Chapter 9

Reporting financial
performance

Introduction
Learning outcomes
Chapter study guidance

Learning topics
1 IAS 1, Presentation of Financial Statements
2 IFRS 8, Operating Segments
3 IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations
4 IAS 24, Related Party Disclosures
5 IFRS 1, First-time Adoption of International Financial Reporting
Standards
6 IAS 34, Interim Financial Reporting
7 IFRS 14, Regulatory Deferral Accounts
8 Audit focus – general issues with reporting performance
9 Audit focus – specific issues
Summary
Self-test questions
Further question practice
Technical reference
Answers to Interactive questions
Answers to Self-test questions
 Introduction

Learning outcomes
• Explain how different methods of recognising and measuring assets and liabilities can affect
reported financial performance
• Explain and appraise accounting standards that relate to reporting performance: in respect of
presentation of financial statements; revenue; operating segments; continuing and discontinued
operations; EPS; interim reporting
• Formulate and evaluate accounting and reporting policies for single entities and groups of
varying sizes and in a variety of industries
• Calculate and disclose, from financial and other qualitative data, the amounts to be included in an
entity’s financial statements according to legal requirements, applicable financial reporting
standards and accounting and reporting policies
• Appraise the significance of inconsistencies and omissions in reported information in evaluating
performance
• Compare the performance and position of different entities allowing for inconsistencies in the
recognition and measurement criteria in the financial statement information provided
• Make adjustments to reported earnings in order to determine underlying earnings and compare
the performance of an entity over time
• Demonstrate and explain, in the application of audit procedures, how relevant ISAs affect audit
risk and the evaluation of audit evidence
Specific syllabus references for this chapter are: 2(a)–(d), 9(f)–(h), 14(f)
9

Chapter study guidance

Use this schedule and your study timetable to plan the dates on which you will complete your study
of this chapter.

Topic Practical Study approach Exam approach Interactive

significance Questions

1 IAS 1, Presentation Approach IAS 1 formats will be N/A

of Financial This section will be ‘taken as read’ in
Statements largely revision from your exam. One
IAS 1 forms the your earlier studies. issue that could
basis of financial However, it includes come up is that of
reporting, setting a recent Practice other
out the formats of Statement on comprehensive
the financial materiality income, and
statements and their judgements that whether an item
structure and you will not have may be reclassified
content. met before, so work from other
through this part comprehensive
carefully. income to profit or
loss.
Stop and think
Is it possible for a
financial report to
provide too much
information?

456 Corporate Reporting ICAEW 2021

Topic Practical Study approach Exam approach Interactive
significance Questions

2 IFRS 8, Operating Approach As IFRS 8 is a IQ1: Segments

Segments This topic is new at disclosure standard, This question tests
External users of Advanced Level, so it is likely to come reportable
financial statements needs to be worked up in the context of segments requiring
rely on the limited through carefully. financial analysis application of size
disaggregation The best way to and also audit. criteria and
provided as a result learn is by looking aggregation.
of the requirements at the summary in
of accounting 3.6.1 and the
standards such as example and
the disclosure of proforma in 3.6.3
segmental and 3.6.4.
information. Stop and think
How does
disaggregation of
data help facilitate
the assessment of a
company’s
performance?

3 IFRS 5, Non-current Approach Both assets held for IQ2: Held for sale
Assets Held for Sale You have studied sale and This question asks
and Discontinued this topic at discontinued you to apply the
Operations Professional Level, operations are held-for-sale criteria.
External users of so work through regularly tested, Make sure you
financial statements quickly then do the both in the single come to a
rely on the limited interactive question. silo FR question and conclusion.
disaggregation the integrated
Stop and think question. Scenarios
provided as a result
of the requirements How do standards are often very
of accounting such as IFRS 5 and detailed and IFRS 5
standards such as IFRS 8 help provide will interact with
the disclosure of disaggregated other standards,
discontinued information to such as IAS 10.
operations. users?

4 IAS 24, Related Approach As a disclosure IQ4: Related party

Party Disclosures You have met this standard, IAS 24 is transactions
Related party standard in your often tested in the This question tests
transactions happen earlier studies but context of audit. It related parties in a
in any size of entity, as it comes up quite can also come up in group context.
and are perfectly regularly, it is best to the context of group
legal, but need to approach it as if accounts.
be disclosed. learning it from
scratch.
Stop and think
What is the
significance in terms
of the company’s
performance of
disclosing related
party transactions?

ICAEW 2021 9: Reporting financial performance 457

 Topic Practical Study approach Exam approach Interactive
significance Questions

5 IFRS 1, First-time Approach As yet IQ5: IFRS 1

Adoption of This standard is undetermined as Read through the
International examinable at Level this standard has question and ‘audit’
Financial Reporting C and has not yet not been examined. the answer.
Standards been examined, so
While this standard read through but
is within the not at the expense
syllabus, and has of other standards
affected companies in this chapter.
in practice, it is not Stop and think
as significant for
your exam. Questions will
generally feature
companies that
already use IFRS
rather than
adopting it for the
first time.

6 IAS 34, Interim Approach The key point to IQ6: Interim

Financial Reporting IAS 34, Interim remember if IAS 34 financial statements
The preparation of Financial Reporting comes up in an This short question
interim financial (a new topic at exam is that an deals with the
statements may Advanced Level) entity should use appropriate tax rate
present a number of lays down the the same to apply to the
challenges. It is principles and recognition and profits in an interim
common for some guidelines for the measurement report.
business production of principles in its
arrangements, such interim reports. interim statements
as supply pricing as it does in its
Stop and think annual financial
agreements, bonus
schemes, taxation What does IAS 34 statements.
and overhead say about holiday
allocation, to be pay?
based on
annualised
approaches. The
measurement and
presentation of such
information may
therefore be
complex.

7 IFRS 14, Regulatory Approach This standard has N/A

Deferral Accounts IFRS 14, Regulatory not yet been
This is a fairly minor Deferral Accounts is examined and is
standard for the in the syllabus, but given Level C in the
purposes of your is not a key topic syllabus. However, it
studies and has not yet could still be
been examined. examined, though
not in as much
Stop and think detail as some of
IFRS 14 tackles an the other IFRS.
accounting
mismatch. Can you
think of another
IFRS that does this?

458 Corporate Reporting ICAEW 2021

 Topic Practical Study approach Exam approach Interactive
significance Questions

8 Audit focus – Approach An exam will test N/A

general issues with Read through specifics rather than
reporting quickly general points.
performance
Stop and think
This is a brief
section outlining Is the auditor
general issues with concerned only with
performance in the fraud?
context of ISA (UK)
200

9 Audit focus – Approach Many questions IQ7: Audit

specific issues Work through all of have a scenario in procedures – held-
This section gives this section, which you are asked for-sale assets
detailed guidance focusing particularly to explain the This question is in
on the audit of: on the audit of financial reporting the style of (though
related parties as treatment and then shorter) one you
• Segment discuss audit issues.
information this comes up a lot. might get as part of
It makes sense to do Question 3.
• Held-for-sale Stop and think the FR first as the
assets How would the audit follows on
• Related parties auditor determine from that. However,
whether the IFRS 5 questions may also
• First-time
held for sale criteria be set in which he
adoption of IFRS
have been met? financial reporting
arises from the audit
issue. This approach
is a key difference
from Professional
Level.

Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.

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 1 IAS 1, Presentation of Financial Statements
Section overview

• IAS 1, Presentation of Financial Statements sets down the format of financial statements,
containing requirements as to their presentation, structure and content.

1.1 Main features

1.1.1 Titles of financial statements
• The three main financial statements under IAS 1 are as follows:
• Statement of financial position
• Statement of profit or loss and other comprehensive income
• Statement of cash flows
You may still see the older names, particularly balance sheet for statement of financial position as
these titles are not mandatory.

1.1.2 Reporting owner changes in equity and comprehensive income

IAS 1 classifies changes in equity in a period as either:
• owner changes in equity; or
• non-owner changes in equity.
Owner changes in equity arise from transactions with owners in their capacity as owners, eg,
dividends paid and issues of share capital. These are presented in the statement of changes in
equity.
Non-owner changes in equity (known as ‘comprehensive income’) include:
• the profit or loss for the period; and
• income or expenditure recognised directly in equity (known as ‘other comprehensive income’).
These are presented in the statement of profit or loss and other comprehensive income.
Summary

IAS 1

Profit or loss for period Statement of profit or loss and other

comprehensive income
Non-owner transactions recognised directly in equity

Owner transactions Statement of changes in equity

1.1.3 Presentation of comparatives

IAS 1 requires disclosure of comparative information in respect of the previous period. It also
requires inclusion of a statement of financial position as at the beginning of the earliest comparative
period when an entity:
• retrospectively applies an accounting policy;
• retrospectively restates items in the financial statements; or
• reclassifies items in the financial statements.
In effect this will result in the presentation of three statements of financial position when there is a
prior period adjustment.

460 Corporate Reporting ICAEW 2021

 1.2 Materiality and aggregation
Entities must be able to use judgement when presenting their financial reports. Accordingly, the
following are required by IAS 1 paragraph 30A:
(a) Materiality. Information should not be obscured by aggregating or by providing immaterial
information. Materiality considerations apply to the parts of the financial statements. Materiality
considerations still apply, even when a standard requires a specific disclosure.
(b) Statement of financial position and statement of profit or loss and other comprehensive income.
The list of line items to be presented in these statements can be disaggregated and aggregated
as relevant and additional guidance is given on subtotals in these statements. An entity’s share of
other comprehensive income of equity-accounted associates and joint ventures should be
presented in aggregate as single line items based on whether or not it will subsequently be
reclassified to profit or loss.
Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general-purpose financial statements make on the basis
of those financial statements, which provide financial information about a specific reporting entity. In
other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude,
or both, of the items to which the information relates in the context of an individual entity’s financial
report. (IAS 1: para. 7, emphasis added)
The IASB has amended the definition of ‘material’ to make it clear that obscuring information has the
same effect as omitting or misstating it. Obscuring information means making the information so
difficult to find or so difficult to understand, that it may as well have been omitted.
This addresses the issue that too much information can be just as problematic as the omission or
misstatement of information.

