IFRS Institute Webcast Financial statement presentation and related-party disclosures June 13, 2012 1
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Today s presenters Paul Munter Audit Partner U.S. International Financial Reporting Standards (IFRS) Professional Practice Leader Brian Heckler Partner Accounting Advisory Services Kevin Bogle Managing Director Accounting Advisory Services 2 3
Learning objectives By completing this module, you should be able to: 1) Understand the basic financial statement presentation requirements under IFRS and differences to U.S. GAAP 2) Understand the differences between the requirements under IAS 7 Statement of Cash Flows and U.S. GAAP 3) Explain the requirements of IAS 24 Related-Party Disclosures. 4
Presentation of financial statements IAS 1 Presentation ti of Financial i Statements t t 5
Complete set of financial statements a) Statement of financial position b) Statement of comprehensive income c) Statement of changes in equity d) Statement of cash flows e) Notes f) Statement of financial position as at the beginning of the earliest comparative period when an entity restates comparative information, if material, following a: Change in accounting policy Correction of an error U.S. GAAP Difference Reclassification of items in the financial statements. 5 6
Knowledge check 1 Which of the following statements is correct? A. In order to be in compliance with the requirements under IAS 1, a reporting entity needs to prepare at least one year of comparative financial information. B. In order to be in compliance with the requirements under IAS 1, a reporting entity needs to prepare at least two years of comparative financial information. C. Similar to U.S. GAAP, there is no requirement under IFRS for inclusion of comparative financial information. D. The IFRS presentation requirements are identical with those under SEC Regulation S-X Art. 3 General Instructions as to Financial Statements. 6 7
Knowledge check 1 Debrief: Correct answer is A A. Correct, In order to be in compliance with the requirements under IAS 1, a reporting entity needs to prepare p at least one year of comparative financial information. B. Incorrect C. Incorrect D. Incorrect 7 8
Other components of financial reports Not within scope of IFRSs, but often presented outside financial statements: Financial review by management Performance Financial position Environmental reports, value-added statements, etc. IASB issued a document on Management Commentary which is not required for entities to be in compliance with IFRS but provides recommendations (similar to MD&A) on issues management may want to discuss 8 9
Identification of financial statements Must be clearly identified and distinguished from other information in annual report Required disclosures: Name of entity Separate, individual, or consolidated financial statements Annual reporting date or reporting period Presentation currency Level of rounding 9 10
Compliance with IFRS Explicit and unreserved statement of compliance Disclose application of standards or interpretations before effective date Inappropriate accounting treatments not rectified by additional disclosure 10 11
Statement of financial position: Current/noncurrent Present assets and liabilities on face of the Statement of Financial Position as: Current/noncurrent Broadly in order of liquidity (when reliable and more relevant) Deferred tax assets and liabilities are noncurrent 11 12
Statement of financial position: Current/noncurrent (continued) Assets current if: Liabilities current if: Involved in normal operating cycle Held primarily for trading purposes Expected to be realized within 12 months Cash or a cash equivalent Involved in normal operating cycle Held primarily for trading purposes Due to be settled within 12 months No unconditional right to defer settlement for at least 12 months All other assets and liabilities are noncurrent Loans due within 12 months classified as noncurrent if have current ability and expectation to refinance for at least 12 months after reporting date Post-balance sheet cures or refinancings do not result in noncurrent classification 12 13
Statement of comprehensive income All items of income and expense recognized in a period are presented in one or two statements: Single statement of comprehensive income Separate (but consecutive) income statement and statement of comprehensive income Statement of comprehensive income includes components of other comprehensive income Total comprehensive income presented Changes in equity: All nonowner changes in equity presented in the same one or two statements noted above Owner changes in equity presented in the statement of changes in equity (not included in the statements above) IASB/FASB issued amendments to presentation of OCI in June 2011 13 14
