policies hierarchy 78 Ex 5*: A received a grant of CU50,000 from a non-government development agency to set up farming operations in a specified rural area. IFRS for SMEs does not specify how to account for a grant from a non-government agency. However, it specifies how to account for government grants (Section 24 Government Grants). By analogy, A should account for the grant received in accordance with Section 24. * see example 5 in Module 10 of the IFRS Foundation training material

79 Section 10 consistency of acc. policies 79 Select and apply its accounting policies consistently for similar transactions, other events and conditions Change accounting policy only if is required by change to IFRS for SMEs (compulsory) results in reliable and more relevant information (voluntary)

80 Section 10 accounting policies Ex 7*: A measures invest s in associates at fair value. Because it cannot determine the fair value of its investment in associate B, it measures it using the cost model. A s accounting policy is acceptable. Sect 14 requires A choose cost, equity method, or fair value. If choose fair value still use cost for investments if impracticable to measure fair value reliably without undue cost or effort (see paragraph 14.10). 80 * see example 7 in Module 10 of the IFRS Foundation training material

81 Section 10 accounting policies 81 Ex 9*: A s acc. policy = account for investments in associates at fair value and jointly controlled entities at cost. None of A s investments are traded in a public securities market. A s accounting policies are acceptable. Its policy for associates need not be the same as its policy for jointly controlled entities. * see example 9 in Module 10 of the IFRS Foundation training material

82 Section 10 change in accounting policy 82 Change accounting policy if if mandated, follow the transition guidance as mandated if voluntary, retrospective application impracticability exemption Disclosures

83 Section 10 retrospective application Ex 20*: In 20X7 A voluntarily changed an accounting policy. The cumulative effect of the change is a decrease of CU100,000 in retained earnings at 1/1/20X7 (ie CU25,000 less profit for each of the past four years). The entity presents two years of comparative information. Presented as a restatement of: retained earnings at 1/1/20X5 reduce by CU50,000 profit 20X5 & 20X6 reduce by CU25,000 each * see example 20 in Module 10 of the IFRS Foundation training material 83

84 Section 10 impracticability exemption 84 Ex 21*: Facts same as Ex 20. Except, it is impracticable to determine the individual period effects of the change of policy. Presented as a restatement of: retained earnings at 1/1/20X7 reduce by CU100,000 (no adjustment to 20X5 & 20X6) additional disclosures * see example 21 in Module 10 of the IFRS Foundation training material

85 Section 10 accounting estimate 85 The use of reasonable estimates is an essential part of accounting. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.

86 Section 10 errors Prior period errors are omissions from, and misstatements in, financial statements for prior periods arising from a failure to use, or misuse of, reliable information that: was available when financial statements for those periods were authorised for issue, and could reasonably be expected to have been obtained and taken into account in the preparation & presentation of those financial statements. 86

87 Section 10 change in estimate 87 Account for changes in accounting estimates prospectively Disclose nature of change and the effect of the change on assets, liabilities, income and expense for the current period if practicable, estimates of the effect of the change in one or more future periods

88 Section 10 correcting errors 88 Correct prior period errors retrospectively (ie restate comparative figures) Disclose nature of the error financial effects (each line-item) an explanation if it is not practicable to determine the financial effects

89 Section 10 change in estimate 89 Ex 28*: On 1/1/20X1 A buys yacht for CU1,000,000. Useful life = 30 years. Residual value = CU100,000. Straight-line method of depreciation. At 31/12/20X9, as a result of research in 20X9, A reassessed the yacht as follows: useful life at 20 years from 1/1/20X1; residual value at nil; fair value at CU800,000; and straight-line depreciation as most appropriate method. * see example 28 in Module 10 of the IFRS Foundation training material

90 Section 10 change in estimate 90 Ex 28 continued: The reassessment of the yacht s useful life and its residual value are changes in accounting estimates. The revised assessments are appropriately made on the basis of new information that arose from research performed in the current reporting period 20X9.* * for accounting entries see example 32 in Module 10 of the IFRS Foundation training material

91 Section 10 prior period error 91 Ex 29*: Same as Ex 28, except, the research was publicly available in late 20X5. A believed the research to be valid but chose to ignore it until 20X9. A s 20X5 20X8 financial statements include errors. The comparative figures in its 20X9 financial statements must be restated to correct the effects of the prior period errors [if material]. * see example 29 in Module 10 of the IFRS Foundation training material

92 The IFRS for SMEs 92 Section 30 Foreign Currency Translation

93 Section 30 background An entity can have transactions in foreign currencies and it can have foreign operations. It may also present its FS in a foreign currency. Accounting for financial instruments denominated in a foreign currency and hedge accounting of foreign currency items are dealt with in Sections 11 and 12 (session on AM day-2 of this workshop). 93

94 Section 30 scope 94 Section 30 prescribes how to: determine an entity s functional currency measure foreign currency transactions include foreign operations in FS (see session on PM day-3 of this workshop) translate FS into a presentation currency (see session on PM day-3 of this workshop). It also specifies disclosures.