1.2.1 Practice Statement 2: Making Materiality Judgements

The IASB issued Practice Statement 2: Making Materiality Judgements in 2017. This is a tool to aid
management in using judgement to decide what information is material and what is not; it is a non-
mandatory document and does not have the status of an IFRS.
The key point is a four‑step process for making materiality judgements:
Step 1 Identify information that has the potential to be material. This step requires consideration of
IFRS requirements and the common information needs of primary users.
Step 2 Assess whether the information identified is material. Both quantitative and qualitative
factors should be considered.
Step 3 Organise the information within the draft financial statements so that it supports clear and
concise communication.
Step 4 Review the information provided as a whole, considering whether it is material individually
and in combination with other information. At this stage information may need to be added
or removed.

Professional skills focus: Assimilating and using information

This Practice Statement is an example of where two professional skills interact. In order to apply
judgement, you need to identify the relevant information, taking into account IFRS requirements and
users’ information needs.

Professional skills focus: Applying judgement

Having assimilated and organised the information (steps 1 to 3 of the Practice Statement process),
you will be in a position to make judgements about whether it is material. Other information may be
needed to support the judgements.

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1.3 Statement of financial position
Note that reserves other than share capital and retained earnings may be grouped as ‘other
components of equity’.
Statement of financial position as at 31 December 20X7

31 Dec 20X7 31 Dec 20X6

$m $m
ASSETS
Non-current assets
Property, plant and equipment X X
Goodwill X X
Other intangible assets X X
Investments in associates X X
Investments in equity instruments X X
X X
Current assets
Inventories X X
Trade receivables X X
Other current assets X X
Cash and cash equivalents X X
X X
Total assets X X
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital X X
Retained earnings X X
Other components of equity X X
X X
Non-controlling interests X X
Total equity X X
Non-current liabilities
Long-term borrowings X X
Deferred tax X X
Long-term provisions X X
Total non-current liabilities X X
Current liabilities
Trade and other payables X X
Short-term borrowings X X
Current portion of long-term borrowings X X
Current tax payable X X

462 Corporate Reporting ICAEW 2021

 31 Dec 20X7 31 Dec 20X6
$m $m
Short-term provisions X X
Total current liabilities X X
Total liabilities X X
Total equity and liabilities X X

1.4 Statement of profit or loss and other comprehensive income

The statement of profit or loss and other comprehensive income presents the total comprehensive
income of an entity for a period.
Total comprehensive income is the change in equity during a period resulting from transactions and
other events, other than those changes resulting from transactions with owners in their capacity as
owners. It includes all components of profit or loss and of ‘other comprehensive income’.
Other comprehensive income includes income and expenses that are not recognised in profit or
loss, but instead recognised directly in equity. It includes:
• changes in the revaluation surplus; IAS-16
• remeasurements (actuarial gains and losses on defined benefit plans recognised in accordance
with IAS 19, Employee Benefits (Chapter 18); IAS-19
• gains and losses arising from translating the financial statements of a foreign operation
(Chapter21); IAS-21
• gains and losses on remeasuring investments in equity instruments where an irrevocable election
has been made to record changes in OCI (Chapter 16); and IFRS-9
• the effective portion of gains and losses on hedging instruments in a cash flow hedge
(Chapter17). IFRS-9
1.4.1 Presentation of other comprehensive income
The issue
The blurring of distinctions between different items in OCI is the result of an underlying general lack
of agreement among users and preparers about which items should be presented in OCI and which
should be part of the profit or loss section. For instance, a common misunderstanding is that the split
between profit or loss and OCI is on the basis of realised versus unrealised gains. This is not, and has
never been, the case.
This lack of a consistent basis for determining how items should be presented can lead to the
somewhat inconsistent use of OCI in financial statements.
IAS 1 approach
Entities are required to group items presented in OCI on the basis of whether they would be
reclassified to (recycled through) profit or loss at a later date, when specified conditions are met.
The amendment does not address which items are presented in OCI or which items need to be
reclassified.
Income tax
IAS 1 requires an entity to disclose income tax relating to each component of OCI. This is because
these items often have tax rates different from those applied to profit or loss.
This may be achieved by either:
• presenting individual components of OCI net of the related tax; or
• presenting individual components of OCI before tax, with one amount shown for the aggregate
amount of income tax relating to those components.

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Presentation
IAS 1 allows comprehensive income to be presented in two ways:
(a) A single statement of profit or loss and other comprehensive income; or
(b) A statement displaying components of profit or loss plus a second statement beginning with
profit or loss and displaying components of OCI (statement of profit or loss and other
comprehensive income).
The recommended format of a single statement of profit or loss and other comprehensive income is
as follows:
Statement of profit or loss and other comprehensive income for the year ended 31 December 20X7

20X7 20X6
$m $m
Revenue X X
Cost of sales (X) (X)
Gross profit X X
Other income X X
Distribution costs (X) (X)
Administrative expenses (X) (X)
Other expenses (X) (X)
Finance costs (X) (X)
Share of profit of associates X X
Profit before tax X X
Income tax expense (X) (X)
Profit for the year from continuing operations X X
Loss for the year from discontinued operations (X)
PROFIT FOR THE YEAR X X
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Gains on property revaluation IAS-16 X X
Investment in equity instruments IFRS-9 (X) X
Actuarial gains (losses) on defined benefit pension plans IAS-19 (X) X
Share of gain (loss) on property revaluation of associates X (X)
Income tax relating to items that will not be reclassified X (X)
(X) X
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations IAS-21 X X
Cash flow hedges IFRS-9 (X) (X)
Income tax relating to items that may be reclassified (X) (X)
X X
Other comprehensive income for the year, net of tax (X) X

464 Corporate Reporting ICAEW 2021

 20X7 20X6
$m $m
TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X
Profit attributable to:
Owners of the parent X X
Non-controlling interests X X
X X
Total comprehensive income attributable to:
Owners of the parent X X
Non-controlling interests X X
X X
Earnings per share ($)
Basic and diluted X X

Alternatively, components of OCI could be presented in the statement of profit or loss and other
comprehensive income net of tax.

Statements of profit or loss

Throughout this Workbook, income and expense items which are included in the ‘top half’ of the
statement of profit or loss and other comprehensive income are referred to as recognised in profit
or loss, or recognised in the income statement.
Income and expense items included in the ‘bottom half’ of the statement of profit or loss and
other comprehensive income are referred to as recognised in other comprehensive income.
For exam purposes, you must ensure that you clarify where in the statement of profit or loss and
other comprehensive income an item is recorded, by referring to recognition:
• in profit or loss; or
• in other comprehensive income.

1.5 Statement of changes in equity

All changes in equity arising from transactions with owners in their capacity as owners are shown in
the statement of changes in equity.
Non-owner transactions are not permitted to be shown in the statement of changes in equity other
than in aggregate.
Statement of changes in equity for the year ended 31 December 20X7
Share capital

Retained
earnings

foreign ops

Inv. in equity
instrum’ts

Cash flow
hedges

Revaluat’n
surplus

Total

Non-controlling
interest

Total equity
Trans. of

Balance at £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
1 Jan 20X7 X X (X) X X – X X X
Changes in
accounting
policy – X – – – – X – X

ICAEW 2021 9: Reporting financial performance 465

 Share capital

Retained
earnings

foreign ops

Inv. in equity
instrum’ts

Cash flow
hedges

Revaluat’n
surplus

Total

Non-controlling
interest

Total equity
Trans. of
Balance at £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Restated
balance X X (X) X X – X X X
Changes in
equity
during
20X7
Issue of
share
capital X – – – – – X – X
Dividends – (X) – – – – (X) (X) (X)
Total
compre-
hensive
income for
the year – X X X X X X X X
Transfer to
retained
earnings – X – – – (X) – – –

Balance at
31 Dec
20X7 X X X X X X X X X

A comparative statement for the prior period is also required. Here is an example of a statement of
changes in equity with some real figures in, to give you a better idea of what it looks like:
Olive Group: statement of changes in equity for the year ended 30 June 20X9

Inv. in Non-
Share Retained equity Revaluat’n controlling Total
capital earnings instrum’ts surplus Total interest equity
£m £m £m £m £m £m £m
Balance at
1 July 20X8 14,280 10,896 384 96 25,656 1,272 26,928
Share
capital
issued 1,320 1,320 1,320
Dividends (216) (216) (120) (336)
Total
compre-
hensive
income for
the year (1,296) 72 48 (1,176) 528 (648)

Balance at
30 June
20X9 15,600 9,384 456 144 25,584 1,680 27,264

466 Corporate Reporting ICAEW 2021

 2 IFRS 8, Operating Segments
Section overview

An important aspect of reporting financial performance is segment reporting. This is covered by IFRS
8, Operating Segments.
IFRS 8 is a disclosure standard.
• Segment reporting is necessary for a better understanding and assessment of:
– past performance;
– risks and returns; and
– informed judgements.
• IFRS 8 adopts the managerial approach to identifying segments.
• The standard gives guidance on how segments should be identified and what information
should be disclosed for each.
It also sets out requirements for related disclosures about products and services, geographical areas
and major customers.

2.1 Introduction
Large entities produce a wide range of products and services, often in several different countries.
Further information on how the overall results of entities are made up from each of these product or
geographical areas will help the users of the financial statements. This is the reason for segment
reporting.
• The entity’s past performance will be better understood.
• The entity’s risks and returns may be better assessed.
• More informed judgements may be made about the entity as a whole.
Risks and returns of a diversified, multinational company can be better assessed by looking at the
individual risks and rewards attached to groups of products or services or in different geographical
areas. These are subject to differing rates of profitability, opportunities for growth, future prospects
and risks.

2.2 Objective and scope

An entity must disclose information to enable users of its financial statements to evaluate the nature
and financial effects of the business activities in which it engages and the economic environments in
which it operates.
Only entities whose equity or debt securities are publicly traded (ie, on a stock exchange) need
disclose segment information. In group accounts, only consolidated segmental information needs to
be shown. (The statement also applies to entities filing or in the process of filing financial statements
for the purpose of issuing instruments.)

2.3 Definition of operating segment

Definition
Operating segment: This is a component of an entity:
• that engages in business activities from which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other components of the same entity);
• whose operating results are regularly reviewed by the entity’s chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance; and
• for which discrete financial information is available.

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 The term ‘chief operating decision maker’ identifies a function, not necessarily a manager with a
specific title. That function is to allocate resources and to assess the performance of the entity’s
operating segments.