Statement of comprehensive income: Presentation Analysis of expenses (face or notes): Nature or function If classification based on function, additional information required: Depreciation/amortization Employee benefits expense U.S. GAAP Difference Separate disclosure of nature and amount of material items of income and expense (face or notes) No extraordinary items Other disclosures Components of other comprehensive income segregated between: Items to be recycled to P&L (e.g., unrealized gain/loss on AFS financial assets, cash flow hedges) Items not recycled to P&L (e.g., remeasurement gain/loss on postretirement benefit plan, revaluation surplus on PPE, gain/loss on equity securities classified as FVTOCI under IFRS 9) 14 15
Knowledge check 2 Which of the following statements is correct? A. IFRS requires that expenses be presented by function. B. IFRS has detailed industry-specific guidance regarding the presentation of line items in the statement of comprehensive income. C. Reporting entities which have transitioned from U.S. GAAP to IFRS have an option to stick to the presentation format they used under U.S. GAAP. D. IFRS provides an option to present expenses by either nature or function in the statement t t of comprehensive income. 15 16
Knowledge check 2 Debrief: correct answer is D A. Incorrect B. Incorrect C. Incorrect D. Correct, IFRS provides an option to present expenses by either nature or function in the statement of comprehensive income. 16 17
Knowledge check 3 Which of the following statements is incorrect regarding the presentation of impairment losses recognized on long-lived assets? A. Under U.S. GAAP, it is common to have a separate line item in the statement of comprehensive income for impairment losses. B. A reporting entity which has chosen under IFRS to classify expenses by function should allocate any impairment losses to the appropriate functions. C. Under IFRS, there is flexibility regarding g the presentation of impairment losses and reporting entities have an option to present it either within or outside the operating results. D. Under IFRS, there is a requirement to disclose in the notes the amount and line item within the statement of comprehensive income in which the impairment loss has been reported. 17 18
Knowledge check 3 Debrief: correct answer is C Incorrect Incorrect Correct, Impairment losses would be included in operating results. Incorrect 18 19
The future of financial statement presentation The IASB and FASB initiated a joint project on financial statement presentation to address users concerns that existing requirements permit too many alternative types of presentation and that information is highly aggregated and inconsistently presented In October 2008, the Boards published the Discussion Paper Preliminary Views on Financial Statement Presentation Staff draft of Exposure Draft Financial Statement Presentation was published on July 1, 2010 reflecting the Boards cumulative tentative decisions During October 2010 meeting, Boards decided to focus on the highest priority projects Unclear when, if at all, deliberations will resume 19 20
Proposed classification and presentation Summary of proposed format Statement of financial position Statement of comprehensive income Statement of cash flows Business section: Operating category Business section: Operating category Business section: Operating category Operating finance subcategory Operating finance subcategory Investing category Investing category Investing category Income taxes section Financing section: Financing section: Debt category Debt category Equity category Discontinued operations section Multicategory transaction section Multicategory transaction section Financing section: Debt category Equity category Income taxes section Discontinued operations section, net of tax Other comprehensive income section, net of tax Income taxes section Discontinued operations section 20 21
The future of financial statement presentation Financial statement presentation Other comprehensive income In June 2011, the IASB and FASB issued amendments to the presentation of items of other comprehensive income: Items of profit or loss and items of other comprehensive income must be presented either as: One combined statement of comprehensive income, or Two consecutive statements: income and other comprehensive income IASB requirement to present separately items in OCI that will and will not be reclassified subsequently to profit or loss Mandatory for annual periods beginning on or after July 1, 2012, early adoption permitted Financial statement presentation Discontinued operations Joint project to establish a common definition of discontinued operations and require common disclosures Project on hold until completion of the highest priority projects 21 22
Statement of cash flows IAS 7 Statement t t of Cash Flows 23
Statement of cash flows Statement of Cash Flows Operating Investing Financing Principal revenue generating and other activities that are not investing or financing Acquisition and disposal of long-term assets and other investments not included in cash equivalents Activities that result in changes in the size and composition of the equity capital and borrowings of the entity 23 24
