IFRS for SMEs World Bank REPARIS FR CoP

Transcription

1 !International Financial Reporting Standards International Financial Reporting Standards 1 IFRS for SMEs World Bank REPARIS FR CoP 14 September 2010 Vienna, Austria Copyright 2010 IFRS Foundation. All rights reserved.

2 The IFRS for SMEs 2 Topic 1.5(a) Sections 3 8 Financial Statement Presentation David Cairns 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 the main principles in these sections are generally the same as full IFRSs

4 Illustrative financial statements 4 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 Disclosure checklist 5 Accompanies the IFRS for SMEs issued by IASB see +SMEs+and+related+material/IFRS+for+SMEs+and +related+material.htm available in English, Chinese, Italian, Romanian, Portuguese and Spanish

6 The IFRS for SMEs 6 Section 3 Financial Statement Presentation

7 Section 3 scope 7 Section 3 explains fair presentation of financial statements what compliance with the IFRS for SMEs requires what is a complete set of financial statements

8 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 8

9 Section 3 compliance 9 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 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. * see example 1 in Module 3 of the IFRS Foundation training material 10

11 Section 3 compliance statement? 11 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

12 Section 3 going concern 12 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

13 Section 3 going concern disclosures 13 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

14 Section 3 consistency of presentation 14 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)

15 Section 3 comparative information 15 Disclose 1 year s comparative amounts comparative information for narrative and descriptive information when relevant to understanding current period s financial statements

16 Section 3 materiality and aggregation 16 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

17 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 17

18 Section 3 financial statements 18 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

19 Section 3 optional alternative formats 19 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

20 Section 3 other comprehensive income 20 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 Section 3 identification 21 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

22 The IFRS for SMEs 22 Section 4 Statement of Financial Position

23 Section 4 scope 23 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

24 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 ) 24

25 Section 4 line items continued 25 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

26 Section 4 current/non-current distinction 26 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

27 Section 4 current assets 27 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

28 Section 4 examples current assets 28 Ex 3*: A produces whiskey from barley, water and yeast in a 24 month distillation process. Inventories include barley and yeast raw materials, partly distilled whiskey and distilled whiskey. 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

29 Section 4 examples continued 29 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

30 Section 4 examples continued 30 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

31 Section 4 current liabilities 31 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

32 Section 4 examples current liabilities 32 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

33 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 33

34 Section 4 examples continued 34 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

35 The IFRS for SMEs 35 Section 5 Statement of Comprehensive Income and Income Statement

36 Section 5 scope 36 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

37 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 37

38 Section 5 disclose allocations 38 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

39 Section 5 presentation alternatives 39 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

40 Section 5 two statements 40 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

41 The IFRS for SMEs 41 Section 6 Statement of Changes in Equity and Statement of Income and Retained Earnings

42 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 42

43 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. 43

44 Section 6 statement of income and retained earnings 44 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.

45 Section 6 statement of income and retained earnings 45 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

46 The IFRS for SMEs 46 Section 7 Statement of Cash Flows

47 Section 7 scope 47 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

48 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 48

49 Section 7 cash equivalents 49 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

50 Section 7 unrealised gains and losses 50 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

51 Section 7 operating activities 51 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

52 Section 7 direct or indirect method 52 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 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) 53

54 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 54

55 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. 55

56 Section 7 example 56 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

57 Section 7 example 1 continued 57 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

58 Section 7 example 58 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

59 Section 7 interest and dividends 59 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

60 Section 7 foreign currency and hedging 60 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

61 Section 7 non-cash transactions 61 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

62 The IFRS for SMEs 62 Section 8 Notes to the Financial Statements

63 Section 8 scope 63 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

64 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 64

65 Section 8 order of presentation 65 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

66 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) 66

67 Section 8 examples of judgements in applying accounting policies 67 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?

68 Section 8 judgement in applying AP 68 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

69 Section 8 key measurement assumptions 69 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

70 Section 8 key measurement assumptions 70 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.

71 Section 8 key measurement assumptions 71 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.

72 Section 8 key measurement assumptions 72 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.

73 Section 8 key measurement assumptions 73 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.

74 Questions or comments? 74 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.

75 75 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.