2.4 Aggregation
Two or more operating segments may be aggregated if the segments have similar economic
characteristics, and the segments are similar in all of the following respects:
• The nature of the products or services
• The nature of the production process
• The type or class of customer for their products or services
• The methods used to distribute their products or provide their services
• If applicable, the nature of the regulatory environment

2.5 Determining reportable segments

An operating segment is reportable where:
• It meets the definition of an operating segment; and
• Any of the following size criteria are met:
– Segment revenue ≥ 10% of total (internal and external) revenue
– Segment profit or loss ≥ 10% of the profit of all segments in profit (or loss of all segments
making a loss if greater)
– Segment assets ≥ 10% of total assets
At least 75% of total external revenue must be reported by operating segments. Where this is not
the case, additional segments must be identified (even if they do not meet the 10% thresholds).

2.5.1 Aggregating segments

Two or more operating segments below the thresholds may be aggregated to produce a reportable
segment if the segments have similar economic characteristics, and the segments are similar in a
majority of the aggregation criteria above.
Evidence of similar economic characteristics is given by similar long-term financial performance. For
example, similar long-term average gross margins for two operating segments would be expected if
their economic characteristics were similar.

2.5.2 Non-reportable segments

Operating segments that do not meet any of the quantitative thresholds may be reported separately
if management believes that information about the segment would be useful to users of the financial
statements.
Non-reportable segments are required by IFRS 8 to be combined and disclosed in an ‘all other
segments’ category separate from other reconciling items in the reconciliations required by IFRS8.
Entities must disclose the sources of revenue in the ‘all other segments’ category.

Professional skills focus: Structuring problems and solutions

IFRS 8 provides a framework for structuring the problem of comparing like with like and identifying
important areas of the business. First segments need to be identified – not always easy in real life or
in the exam. Then the relevant disclosures need to be made.

2.6 Disclosures
2.6.1 Segment disclosures
Disclosures required by the IFRS are extensive and best learned by looking at the example and pro
forma, which follow the list. Disclosure is required of:
• Factors used to identify the entity’s reportable segments

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 • Types of products and services from which each reportable segment derives its revenues
• For each reportable segment:
– Operating segment profit or loss
– Segment assets
– Segment liabilities
– Certain income and expense items
Figure 9.1: IFRS 8 Disclosures

A reconciliation of each of the above material items to the entity’s reported figures is required.
Reporting of a measure of profit or loss by segment is compulsory. Other items are disclosed if
included in the figures reviewed by or regularly provided to the chief operating decision maker.

2.6.2 Entity-wide disclosures

The following disclosures are required for the whole entity:
• External revenue by each product and service (if reported basis is not products and services)
• Geographical information:

Notes
1 External revenue is allocated based on the customer’s location.
2 Non-current assets exclude financial instruments, deferred tax assets, post-employment benefit
assets, and rights under insurance contracts.
• Information about reliance on major customers (ie, those who represent more than 10% of
external revenue)

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2.6.3 Disclosure example from IFRS 8
The following example is adapted from the IFRS 8, Implementation Guidance, which emphasises that
this is for illustrative purposes only and that the information must be presented in the most
understandable manner in the specific circumstances.
The hypothetical company does not allocate tax expense (tax income) or non-recurring gains and
losses to reportable segments. In addition, not all reportable segments have material noncash items
other than depreciation and amortisation in profit or loss. The amounts in this illustration,
denominated as dollars, are assumed to be the amounts in reports used by the chief operating
decision maker.

Car Motor All

parts vessel Software Electronics Finance other Totals
$ $ $ $ $ $ $
Revenues from external
customers 3,000 5,000 9,500 12,000 5,000 1,000 35,500
Inter-segment revenues – – 3,000 1,500 – – 4,500
Interest revenue 450 800 1,000 1,500 – – 3,750
Interest expense 350 600 700 1,100 – – 2,750
Net interest revenue – – – – 1,000 – 1,000
Depreciation and
amortisation 200 100 50 1,500 1,100 – 2,950
Reportable segment
profit 200 70 900 2,300 500 100 4,070
Other material non-cash
items:
Impairment of assets – 200 – – – – 200
Reportable segment
assets 2,000 5,000 3,000 12,000 57,000 2,000 81,000
Expenditure for
reportable segment non-
current assets 300 700 500 800 600 – 2,900
Reportable segment
liabilities 1,050 3,000 1,800 8,000 30,000 – 43,850

• ‘All other’ segment results are attributable to four operating segments of the company which do
not meet the quantitative thresholds. Those segments include a small property business, an
electronics equipment rental business, a software consulting practice and a warehouse leasing
operation. None of those segments has ever met any of the quantitative thresholds for
determining reportable segments.
• The finance segment derives a majority of its revenue from interest. Management primarily relies
on net interest revenue, not the gross revenue and expense amounts, in managing that segment.
Therefore, as permitted by IFRS 8, only the net amount is disclosed.

2.6.4 Suggested pro forma

Information about profit or loss, assets and liabilities

Segment Segment Segment All other Inter Entity

A B C segments segment total
Revenue – external
customers X X X X – X
Revenue – inter segment X X X X (X) –

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 Segment Segment Segment All other Inter Entity
A B C segments segment total
X X X X (X) X
Interest revenue X X X X (X) X
Interest expense (X) (X) (X) (X) X (X)
Depreciation and
amortisation (X) (X) (X) (X) – (X)
Other material non-cash
items X/(X) X/(X) X/(X) X/(X) X/(X) X/(X)
Material income/expense
(IAS 1) X/(X) X/(X) X/(X) X/(X) X/(X) X/(X)
Share of profit of
associate/JVs X X X X – X
Segment profit before tax X X X X (X) X
Income tax expense (X) (X) (X) (X) – (X)
Unallocated items X/(X)
Profit for the period X
Segment assets X X X X (X) X
Investments in associate/JVs X X X X – X
Unallocated assets X
Entity’s assets X
Expenditures for reportable
assets X X X X (X) X
Segment liabilities X X X X (X) X
Unallocated liabilities X
Entity’s liabilities X

Information about geographical areas

Country of Foreign
domicile countries Total
Revenue – external customers X X X
Non-current assets X X X

Interactive question 1: Segments

Endeavour, a public limited company, trades in six business areas which are reported separately in its
internal accounts provided to the chief operating decision maker. The results of these segments for
the year ended 31 December 20X5 are as follows.
Operating segment information as at 31 December 20X5

Segment
External Internal Total profit/ Segment Segment
revenue revenue revenue (loss) assets liabilities
£m £m £m £m £m £m
Chemicals:
Europe 14 7 21 1 31 14

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 Segment
External Internal Total profit/ Segment Segment
revenue revenue revenue (loss) assets liabilities
£m £m £m £m £m £m
Rest of world 56 3 59 13 78 34
Pharmaceuticals
wholesale 59 8 67 9 104 35
Pharmaceuticals
retail 22 0 22 (2) 30 12
Cosmetics 12 3 15 2 18 10
Hair care 11 1 12 4 21 8
Body care 18 24 42 (6) 54 19
192 46 238 21 336 132

Requirement
Which of the operating segments of Endeavour constitute a ‘reportable’ operating segment under
IFRS 8, Operating Segments for the year ending 31 December 20X5?

See Answer at the end of this chapter.

3 IFRS 5, Non-current Assets Held for Sale and

Discontinued Operations
Section overview

IFRS 5 requires assets and groups of assets that are ‘held for sale’ to be presented separately on the
face of the statement of financial position and the results of discontinued operations to be presented
separately in the statement of profit or loss and other comprehensive income. This is required so that
users of financial statements will be better able to make projections about the financial position,
profits and cash flows of the entity based on continuing operations only.

Definition
Disposal group: A group of assets to be disposed of, by sale or otherwise, together as a group in a
single transaction, and liabilities directly associated with those assets that will be transferred in the
transaction. (In practice a disposal group could be a subsidiary, a cash-generating unit or a single
operation within an entity.)
(IFRS 5)

A disposal group could form a group of cash-generating units, a single cash-generating unit or be
part of a cash-generating unit.
The disposal group should include goodwill if it is a cash-generating unit (or group of cash-
generating units to which goodwill has been allocated under IAS 36). Only goodwill recognised in
the statement of financial position can be included in the disposal group. If a previous generally
accepted accounting practice (GAAP) allowed goodwill to be recorded directly in reserves, this
goodwill does not form part of a disposal group.

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 A disposal group may include current and non-current assets and current and non-current liabilities.
However, only liabilities that will be transferred as part of the transaction are classified as part of the
disposal group. If any liabilities remain with the vendor, these are not included in the scope of IFRS 5.
IFRS 5 does not apply to certain assets covered by other accounting standards:
• Deferred tax assets (IAS 12)
• Assets arising from employee benefits (IAS 19)
• Financial assets (IFRS 9)
• Investment properties accounted for in accordance with the fair value model (IAS 40)
• Agricultural and biological assets that are measured at fair value less estimated point of sale costs
(IAS 41)
• Insurance contracts (IFRS 4)

3.1 Classification of assets held for sale

A non-current asset (or disposal group) should be classified as held for sale if its carrying amount will
be recovered principally through a sale transaction rather than through continuing use. A number of
detailed criteria must be met:
• The asset must be available for immediate sale in its present condition.
• Its sale must be highly probable (ie, significantly more likely than not).
For the sale to be highly probable, the following must apply.
• Management must be committed to a plan to sell the asset.
• There must be an active programme to locate a buyer.
• The asset must be marketed for sale at a price that is reasonable in relation to its current fair
value.
• The sale should be expected to take place within one year from the date of classification.
• It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
An asset (or disposal group) can still be classified as held for sale, even if the sale has not actually
taken place within one year. However, the delay must have been caused by events or circumstances
beyond the entity‘s control and there must be sufficient evidence that the entity is still committed to
sell the asset or disposal group. Otherwise the entity must cease to classify the asset as held for sale.
Subsidiaries acquired exclusively with a view to resale
If an entity acquires a disposal group (eg, a subsidiary) exclusively with a view to its subsequent
disposal it can classify the asset as held for sale only if the sale is expected to take place within one
year and it is highly probable that all the other criteria will be met within a short time (normally three
months).
Abandoned assets
An asset that is to be abandoned should not be classified as held for sale. This is because its carrying
amount will be recovered principally through continuing use. However, a disposal group that is to be
abandoned may meet the definition of a discontinued operation and therefore separate disclosure
may be required (see below).