Cash flows from operating activities Choose between The direct method (recommended) Major classes of gross cash receipts and gross cash payments are disclosed The indirect method (most common) Profit or loss is adjusted for: Effects of transactions of a noncash nature Deferrals/Accruals of past or future operating cash receipts or payments Items of income/expense associated with investing and financing cash flows 24 25
Key points Definition of cash and cash equivalents Classification of transactions into different categories: operating, investing, and financial activities Cash flow items in majority of cases reported gross Foreign currency transactions Separate reporting of: U.S. GAAP Difference Interest and dividends paid and received Income taxes Acquisition and disposal of business units 25 26
Knowledge check 4 Which of the following statements is correct regarding the statement of cash flows presentation requirements? A. IFRS and U.S. GAAP are completely converged. B. There are some significant differences, particularly for financial institutions, regarding the presentation requirements under IFRS versus U.S. GAAP. C. The requirements to prepare and present a statement of cash flows are completely different between U.S. GAAP and IFRS. D. Under IFRS, income taxes paid or received have to be allocated to cash flows from operating, investing, and financing activities respectively and separately. 26 27
Knowledge check 4 Debrief: correct answer is B A. Incorrect B. Correct, there are some significant differences, particularly for financial institutions, regarding the presentation requirements under IFRS versus U.S. GAAP. C. Incorrect D. Incorrect 27 28
Related-party disclosures IAS 24 Related-Party t Disclosures 29
IAS 24 Objective To ensure that an entity s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties. (IAS 24.1) 29 30
Definition of a related party 1) A person or a close member of that person s family is related to a reporting entity if that person has control, joint control or significant influence, or is a member of the key management personnel or the reporting entity or of a parent of the reporting entity. 2) An entity is related to the reporting entity if any of the following conditions applies: They are members of the same group One entity is an associate or joint venture of the other entity Both entities are joint ventures of the same third party One entity is a joint venture of a third party and the other an associate The entity is a postemployment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity An entity is controlled or jointly controlled by a person identified in #1) above A person having control or joint control over the reporting entity has significant influence over the entity or is a member of key management 30 31
Related-party disclosures include: Relationships between a parent and its subsidiaries Key management personnel compensation by category Related-party transactions minimum disclosure includes: The amount of the transactions The amount of outstanding balances Provisions for doubtful debts The expense recognized during the period in respect of bad or doubtful debts due from related parties 31 32
Knowledge check 5 Which of the following statements is correct regarding the disclosure requirements for key management compensation? A. There is no requirement to disclose key management compensation. B. Disclosure of key management compensation generally is considered to be material from a qualitative perspective. C. There is no requirement to categorize different elements of key management compensation (for example, distinguish between short-term benefits and postemployment benefits). D. A qualitative discussion around the key features of the compensation arrangements usually is sufficient. 32 33
Knowledge check 5 Debrief: correct answer is B A. Incorrect B. Correct, disclosure of key management compensation generally is considered to be material from a qualitative perspective. C. Incorrect D. Incorrect 33 34
Practical considerations Changes to financial statement presentations may impact an organization s at o financial a systems s and processes: New accounting disclosure and recognition requirements may result in more detailed presentation of information and/or new data elements or fields to be recorded and information to be calculated on a different basis. Reporting packs may need to be modified to gather additional disclosure information from branches or subsidiaries operating on a standard general ledger package or collect information from subsidiaries that use different financial accounting packages. 34 35
Practical considerations Assessment and planning: Accounting disclosure and information gap analysis Complexity assessment Initial adoption alternatives IFRS 1 Industry/competitor assessment Other company-wide initiatives and projects Analysis of existing resource capabilities Training requirements Impact on investments, foreign subsidiaries, and overseas operations Investor and analyst communications Project team structure and work plan Entire organization involvement not just an accounting issue Ensure buy-in from auditors on decisions and interpretations made by management 35 36
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