95 Section 30 functional currency 95 Each entity identifies its functional currency the currency of the primary economic environment in which the entity operates (ie normally the one in which it primarily generates and expends cash) A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency (ie a currency other than the entity s functional currency)

96 Section 30 determine functional currency 96 Most important factors to consider when determining an entity s functional currency: the currency: that mainly influences sales prices (often the currency in which its sales are denominated and settled), and of the country whose competitive forces and regulations mainly determine its sales prices. the currency that mainly influences labour, material & other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).

97 Section 30 disclose functional currency Disclose currency in which financial statements are presented If presentation currency is not functional currency disclose: that fact the functional currency reason for using a different presentation currency When functional currency of entity or a significant operation changes disclose: that fact reason for the change 97

98 Section 30 change functional currency Change functional currency only if change to underlying transactions, events and conditions eg a change in the currency that mainly influences the sales prices of goods and services Accounted for change prospectively translate all items using the exchange rate at the date of the change resulting translated amounts for nonmonetary items are treated as their historical cost 98

99 Section 30 foreign currency transaction 99 Initial recognition measure a foreign currency transaction in the functional currency using the spot exchange rate on the date when the transaction first qualifies for recognition

100 Section 30 examples initial recognition 100 Ex 1: A s functional currency is CU. On 1/12/20X1 A buys goods on credit for FCU100,000 (FCU denominated) when spot currency exchange rate = FCU1:CU2. On 1/12/20X1 A recognises inventories and trade payables of CU200,000.

101 Section 30 examples initial recognition 101 Ex 2: A s functional currency is CU. On 1/12/20X1 A buys an investment property for FCU100,000 when the spot currency exchange rate = FCU1:CU2 (ie A pays CU200,000). A accounts for the investment property at its fair value. On 1/12/20X1 A recognises its investment property at CU200,000.

102 Section 30 subsequent measurement At the end of each reporting period translate foreign currency monetary items using the closing rate; translate non-monetary items that are measured in terms of historical cost in a foreign currency using the exchange rate at the date of the transaction; and translate non-monetary items that are measured at fair value in a foreign currency using the exchange rates at the date when the fair value was determined. 102

103 Section 30 translation gains and losses 103 Monetary items recognise, in profit or loss when the exchange differences arise (ie on settlement or on retranslating (exception see paragraph 30.13). Non-monetary items recognise exchange differences (in profit or loss or OCI) follows classification of the underlying item. Disclose amount of exchange differences recognised in profit or loss (excluding those on items carried using the fair value model)

104 Section 30 subsequent measurement 104 Ex 1 continued: On 31/12/20X1 (A s year-end) the spot currency exchange rate = FCU1:CU2.1. On 1/2/20X2 when the spot rate = FCU1:CU2.05 A pays CU205,000 to settle the FCU100,000 liability. At 31/12/20X1 A reports the trade payable at CU210,000 and recognises loss of CU10,000 in profit or loss. On 1/2/20X2 A derecognises the FCU100,000 payable and recognises gain of CU5,000.

105 Section 30 subsequent measurement Ex 2 continued: On 31/12/20X1 (A s financial year-end) the fair value of the investment property = FCU100,000 (ie coincidentally no change) and the spot currency exchange rate = FCU1:CU2.1. At 31/12/20X1 A remeasures the investment property at CU210,000 and records a gain of CU10,000 as a change in fair value (rather than exchange difference) in profit or loss. 105

106 Section 30 subsequent measurement Ex 3: Same as Ex 2 except: A accounts for its investment property using the cost model (because its fair value cannot be measured reliably on an ongoing basis). At 31/12/20X1 A records the investment property at CU200,000 (ie no remeasurement because it is a nonmonetary asset carried at historical cost). 106

107 Section 30 presentation & disclosure 107 The amount of exchange differences recognised in profit or loss (other than those arising from fair value changes) Non-monetary items recognise exchange differences (in profit or loss or OCI) follows classification of the underlying item.

108 The IFRS for SMEs 108 Section 32 Events after the End of the Reporting Period

109 Section 32 scope Events after the end of the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. 109

110 Section 32 types of events Two types of events after the end of the reporting period adjusting events those that provide evidence of conditions that existed at the end of the reporting period non-adjusting events those that are indicative of conditions that arose after the end of the reporting period 110

111 Section 32 accounting and reporting 111 Adjusting events adjust the amounts recognised (and update disclosures made) in its financial statements Non-adjusting events do not adjust the amounts recognised in its financial statements. However, disclose: the nature of the event, and an estimate of its financial effect, or a statement that estimate cannot be made

112 Section 32 example adjusting event 112 Ex 7*: On 31/12/20X5 A assessed its warranty obligation as CU100,000. Before its 20X5 financial statements were authorised for issue, A discovered a latent defect in one of its lines of products. It reassessed its warranty obligation at 31/12/20X5 at CU150,000. Adjusting event latent defect existed at 31/12/20X5. Measure warranty provision at CU150,000 at 31/12/20X5. * see example 7 in Module 32 of the IFRS Foundation training material