Interactive question 2: Held for sale

On 1 December 20X3, a company became committed to a plan to sell a manufacturing facility and
has already found a potential buyer. The company does not intend to discontinue the operations
currently carried out in the facility. At 31 December 20X3 there is a backlog of uncompleted
customer orders. The subsidiary will not be able to transfer the facility to the buyer until after it
ceases to operate the facility and has eliminated the backlog of uncompleted customer orders. This
is not expected to occur until Spring 20X4.
Requirement
How should the manufacturing facility be accounted for as at 31 December 20X3?

See Answer at the end of this chapter.

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3.2 Measurement of assets held for sale
A non-current asset (or disposal group) that is held for sale should be measured at the lower of its
carrying amount and fair value less costs to sell (net realisable value).
An impairment loss should be recognised where fair value less costs to sell is lower than carrying
amount. Note that this is an exception to the normal rule. IAS 36, Impairment of Assets requires an
entity to recognise an impairment loss only where an asset’s recoverable amount is lower than its
carrying value. Recoverable amount is defined as the higher of net realisable value and value in use.
IAS 36 does not apply to assets held for sale.
Non-current assets held for sale should not be depreciated, even if they are still being used by the
entity.
A non-current asset (or disposal group) that is no longer classified as held for sale (for example,
because the sale has not taken place within one year) is measured at the lower of the following:
• Its carrying amount before it was classified as held for sale, adjusted for any depreciation that
would have been charged had the asset not been held for sale
• Its recoverable amount at the date of the decision not to sell

3.3 Presenting discontinued operations

Definition
Discontinued operation: A component of an entity that has either been disposed of, or is classified
as held for sale, and:
• represents a separate major line of business or geographical area of operations;
• is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations; or
• is a subsidiary acquired exclusively with a view to resale.
Operations and cash flows that can be clearly distinguished, operationally and for financial reporting
purposes, from the rest of the entity.

An entity should present and disclose information that enables users of the financial statements to
evaluate the financial effects of discontinued operations and disposals of non-current assets or
disposal groups.
An entity should disclose a single amount on the face of the statement of profit or loss and other
comprehensive income (or statement of profit or loss where presented separately) comprising the
total of:
• the post-tax profit or loss of discontinued operations; and
• the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operation.
An entity should also disclose an analysis of the above single amount into:
• the revenue, expenses and pre-tax profit or loss of discontinued operations;
• the related income tax expense;
• the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal
of the assets or the discontinued operation; and
• the related income tax expense.
This may be presented either on the face of the statement of profit or loss and other comprehensive
income or in the notes. If it is presented on the face of the statement of profit or loss and other
comprehensive income it should be presented in a section identified as relating to discontinued
operations, ie, separately from continuing operations. This analysis is not required where the
discontinued operation is a newly acquired subsidiary that has been classified as held for sale.
An entity should disclose the net cash flows attributable to the operating, investing and financing
activities of discontinued operations. These disclosures may be presented either on the face of the
statement of cash flows or in the notes.

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 Gains and losses on the remeasurement of a disposal group that is not a discontinued operation but
is held for sale should be included in profit or loss from continuing operations.

Interactive question 3: Closure

On 20 October 20X3 the directors of a parent company made a public announcement of plans to
close a steel works. The closure means that the group will no longer carry out this type of operation,
which until recently has represented about 10% of its total revenue. The works will be gradually shut
down over a period of several months, with complete closure expected in July 20X4. At 31
December 20X3 output had been significantly reduced and some redundancies had already taken
place. The cash flows, revenues and expenses relating to the steel works can be clearly distinguished
from those of the subsidiary’s other operations.
Requirement
How should the closure be treated in the financial statements for the year ended 31 December
20X3?

See Answer at the end of this chapter.

3.4 Presentation of a non-current asset or disposal group classified as held for sale
Non-current assets and disposal groups classified as held for sale should be presented separately
from other assets in the statement of financial position. The liabilities of a disposal group should be
presented separately from other liabilities in the statement of financial position.
• Assets and liabilities held for sale should not be offset.
• The major classes of assets and liabilities held for sale should be separately disclosed either on
the face of the statement of financial position or in the notes.

3.5 IFRS 5 and impairment

There are particular rules on impairment in the context of IFRS 5. These are covered in Chapter 12,
section 1.4 of this Workbook.

3.6 Additional disclosures

In the period in which a non-current asset (or disposal group) has been either classified as held for
sale or sold, the following should be disclosed.
(a) A description of the non-current asset (or disposal group)
(b) A description of the facts and circumstances of the disposal
(c) Any gain or loss recognised when the item was classified as held for sale
(d) If applicable, the segment in which the non-current asset (or disposal group) is presented in
accordance with IFRS 8, Operating Segments
Where an asset previously classified as held for sale is no longer held for sale, the entity should
disclose a description of the facts and circumstances leading to the decision and its effect on results.

4 IAS 24, Related Party Disclosures

Section overview

The objective of IAS 24 is to ensure that an entity’s financial statements contain the disclosures
necessary to draw attention to the possibility that its financial position and/or profit or loss may have
been affected by the existence of related parties or by related party transactions.

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4.1 Overview of material from earlier studies
Scope
IAS 24 requires disclosure of related party transactions, and outstanding balances, in the separate
financial statements of:
• a parent;
• a venturer; or
• an investor.
What constitutes a related party?
A related party is a person or entity that is related to the entity that is preparing its financial
statements.
(a) A person or a close member of that person’s family is related to a reporting entity if that person:
(1) has control or joint control over the reporting entity;
(2) has significant influence over the reporting entity; or
(3) is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.
(b) An entity is related to a reporting entity if any of the following conditions apply:
(1) The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).
(2) One entity is an associate or joint venture of the other entity (or an associate or joint venture
of a member of a group of which the other entity is a member).
(3) Both entities are joint ventures of the same third party.
(4) One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
(5) The entity is a post-employment defined 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 reporting entity.
(6) The entity is controlled or jointly controlled by a person identified in (a).
(7) A person identified in (a)(1) has significant influence over the entity or is a member of the
key management personnel of the entity (or of a parent of the entity).
(8) The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or the parent of the reporting entity.
Exclusions
• Two entities simply because they have a director or other key management in common
(notwithstanding the definition of related party above, although it is necessary to consider how
that director would affect both entities)
• Two venturers, simply because they share joint control over a joint venture
• Certain other bodies, simply as a result of their role in normal business dealings with the entity:
– Providers of finance
– Trade unions
– Public utilities
– Government departments and agencies
• Any single customer, supplier, franchisor, distributor or general agent with whom the entity
transacts a significant amount of business, simply by virtue of the resulting economic dependence
What constitutes a related party transaction?

Definition
Related party transaction: A transfer of resources, services or obligations between related parties,
regardless of whether a price is charged.

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 What must be disclosed?
• A related party relationship between parent and subsidiaries
• Compensation, being the consideration in exchange for their services, received by key
management personnel
• Disclosures required about related parties only if transactions have taken place between them
during the period:
– The nature of the relationship (but remember this must always be disclosed in respect of a
parent)
– The amount of the transactions
– The amount of any balance outstanding at the yearend
– The terms and conditions attaching to any outstanding balance (for example, whether security
or guarantees have been provided and what form the payment will take)
– If an amount has been provided against or written off any outstanding balance due
• Disclosure of the fact that transactions are on an arm’s length basis (the term ‘arm’s length’
continues to be used in the context of IAS 24, even though it has been removed from the
definition of fair value in IFRS 13 (see Chapter 2, section 4))

Interactive question 4: Related party transactions

P owns S and a number of other subsidiaries. The following details relate to amounts due to the key
management personnel (KMP) of P and of S for the year ended 31 December 20X5.

£
Salaries and related taxes payable by S to its KMP for services rendered to S 500,000
Salaries and related taxes payable by P to S’s KMP for services rendered to S 60,000
Salaries and related taxes payable by S to its KMP for services rendered to P 20,000
Pension benefits accruing within the group-wide pension scheme to S’s KMP for
services rendered to S 50,000
Share options granted under the group-wide share option scheme to S’s KMP for
services rendered to S 28,000

658,000

Requirement
What transactions should be disclosed as key management personnel compensation in the financial
statements of S?

See Answer at the end of this chapter.

4.2 Application of substance over form

Under IAS 24 attention should be directed to the substance of the relationship rather than focusing
on its legal form. For example, the following are not related parties:
• Two entities simply because they have a director (or other member of key management
personnel) in common, or because a member of key management personnel of one entity has
significant influence over the other entity
• Two venturers simply because they share joint control over a joint venture
• Providers of finance, trade unions, public utilities and government departments and agencies of a
government that does not control, jointly control or significantly influence the reporting entity
simply by virtue of their normal dealings with an entity
• A customer, supplier, franchisor, distributor or general agent, with whom an entity transacts a
significant volume of business, simply by virtue of the resulting economic dependence

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 Context example: Related parties
The following examples illustrate the application of the definition of a related party to practical
situations:
(a) Alan Jones owns 30% of Benson Co and Clark Co owns 40% of Benson Co. The remaining 30%
is held by many unconnected shareholders.
Benson Co is the reporting entity:
Alan Jones is a related party under definition (a)(2) and Clark Co is a related party under
definition (b)(2)
Clark Co is the reporting entity:
Benson Co is a related party under definition (b)(2)
(b) Alan Jones and Benson Co have joint control over Clark Co
Benson Co is the reporting entity:
Clark Co is a related party under definition (b)(2)
Clark Co is the reporting entity:
Alan Jones is a related party under definition (a)(1) and Benson Co is a related party under
definition (b)(2)
(c) Alan Jones is a non-executive director of Benson Co
Benson Co is the reporting entity:
Alan Jones falls within the definition of Benson Co’s key management personnel and is a related
party under definition (a)(3)
(d) Alan Jones owns 70% of Benson Co and is a director of Clark Co
Benson Co is the reporting entity:
Alan Jones is a related party under definition (a)(1) and Clark Co is a related party under
definition (b)(7)
Clark Co is the reporting entity:
Alan Jones falls within the definition of Clark Co’s key management personnel and is a related
party under definition (b)(3)
Benson Co is a related party under definition (b)(6)

5 IFRS 1, First-time Adoption of International

Financial Reporting Standards
Section overview

IFRS 1 gives guidance to entities applying IFRSs for the first time.

The adoption of a new body of accounting standards will inevitably have a significant effect on the
accounting treatments used by an entity and on the related systems and procedures. In 2005 many
countries adopted IFRS for the first time and over the next few years other countries are likely to do
the same.
In addition, many Alternative Investment Market (AIM) companies and public sector companies
adopted IFRSs for the first time for accounting periods ending in 2009 and 2010. US companies are
likely to move increasingly to IFRS, although the US Securities and Exchange Commission did not
give any definite timeline for this in its 2012 work plan.
As discussed in Chapter 2 of this Manual, the regulatory shift away from UK GAAP means that all
entities except those small enough to qualify as micro-entities will be required to report in
accordance withFRS102, with an option to use IFRS.

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 IFRS 1, First-time Adoption of International Financial Reporting Standards was issued to ensure that an
entity’s first IFRS financial statements contain high quality information that fulfil the following criteria:
• It is transparent for users and comparable over all periods presented.
• It provides a suitable starting point for accounting under IFRSs.
• It can be generated at a cost that does not exceed the benefits to users.

5.1 General principles

An entity applies IFRS 1 in its first IFRS financial statements.
An entity’s first IFRS financial statements are the first annual financial statements in which the entity
adopts IFRSs by an explicit and unreserved statement of compliance with IFRSs.
Any other financial statements (including fully compliant financial statements that did not state so)
are not the first set of financial statements under IFRSs.
An entity may apply IFRS 1 more than once, for example if a UK company adopted IFRSs, then
reverted to UK GAAP, then moved to IFRSs again.

5.2 Opening IFRS statement of financial position

An entity prepares and presents an opening IFRS statement of financial position at the date of
transition to IFRSs as a starting point for IFRS accounting.
Generally, this will be the beginning of the earliest comparative period shown (ie, full retrospective
application). Given that the entity is applying a change in accounting policy on adoption of IFRS 1,
IAS1, Presentation of Financial Statements requires the presentation of at least three statements of
financial position (and two of each of the other statements).

Context example: Opening IFRS SOFP

Preparation of an opening IFRS statement of financial position typically involves adjusting the
amounts reported at the same date under previous GAAP.
All adjustments are recognised directly in retained earnings (or, if appropriate, another category of
equity) not in profit or loss.

5.3 Estimates
Estimates in the opening IFRS statement of financial position must be consistent with estimates made
at the same date under previous GAAP even if further information is now available (in order to
comply with IAS 10).

5.4 Transition process

(a) Accounting policies
The entity should select accounting policies that comply with IFRSs effective at the end of the
first IFRS reporting period.
These accounting policies are used in the opening IFRS statement of financial position and
throughout all periods presented. The entity does not apply different versions of IFRSs effective
at earlier dates.

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 (b) Derecognition of assets and liabilities
A previous GAAP statement of financial position may contain items that do not qualify for
recognition under IFRS.
Eg, IFRSs do not permit capitalisation of research, staff training and relocation costs.
(c) Recognition of new assets and liabilities
New assets and liabilities may need to be recognised.
Eg, deferred tax balances and certain provisions such as environmental and decommissioning
costs.
(d) Reclassification of assets and liabilities
Eg, compound financial instruments need to be split into their liability and equity components.
(e) Measurement
Value at which asset or liability is measured may differ under IFRSs.
Eg, discounting of deferred tax assets/liabilities not allowed under IFRSs.

5.5 Main exemptions from applying IFRSs in the opening IFRS statement of financial
position
(a) Property, plant and equipment, investment properties and intangible assets
– Fair value/previous GAAP revaluation may be used as a substitute for cost at date of transition
to IFRSs.
(b) Business combinations
For business combinations before the date of transition to IFRSs:
– The same classification (acquisition or uniting of interests) is retained as under previous GAAP.
– For items requiring a cost measure for IFRSs, the carrying value at the date of the business
combination is treated as deemed cost and IFRS rules are applied from thereon.
– Items requiring a fair value measure for IFRSs are revalued at the date of transition to IFRSs.
– The carrying value of goodwill at the date of transition to IFRSs is the amount as reported under
previous GAAP.
(c) Employee benefits
– Unrecognised actuarial gains and losses can be deemed zero at the date of transition to IFRSs.
IAS 19 is applied from then on.
(d) Cumulative translation differences on foreign operations
– Translation differences (which must be disclosed in a separate translation reserve under IFRSs)
may be deemed zero at the date of transition to IFRSs. IAS 21 is applied from then on.
(e) Adoption of IFRSs by subsidiaries, associates and joint ventures
If a subsidiary, associate or joint venture adopts IFRSs later than its parent, it measures its assets
and liabilities either:
– at the amount that would be included in the parent’s financial statements, based on the
parent’s date of transition; or
– at the amount based on the subsidiary (associate or joint venture)’s date of transition.
Disclosure
• A reconciliation of previous GAAP equity to IFRSs is required at the date of transition to IFRSs and
for the most recent financial statements presented under previous GAAP.
• A reconciliation of profit for the most recent financial statements presented under previous GAAP.

5.6 Organisational and procedural changes

The technical changes involved in adopting a new body of standards will provide a challenge to
company management and their advisers.

480 Corporate Reporting ICAEW 2021

These are some of the key issues:
• Accurate assessment of the task involved. Underestimation or wishful thinking may hamper the
effectiveness of the conversion and may ultimately prove inefficient.
• Proper planning. This should take place at the overall project level, but a detailed task analysis
could be drawn up to control work performed.
• Human resource management. The project must be properly structured and staffed.
• Training. Where there are skills gaps, remedial training should be provided.
• Monitoring and accountability. A relaxed ‘it will be all right on the night’ attitude could spell
danger. Implementation progress should be monitored and regular meetings set up so that
participants can personally account for what they are doing as well as flag up any problems as
early as possible. Project drift should be avoided.
• Achieving milestones. Successful completion of key steps and tasks should be appropriately
acknowledged, ie, what managers call ‘celebrating success’, so as to sustain motivation and
performance.
• Physical resources. The need for IT equipment and office space should be properly assessed.
• Process review. Care should be taken not to perceive the conversion as a one-off quick fix. Any
change in future systems and processes should be assessed and properly implemented.
• Follow-up procedures. Good management practice dictates that follow-up procedures should be
planned and in place to ensure that the transfer is effectively implemented and that any necessary
changes are identified and implemented on a timely basis.
• Contractual terms. These may be affected, such as covenants related to borrowing facilities based
on statement of financial position ratios. The potential effect of the new standards on these
measurements should be assessed and discussed with the lenders at an early stage.

Interactive question 5: IFRS 1

Europa is a listed company incorporated in Molvania. It will adopt International Financial Reporting
Standards (IFRSs) for the first time in its financial statements for the year ended 31 December 20X8.
The directors of Europa are unclear as to the impact of IFRS 1, First-time Adoption of International
Financial Reporting Standards.
Advise the directors of Europa on the following.
Requirements
5.1 The procedure for preparing IFRS financial statements for the first time (as required by IFRS 1).
5.2 The practical steps that the company should take in order to ensure an efficient transfer to
accounting under IFRS.
5.3 In its previous financial statements for 31 December 20X6 and 20X7, which were prepared
under local GAAP, the company:
(1) made a number of routine accounting estimates, including accrued expenses and
provisions; and
(2) did not recognise a provision for a court case arising from events that occurred in
September 20X7. When the court case was concluded on 30 June 20X8, Europa was
required to pay $10 million and paid this on 10 July 20X8, after the 20X7 financial
statements were authorised for issue.
In the opinion of the directors, the company’s estimates of accrued expenses and provisions
under local GAAP were made on a basis consistent with IFRSs.
5.4 Discuss how the matters above should be dealt with in the financial statements of Europa for
the year ended 31 December 20X8.

See Answer at the end of this chapter.

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 6 IAS 34, Interim Financial Reporting
Section overview

IAS 34 recommends that publicly traded entities should produce interim financial reports and, for
entities that do publish such reports, it lays down principles and guidelines for their production.

The following definitions are used in IAS 34.

Definitions
Interim period: A financial reporting period shorter than a full financial year.
Interim financial report: A financial report containing either a complete set of financial statements (as
described in IAS 1) or a set of condensed financial statements (as described in this standard) for an
interim period.

6.1 Scope of IAS 34

IAS 34 does not make the preparation of interim financial reports mandatory, taking the view that this
is a matter for governments, securities regulators, stock exchanges or professional accountancy
bodies to decide within each country. The IASB does, however, strongly recommend to governments
and regulators that interim financial reporting should be a requirement for companies whose equity
or debt securities are publicly traded.
IAS 34 encourages publicly traded entities:
• to provide an interim financial report for at least the first six months of their financial year (ie, a
half year financial report); and
• to make the report available no later than 60 days after the end of the interim period.
Thus, a company with a year ending 31 December would be required as a minimum to prepare an
interim report for the half year to 30 June and this report should be available before the end of
August.

6.2 Minimum components

IAS 34 specifies the minimum component elements of an interim financial report as follows:
• Condensed statement of financial position
• Condensed statement of profit or loss and other comprehensive income, presented either as a
single condensed statement or a statement of profit or loss and a statement showing other
comprehensive income
• Condensed statement of changes in equity
• Condensed statement of cash flows
• Selected note disclosures
IAS 34 applies where an entity is required to or chooses to publish an interim financial report in
accordance with IFRSs.
An interim report complying with IFRSs may be:
• a complete set of financial statements at the interim reporting date complying in full with IFRSs; or
• a condensed interim financial report prepared in compliance with IAS 34.
The rationale for allowing only condensed statements and selected note disclosures is that entities
need not duplicate information in their interim report that is contained in their report for the previous
financial year. Interim statements should focus more on new events, activities and circumstances.

482 Corporate Reporting ICAEW 2021

 6.3 Form and content
Where full financial statements are given as interim financial statements, IAS 1 should be used as a
guide, otherwise IAS 34 specifies minimum contents.
The condensed statement of financial position should include, as a minimum, each of the major
components of assets, liabilities and equity as were in the statement of financial position at the end
of the previous financial year, thus providing a summary of the economic resources of the entity and
its financial structure.
The condensed statement of profit or loss and other comprehensive income should include, as a
minimum, each of the component items of total comprehensive income as were shown in the
statement of profit or loss and other comprehensive income for the previous financial year, together
with the earnings per share and diluted earnings per share.
The condensed statement of cash flows should show, as a minimum, the three major subtotals of
cash flow as required in statements of cash flows by IAS 7, namely: cash flows from operating
activities, cash flows from investing activities and cash flows from financing activities.
The condensed statement of changes in equity should include, as a minimum, each of the major
components of equity as were contained in the statement of changes in equity for the previous
financial year of the entity.