113 Section 32 example non-adjusting event 113 Ex 12*: On 28/2/20X1 A s 31/12/20X0 FS authorised for issue. At 31/12/20X0 the fair value of A s investment in B s publicly traded shares = CU20,000. On 28/2/20X1 fair value of shares = CU25,000. * see example 12 in Module 32 of the IFRS Foundation training material

114 Section 32 example non-adjusting event 114 Ex 12 continued: Non-adjusting event the change in the fair value results from conditions that arose after 20X0. A does not adjust the amounts recognised in its financial statements. However, it must give additional disclosure see paragraph

115 Section 32 disclosure non-adjusting 115 Ex 15*: 1/3/20X1 A s 31/12/20X0 FS authorised for issue when spot ex rate = CU2.5:FCU1. At 31/12/20X0 spot ex rate = CU2:FCU1. A measured its FCU2,000,000 unhedged non-current liability at CU4,000,000 in SOFP. * see example 15 in Module 32 of the IFRS Foundation training material

116 Section 32 disclosure non-adjusting Ex 15 continued: Note 20 Events after the end of the reporting period The financial statements were authorised for issue on 1 March 20X1 when the exchange rate was CU2.5:FCU1. The deterioration of the exchange rate from CU2:FCU1 at 31 December 20X1 has increased the expected settlement amount of the FCU-denominated liability by CU1,000,

117 The IFRS for SMEs 117 Section 33 Related Party Disclosures

118 Section 33 scope 118 FS include disclosures necessary to draw attention to the possibility that an entity s financial position and performance have been affected by the existence of related parties and by transactions and outstanding balances with such parties. Assess the substance of the relationship and not merely its legal form.

119 Section 33 related parties defined 119 (a) A person or a close member of that person s family that (i) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity; (ii) has control over the reporting entity; or (iii) has joint control or significant influence over the reporting entity or has significant voting power in it.

120 120 Section 33 related parties defined continued (b) An entity if any of the following conditions applies: (i) the entity & the reporting entity are members of the same group (parent, subsidiary & fellow subsidiary are related to the others). (ii) either entity is an associate or joint venture of the other entity (or of a member of a group of which the other entity is a member). (iii) both entities are joint ventures of a third entity.

121 Section 33 related parties defined continued 121 (b) An entity if any of the following conditions applies continued: (iv) either entity is a joint venture of a third entity and the other entity is an associate of the third entity. (v) the entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the plan.

122 Section 33 related parties defined continued 122 (b) An entity if any of the following conditions applies continued: (vi) the entity is controlled or jointly controlled by a person identified in (a). (vii) a person identified in (a)(i) has significant voting power in the entity. (viii) a person identified in (a)(ii) has significant influence over the entity or significant voting power in it.

123 123 Section 33 related parties defined continued (b) An entity if any of the following conditions applies continued: (ix) a person or a close member of that person s family has both significant influence over the entity or significant voting power in it and joint control over the reporting entity. (x) a member of the key management personnel of the entity or of a parent of the entity, or a close member of that member s family, has control or joint control over the reporting entity or has significant voting power in it.

124 Section 33 not necessarily related party entities simply because of common director 2 venturers simply because they share joint control Simply by virtue of their normal dealings with an entity: providers of finance; trade unions; public utilities; and government departments and agencies. A customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant volume of business, merely by virtue of the resulting economic dependence.

125 Section 33 relationship disclosures 125 Disclose related party relationship only if an entity has related party transactions Exception disclose parent-subsidiary relationship irrespective of whether there are related party transactions including name of its parent and ultimate controlling party if neither parent nor ultimate controlling party produces FS available for public use then also disclose name of the next most senior parent that does do so

126 Section 33 relationship disclosures 126 Disclose key management personnel compensation in total this disclosure is in addition to disclosures about related party transactions (see following slides)

127 Section 33 related party transactions 127 A RPT is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. If an entity has a RPT it discloses information about the transactions, outstanding balances and commitments necessary for an understanding of the potential effect of the relationship on the financial statements. Do not state RPT made on terms equivalent to arm s length transactions unless can be 2010 substantiated. IFRS Foundation. 30 Cannon Street London EC4M 6XH UK.

128 Section 33 RPT disclosures RPT disclosures include (at minimum): the amount of the transactions the amount of outstanding balances and: their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received. provisions for uncollectible RP receivables. expense recognised for RP bad/doubtful debts. 128

129 Section 33 aggregation 129 Disclose items of a similar nature in the aggregate except when separate disclosure is necessary for an understanding of the effects of RPTs on the financial statements Disclose separately for each of entities with control, joint control or significant influence over the entity entities over which the entity has control, joint control or significant influence key management personnel of the entity or its parent (in the aggregate) other related parties

130 Section 33 exemption from RPT discl. Exemption applies to transaction disclosures only (ie the nature of the relationship must be disclosed). a state (a national, regional or local government) that has control, joint control or significant influence over the reporting entity, and another entity that is a related party because the same state has control, joint control or significant influence over both the reporting entity and the other entity. 130

131 Questions or comments? 131 Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

132 132 This presentation may be modified from time to time. The latest version may be downloaded from: the+trainer+workshops.htm The accounting requirements applicable to small and medium-sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.