6.3.1 Selected explanatory notes

IAS 34 states that relatively minor changes from the most recent annual financial statements need
not be included in an interim report. However, the notes to an interim report should include the
following (unless the information is contained elsewhere in the report).
• A statement that the same accounting policies and methods of computation have been used for
the interim statements as were used for the most recent annual financial statements. If not, the
nature of the differences and their effect should be described. (The accounting policies for
preparing the interim report should only differ from those used for the previous annual accounts
in a situation where there has been a change in accounting policy since the end of the previous
financial year, and the new policy will be applied for the annual accounts of the current financial
period.)
• Explanatory comments on the seasonality or ‘cyclicality‘ of operations in the interim period. For
example, if a company earns most of its annual profits in the first half of the year, because sales
are much higher in the first six months, the interim report for the first half of the year should
explain this fact
• The nature and amount of items during the interim period affecting assets, liabilities, capital, net
income or cash flows, that are unusual, due to their nature, incidence or size
• The issue or repurchase of equity or debt securities
• Nature and amount of any changes in estimates of amounts reported in an earlier interim report
during the financial year, or in prior financial years if these affect the current interim period
• Dividends paid on ordinary shares and the dividends paid on other shares
• Segmental results for entities that are required by IFRS 8, Operating Segments to disclose
segment information in their annual financial statements
• Any significant events since the end of the interim period
• Effect of changes in the composition of the entity during the interim period including the
acquisition or disposal of subsidiaries and long-term investments, restructurings and
discontinued operations
• Any significant change in a contingent liability or a contingent asset since the date of the last
annual statement of financial position
Changes in the business environment such as changes in price, costs, demand, market share and
prospects for the full year should be discussed in the management discussion and analysis of the
financial review.
The entity should also disclose the fact that the interim report has been produced in compliance with
IAS 34 on interim financial reporting.

ICAEW 2021 9: Reporting financial performance 483

 Worked example: Disclosure
Give some examples of the type of disclosures required according to the above list of explanatory
notes.

Solution
The following are examples:
• Write down of inventories to net realisable value and the reversal of such a write down
• Recognition of a loss from the impairment of property, plant and equipment, intangible assets, or
other assets, and the reversal of such an impairment loss
• Reversal of any provisions for the costs of restructuring
• Acquisitions and disposals of items of property, plant and equipment
• Commitments for the purchase of property, plant and equipment
• Litigation settlements
• Corrections of fundamental errors in previously reported financial data
• Any debt default or any breach of a debt covenant that has not been corrected subsequently
• Related party transactions

Professional skills focus: Concluding, recommending and communicating

IAS 34 is concerned with communication – publicly traded entities need more information to be
communicated than do private companies. While a private company would often produce
management accounts, these would be for internal purposes and not communicated to the public.

6.4 Periods covered

The standard requires that interim financial reports should provide financial information for the
following periods or as at the following dates.
• Statement of financial position data as at the end of the current interim period, and comparative
data as at the end of the most recent financial year
• Statement of profit or loss and other comprehensive income data for the current interim period
and cumulative data for the current year to date, together with comparative data for the
corresponding interim period and cumulative figures for the previous financial year
• Statement of cash flows data should be cumulative for the current year to date, with comparative
cumulative data for the corresponding interim period in the previous financial year
• Data for the statement of changes in equity should be for both the current interim period and for
the year to date, together with comparative data for the corresponding interim period, and
cumulative figures, for the previous financial year

6.5 Materiality
Materiality should be assessed in relation to the interim period financial data. It should be recognised
that interim measurements rely to a greater extent on estimates than annual financial data.

6.6 Recognition and measurement principles

A large part of IAS 34 deals with recognition and measurement principles, and guidelines as to their
practical application. The guiding principle is that an entity should use the same recognition and
measurement principles in its interim statements as it does in its annual financial statements.
This means, for example, that a cost that would not be regarded as an asset in the year-end
statement of financial position should not be regarded as an asset in the statement of financial
position for an interim period. Similarly, an accrual for an item of income or expense for a transaction
that has not yet occurred (or a deferral of an item of income or expense for a transaction that has
already occurred) is inappropriate for interim reporting, just as it is for year-end reporting.

484 Corporate Reporting ICAEW 2021

 Applying this principle of recognition and measurement may result, in a subsequent interim period
or at the yearend, in a remeasurement of amounts that were reported in a financial statement for a
previous interim period. The nature and amount of any significant remeasurements should be
disclosed.

6.6.1 Revenues received occasionally, seasonally or cyclically

Revenue that is received as an occasional item, or within a seasonal or cyclical pattern, should not be
anticipated or deferred in interim financial statements, if it would be inappropriate to anticipate or
defer the revenue for the annual financial statements. In other words, the principles of revenue
recognition should be applied consistently to the interim reports and year-end reports.

6.6.2 Costs incurred unevenly during the financial year

These should only be anticipated or deferred (ie, treated as accruals or prepayments) if it would be
appropriate to anticipate or defer the expense in the annual financial statements. For example, it
would be appropriate to anticipate a cost for property rental where the rental is paid in arrears, but it
would be inappropriate to anticipate part of the cost of a major advertising campaign later in the
year, for which no expenses have yet been incurred.
The standard goes on, in an appendix, to deal with specific applications of the recognition and
measurement principles. Some of these examples are explained below, by way of explanation and
illustration.

6.6.3 Payroll taxes or insurance contributions paid by employers

In some countries these are assessed on an annual basis, but paid at an uneven rate during the
course of the year, with a large proportion of the taxes being paid in the early part of the year, and a
much smaller proportion paid later on in the year. In this situation, it would be appropriate to use an
estimated average annual tax rate for the year in an interim statement, not the actual tax paid. This
treatment is appropriate because it reflects the fact that the taxes are assessed on an annual basis,
even though the payment pattern is uneven.

6.6.4 Cost of a planned major periodic maintenance or overhaul

The cost of such an event later in the year must not be anticipated in an interim financial statement
unless there is a legal or constructive obligation to carry out this work. The fact that a maintenance or
overhaul is planned and is carried out annually is not of itself sufficient to justify anticipating the cost
in an interim financial report.

6.6.5 Other planned but irregularly occurring costs

Similarly, these costs, such as charitable donations andemployee training costs, should not be
accrued in an interim report. These costs, even if they occur regularly and are planned, are
nevertheless discretionary.

6.6.6 Year-end bonus

A year-end bonus should not be provided for in an interim financial statement unless there is a
constructive obligation to pay a year-end bonus (eg, a contractual obligation, or a regular past
practice) and the size of the bonus can be reliably measured.

Worked example: Bonus

An entity’s accounting year ends on 31 December each year and it is currently preparing interim
financial statements for the half year to 30 June 20X4. It has a contractual agreement with its staff that
it will pay them an annual bonus equal to 10% of their annual salary if the full year’s output exceeds
one million units. Budgeted output is 1.4 million units and the entity has achieved budgeted output
during the first six months of the year. Annual salaries are estimated to be £100 million, with the cost
in the first half year to 30 June being £45 million.
Requirement
How should the bonus be reflected in the interim financial statements?

ICAEW 2021 9: Reporting financial performance 485

 Solution
It is probable that the bonus will be paid, given that the actual output already achieved in the year is
in line with budgeted figures, which exceed the required level of output. So a bonus of £4.5 million
should be recognised in the interim financial statements at 30 June 20X4.

6.6.7 Holiday pay

The same principle applies here. If holiday pay is an enforceable obligation on the employer, then
any unpaid accumulated holiday pay may be accrued in the interim financial report.

6.6.8 Non-monetary intangible assets

The entity might incur expenses during an interim period on items that might or will generate non-
monetary intangible assets. IAS 38, Intangible Assets requires that costs to generate non-monetary
intangible assets (eg, development expenses) should be recognised as an expense when incurred
unless the costs form part of an identifiable intangible asset. Costs that were initially recognised as an
expense cannot subsequently be treated as part of the cost of an intangible asset instead. IAS 34
states that interim financial statements should adopt the same approach. This means that it would be
inappropriate in an interim financial statement to ‘defer’ a cost in the expectation that it will
eventually be part of a non-monetary intangible asset that has not yet been recognised: such costs
should be treated as an expense in the interim statement.

6.6.9 Depreciation
Depreciation should only be charged in an interim statement on non-current assets that have been
acquired, not on non-current assets that will be acquired later in the financial year.

6.6.10 Foreign currency translation gains and losses

These should be calculated by the same principles as at the financial year end, in accordance with
IAS 21.

6.6.11 Tax on income

An entity will include an expense for income tax (tax on profits) in its interim statements. The tax rate
to use should be the estimated average annual tax rate for the year. For example, suppose that in a
particular jurisdiction, the rate of tax on company profits is 30% on the first £200,000 of profit and
40% on profits above £200,000. Now suppose that a company makes a profit of £200,000 in its first
half year, and expects to make £200,000 in the second half year. The rate of tax to be applied in the
interim financial report should be 35%, not 30%, ie, the expected average rate of tax for the year as a
whole. This approach is appropriate because income tax on company profits is charged on an annual
basis, and an effective annual rate should therefore be applied to each interim period.
As another illustration, suppose a company earns pre-tax income in the first quarter of the year of
£30,000, but expects to make a loss of £10,000 in each of the next three quarters, so that net income
before tax for the year is zero. Suppose also that the rate of tax is 30%. In this case, it would be
inappropriate to anticipate the losses, and the tax charge should be £9,000 for the first quarter of the
year (30% of £30,000) and a negative tax charge of £3,000 for each of the next three quarters, if
actual losses are the same as anticipated.
Where the tax year for a company does not coincide with its financial year, a separate estimated
weighted average tax rate should be applied for each tax year, to the interim periods that fall within
that tax year.
Some countries give entities tax credits against the tax payable, based on amounts of capital
expenditure or research and development, etc. Under most tax regimes, these credits are calculated
and granted on an annual basis; therefore it is appropriate to include anticipated tax credits within
the calculation of the estimated average tax rate for the year, and apply this rate to calculate the tax
on income for the interim period.

Worked example: Taxation charge

An entity’s accounting year ends on 31 December 20X4, and it is currently preparing interim financial
statements for the half year to 30 June 20X4. Its profit before tax for the six month period to 30 June
20X4 is £6 million. The business is seasonal and the profit before tax for the six months to 31
December 20X4 is almost certain to be £10 million. Income tax is calculated as 25% of reported

486 Corporate Reporting ICAEW 2021

 annual profit before tax if it does not exceed £10 million. If annual profit before tax exceeds £10
million the tax rate on the whole amount is 30%.
Requirement
Under IAS 34 what should the taxation charge be in the interim financial statements?

Solution
The taxation charge in the interim financial statements is based upon the weighted average rate for
the year. In this case the entity’s tax rate for the year is expected to be 30%. The taxation charge in the
interim financial statements will be £1.8 million.

Interactive question 6: Interim financial statements

The Alshain Company’s profit before tax for the six months to 30 September 20X6 was £4 million.
However, the business is seasonal and profit before tax for the six months to 31 March 20X7 is almost
certain to be £8 million. Profit before tax equals taxable profit for this company.
Alshain operates in a country where income tax on companies is at a rate of 25% if annual profits are
below £11 million and a rate of 30% where annual profits exceed £11 million. These tax rates apply
to the entire profit for the year.
Requirement
Under IAS 34, Interim Financial Reporting, what should be the income tax expense in Alshain’s
interim financial statements for the half year to 30 September 20X6?

See Answer at the end of this chapter.

6.6.12 Inventory valuations

Within interim reports, inventories should be valued in the same way as year-end accounts. It is
recognised, however, that it will be necessary to rely more heavily on estimates for interim reporting
than for year-end reporting.
In addition, it will normally be the case that the net realisable value of inventories should be
estimated from selling prices and related costs to complete and dispose at interim dates.

Worked example: Inventory valuations

An entity’s accounting year ends on 31 December 20X4, and it is currently preparing interim financial
statements for the half year to 30 June 20X4. The price of its products tends to vary. At 30 June 20X4,
it has inventories of 100,000 units, at a cost per unit of £1.40. The net realisable value of the
inventories is £1.20 per unit at 30 June 20X4. The expected net realisable value of the inventories at
31 December 20X4 is £1.55 per unit.
Requirement
How should the value of the inventories be reflected in the interim financial statements?

Solution
The value of the inventories in the interim financial statements at 30 June 20X4 is the lower of cost
and NRV at 30 June 20X4. This is:
100,000 × £1.20 = £120,000

6.7 Use of estimates

Although accounting information must be reliable and free from material error, it may be necessary
to sacrifice some accuracy and reliability for the sake of timeliness and cost benefits. This is
particularly the case with interim financial reporting, where there will be much less time to produce
reports than at the financial year end. The standard therefore recognises that estimates will have to

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 be used to a greater extent in interim reporting, to assess values or even some costs, than in year-end
reporting.
An appendix to IAS 34 gives some examples of the use of estimates.
• Inventories. An entity might not need to carry out a full inventory count at the end of each interim
period. Instead, it may be sufficient to estimate inventory values using sales margins.
• Provisions. An entity might employ outside experts or consultants to advise on the appropriate
amount of a provision, as at the year end. It will probably be inappropriate to employ an expert to
make a similar assessment at each interim date. Similarly, an entity might employ a professional
valuer to revalue non-current assets at the year end, whereas at the interim date(s) the entity will
not rely on such experts.
• Income taxes. The rate of income tax (tax on profits) will be calculated at the year end by applying
the tax rate in each country/jurisdiction to the profits earned there. At the interim stage, it may be
sufficient to estimate the rate of income tax by applying the same ‘blended’ estimated weighted
average tax rate to the income earned in all countries/jurisdictions.
• Classification of current and non-current assets and liabilities. The investigation for classifying
assets and liabilities as current and non-current may be more thorough at annual reporting dates
than at interim ones.
• Pensions. IAS 19, Employee Benefits encourages the use of a professionally qualified actuary in
the measurement of the plan’s defined benefit obligations. For interim reporting purposes
reliable estimates may be obtained by extrapolation of the latest actuarial valuation.
• Contingencies. Normally the measurement of contingencies may involve formal reports giving
the opinions of experts. Expert opinions about contingencies and uncertainties relating to
litigation or assessments may or may not be needed at interim dates.
• Revaluations and fair value accounting. Where an entity carries assets at fair value such as non-
current assets in accordance with IAS 16, Property, Plant and Equipment or investment properties
in accordance with IAS 40, Investment Property, it may rely on independent professional
valuations at annual reporting dates, though not at interim reporting dates.
• Intercompany reconciliations. Intercompany balances that are reconciled at a detailed level at the
year end may be reconciled at a less detailed level at the interim reporting date.
• Specialised industries. Interim period measurement in specialised industries may be less precise
than at year end due to their complexity, and the cost and time investment that is required.
The principle of materiality applies to interim financial reporting, as it does to year-end reporting. In
assessing materiality, it needs to be recognised that interim financial reports will rely more heavily on
estimates than year-end reports. Materiality should be assessed in relation to the interim financial
statements themselves, and should be independent of ‘annual materiality’ considerations.

6.8 IFRIC 10, Interim Financial Reporting and Impairment

This IFRIC, issued in 2006, addresses the apparent conflict between IAS 34 and the requirement in
other standards on the recognition and reversal in financial statements of impairment losses on
goodwill and certain financial assets.
IFRIC 10 states that any such impairment losses recognised in an interim financial statement must not
be reversed in subsequent interim or annual financial statements.

6.9 IFRS 13, amendments

IFRS 13, Fair Value Measurement amended IAS 34, requiring interim reports to make the disclosures
required by paragraphs 91–93(h), 94–96, 98 and 99 of IFRS 13, Fair Value Measurement and
paragraphs 25, 26 and 28–30 of IFRS 7, Financial Instruments: Disclosures.

488 Corporate Reporting ICAEW 2021

 7 IFRS 14, Regulatory Deferral Accounts
Section overview

• IFRS 14, Regulatory Deferral Accounts permits entities adopting IFRS for the first time to continue
to account, with some limited changes, for ‘regulatory deferral account balances’ in accordance
with their previous GAAP, both on initial adoption of IFRS and in subsequent financial statements.
• Regulatory deferral account balances, and movements in them, are presented separately in the
statement of financial position and statement of profit or loss and other comprehensive income.
Specific disclosures are required.

IFRS 14, Regulatory Deferral Accounts was issued in January 2014 and is effective for an entity’s first
annual IFRS financial statements for a period beginning on or after 1 January 2016. IFRS 14 is an
interim standard, applicable to first-time adopters of IFRS that provide goods or services to
customers at a price or rate that is subject to rate regulation by the Government eg, the supply of gas
or electricity.
The following definitions are used in IFRS 14.

Definitions
Rate regulation: A framework for establishing the prices that can be charged to customers for goods
and services and that framework is subject to oversight and/or approval by a rate regulator.
Rate regulator: An authorised body that is empowered by statute or regulation to establish the rate
or range of rates that bind an entity.
Regulatory deferral account balance: The balance of any expense (or income) account that would
not be recognised as an asset or a liability in accordance with other Standards, but that qualifies for
deferral because it is included, or is expected to be included, by the rate regulator in establishing the
rate(s) that can be charged to customers.

7.1 Objective
The objective of IFRS 14 is to specify the financial reporting requirements for ‘regulatory deferral
account balances’ that arise when an entity provides goods or services to customers at a price or rate
that is subject to rate regulation.

7.2 Scope of IFRS 14

IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated
activities and has recognised amounts in its previous GAAP financial statements that meet the
definition of ‘regulatory deferral account balances’ (sometimes referred to as ‘regulatory assets’ and
‘regulatory liabilities’).

7.3 Main issues

Rate regulation is a means of ensuring that specified costs are recovered by the supplier, and that
prices charged to customers are fair. These twin objectives mean that prices charged to customers at
a particular time do not necessarily cover the costs incurred by the supplier at that time. In this case,
the recovery of such costs is deferred and they are recognised through future sales.
This leads to a mismatch. IFRS does not have specific requirements in respect of accounting for this
mismatch. However, established practice is that amounts are recognised in profit or loss as they arise.
In some jurisdictions, however, local GAAP allows or requires a supplier of rate-regulated activities to
recognise costs to be recovered either as a separate regulatory deferral account or as part of the cost
of a related asset.
The IASB is currently working on a comprehensive project to address this issue, but the project is not
complete. In the meantime, IFRS 14 permits first-time adopters of IFRS to continue to recognise
amounts related to rate regulation in accordance with their previous GAAP when they adopt IFRS.

ICAEW 2021 9: Reporting financial performance 489

 This is effected through an exemption from paragraph 11 of IAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors, which generally requires an entity to consider the requirements of
IFRSs dealing with similar matters and the requirements of the Conceptual Framework when setting
its accounting policies.
An entity may change its policy for regulatory deferral accounts in accordance with IAS 8, but only if
the change makes the financial statements more relevant and reliable to users.

7.4 Presentation
The amounts of regulatory deferral account balances are separately presented in an entity’s financial
statements.

7.5 Disclosures
Specific disclosures are required in order to enable users to assess:
• the nature of, and risks associated with, the rate regulation that establishes the price(s) the entity
can charge customers for the goods or services it provides; and
• the effects of rate regulation on the entity’s financial statements.

8 Audit focus – general issues with reporting

performance
Section overview

The auditor must consider the risk of fraud in general, and the risk of creative accounting in
particular, when auditing financial performance.

ISA (UK) 200 (Revised June 2016), Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with the International Standards on Auditing (UK) states the auditor’s overall
objectives as follows:
• To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework
• To report on the financial statements, and communicate as required by the ISAs (UK), in
accordance with the auditor’s findings
(ISA 200.11)
Note that the auditor is concerned with material misstatements arising both as a result of error, and
as a result of fraud.
We looked at creative accounting, a form of fraudulent financial reporting, in Chapter 5. We will look
at the audit approach to fraud and creative accounting in more detail in Chapter 24.
Another point which is worth drawing out is the need for the auditor to report and communicate as
required by the ISAs. As ISA 200 makes clear, the auditor must fully understand and comply with all
the ISAs relevant to the audit.

490 Corporate Reporting ICAEW 2021

 9 Audit focus – specific issues
Section overview

This section looks at some of the audit issues related to certain financial reporting treatments
covered earlier in this chapter.

9.1 Presentation and disclosure of segment information

ISA (UK) 501, Audit evidence –Specific Considerations for Selected Items governs the auditor’s
approach to auditing segment information.
Auditors are required to obtain sufficient, appropriate audit evidence regarding the presentation and
disclosure of segment information by:
(a) obtaining an understanding of the methods used by management in determining segment
information:
– evaluating whether such methods are likely to result in disclosure in accordance with the
applicable financial reporting framework,
– where appropriate, testing the application of such methods; and
(b) performing analytical procedures or other audit procedures appropriate in the circumstances.
(ISA 501.13)
When the ISA talks about obtaining an understanding of management’s methods, the following may
be relevant:
• Sales, transfers and charges between segments, elimination of inter-segment amounts
• Comparisons with budgets and other expected results; for example, operating profits as a
percentage of sales
• Allocations of assets and costs among segments
• Consistency with prior periods, and the adequacy of the disclosures with respect to
inconsistencies
It is important to stress that auditors only have a responsibility in relation to the financial statements
taken as a whole. Auditors are not required to express an opinion on the segment information
presented on a standalone basis.

9.2 Held-for-sale assets

As we have seen above, IFRS 5 requires that assets which meet the criteria ‘held for sale’ are shown at
the lower of carrying amount and fair value less costs to sell, that held-for-sale assets are classified
separately on the statement of financial position and the results of discontinued operations are
presented separately on the statement of profit or loss and other comprehensive income.
Audit procedures to ensure assets meet the criteria include the following:
• Make enquiries/obtain written representations from management concerning intentions
• Review minutes of management for evidence of firm plan to sell
• Ascertain whether appropriate estate agent appointed (by reviewing contract between the
parties)
• Review sale particulars
• Comparison of sale price per sale particulars to fair value
• Confirm likelihood of completion within a year by asking estate agent

Interactive question 7: Audit procedures – held-for-sale assets

Robinson Ltd has a balance of £250,000 in respect of assets classified as held for sale in the financial
statements for the year ended 31 December 20X7.

ICAEW 2021 9: Reporting financial performance 491

 This is in respect of two assets as follows:
• £70,000 relates to production machinery used for a product which is to be withdrawn. Production
will be run down until the end of January 20X8 so that outstanding orders can be completed. The
plant will then be serviced and uninstalled in early February.
• £180,000 relates to a piece of land which was classified as held for sale on 1 October. (You should
assume that the IFRS 5 criteria are satisfied.) On this date the land’s fair value was estimated to be
£210,000 with costs to advertise the asset as being available for sale estimated at £6,000. The
£180,000 represents the carrying value of the land on the basis that it is lower than fair value less
costs to sell. Robinson Ltd has adopted a revaluation policy for land.
Requirements
Do the following for each of the above assets:
(a) Identify the key audit issue
(b) State the audit procedures which would be performed to address this issue

See Answer at the end of this chapter.

9.3 Related parties

Related parties are often involved in cases of fraudulent financial reporting, as highlighted in many
major corporate scandals. Transactions with related parties provide scope for distorting financial
information in financial statements and hiding the economic substance of transactions or fraud in
companies.
The overall aim of ISA (UK) 550, Related Parties is to enhance the auditor’s consideration of related
parties and related party transactions with a focus on risk assessment, including the recognition of
fraud risk factors. The firm must establish an approach that requires the auditor to assess the risks of
misstatement and design audit procedures to address these. In particular, the ISA includes the
following:
• Clearer responsibilities for the auditor, with a distinction being made between circumstances
where the accounting framework includes disclosure and other reporting requirements for related
parties, and circumstances where either there are no such requirements or they are inadequate
• Clearer distinction between the risk assessment procedures and the further audit procedures
• A definition of a related party, which is to be used as a minimum level for audit purposes where
the applicable financial reporting framework establishes minimal or no related party requirements

9.4 Related parties: key issues

Readers of financial statements normally assume that transactions reflected in financial statements
are made with independent parties unless told otherwise.
Readers will also normally assume that a company is owned by a number of shareholders and is not
subject to control or significant influence by any one person or company unless told otherwise, eg,
through disclosure of the identity of the parent company and significant shareholdings disclosure.
Where a company does business with ‘related parties’, for instance with shareholders or directors,
these assumptions may not be valid.

9.5 The audit of related parties

9.5.1 Scope
ISA 550 provides guidance on the auditor’s responsibilities, and audit procedures regarding related
parties and transactions with such parties.
ISA 550 is applicable whether or not IAS 24,Related Party Disclosures is a requirement of the
reporting framework for the entity concerned. ISA 550, therefore, applies to private companies in
the UK as well as listed companies. ISA 550 provides the following definition.

492 Corporate Reporting ICAEW 2021

 Definition
Related party: A party that is either:
(a) a related party as defined in the applicable financial reporting framework; or
(b) where the applicable financial reporting framework establishes minimal or no related party
requirements:
(1) a person or other entity that has control or significant influence, directly or indirectly through
one or more intermediaries, over the reporting entity;
(2) another entity over which the reporting entity has control or significant influence, directly or
indirectly through one or more intermediaries; or
(3) another entity that is under common control with the reporting entity through having:
• common controlling ownership;
• owners who are close family members; or
• common key management.
However, entities that are under common control by a state (ie, a national, regional or local
government) are not considered related unless they engage in significant transactions or share
resources to a significant extent with one another.
(ISA 550.10)

9.5.2 Responsibilities
Management is responsible for the identification of related parties and the disclosure of transactions
with such parties. Management should set up appropriate internal controls to ensure that related
parties are identified and disclosed along with any related party transactions.
It may not be self-evident to management whether a party is related. Furthermore, many accounting
systems are not designed to either distinguish or summarise related party transactions, so
management will have to carry out additional analysis of accounting information.
The auditor has a responsibility to perform audit procedures to identify, assess and respond to the
risks of material misstatement arising from the entity’s failure to appropriately account for or disclose
related party relationships, transactions or balances.

9.5.3 Risks
The following audit risks may arise from a failure to identify a related party.
• Failure of the financial statements to comply with IAS 24.
• There may be a misstatement in the financial statements – transactions may be on a non arm’s
length basis and thus may result in assets, liabilities, profit or loss being overstated or
understated. For example, special tax rates may apply to profits reported on sales to related
parties.
• The reliance on a source of audit evidence may be misjudged. An auditor may rely on what is
perceived to be third-party evidence when in fact it is from a related party. More generally,
reliance on management assurances may be affected if the auditor were made aware of non-
disclosure of a related party.
• The motivations of related parties may be outside normal business motivations and thus may be
misunderstood by the auditor if there is non-disclosure. In the extreme, this may amount to fraud.
The inherent risk linked to related party transactions (RPT) can be high, especially where
management is unaware of the existence of all the related party relationships or transactions, or
where there is an opportunity for collusion, concealment or manipulation by management. There is
an increased risk that the auditor may fail to detect a RPT, where:
• there has been no charge made for a RPT (ie, a zero cost transaction);
• disclosure would be sensitive for directors or have adverse consequences for the company;
• the company has no formal system for detecting RPTs;
• RPTs are with a party that the auditor could not reasonably expect to know is a related party;
• RPTs from an earlier period have remained as an unsettled balance;

ICAEW 2021 9: Reporting financial performance 493

 • management have concealed, or failed to disclose fully, related parties or transactions with such
parties; and
• the corporate structure is complex.
Note: The term ‘arm’s length’ continues to be used in the context of IAS 24 even though it has been
removed from the definition of fair value in IFRS 13.

9.5.4 Risk assessment procedures

In planning the audit, the auditor needs to consider the risk of undisclosed related party
transactions. This is a difficult area because IAS 24 does not have consideration for materiality. Thus,
even small RPTs should be disclosed by a company. Indeed, related party relationships where there is
control (eg, a subsidiary) need to be disclosed even where there are no transactions with this party.
The auditor needs to perform the following procedures:
(a) The engagement team shall discuss the risks of fraud-related misstatements.
Matters to be addressed would include the importance of maintaining professional scepticism
and circumstances which may indicate the existence of related party relationships or transactions
that management has not identified.
(b) Make inquiries of management about the identities of related parties and any RPTs.
This includes:
(1) the identity of related parties, including changes from prior period;
(2) the nature of the relationships between the entity and its related parties;
(3) whether any transactions occurred between the parties and, if so;
(4) what controls the entity has to identify, account for and disclose related party relationships
and transactions;
(5) what controls the entity has to authorise and approve significant transactions and
arrangements with related parties; and
(6) what controls the entity has to authorise and approve significant transactions and
arrangements outside the normal course of business.
(c) Obtain an understanding of controls established to identify, account for and disclose RPTs and
to authorise and approve significant transactions with related parties / outside the normal course
of business.
Where controls are ineffective or non-existent, the auditor may be unable to obtain sufficient,
appropriate audit evidence and will need to consider the impact of this on the audit opinion.
The auditor is also required to be alert for related party information when reviewing records or
documents. In particular, the auditor must inspect bank and legal confirmations and minutes of
meetings of the shareholders and those charged with governance. Where these procedures reveal
significant transactions outside the entity’s normal course of business, the auditor must inquire of
management about the nature of these transactions and whether a related party could be involved.

9.5.5 Responses to the risks of material misstatement

In accordance with ISA 330, the auditor must design and perform further audit procedures to obtain
sufficient, appropriate evidence about the assessed risks of material misstatement. These may
include:
• confirming or discussing the transactions with intermediaries eg, banks, lawyers or agents;
• confirming the purposes, specific terms or amounts of the transaction with the related party; and
• reading the financial statements of the related party for evidence of the transaction in the related
party’s accounting records.
Where the risk of misstatement may be due to fraud additional procedures may apply:
• Inquiries of and discussion with management and those charged with governance
• Inquiries of the related party
• Inspection of significant contracts with the related party
• Background research eg, internet
• Review of employee whistleblowing reports

494 Corporate Reporting ICAEW 2021

 Identification of previously unidentified or undisclosed related parties or significant related party
transactions
If the auditor identifies related parties or significant related party transactions that management has
not previously identified or disclosed to the auditor, the auditor must do the following:
• Promptly communicate the relevant information to the other members of the engagement team
• Where the applicable reporting framework establishes related party requirements request
management to identify all transactions with the newly identified related parties and inquire as to
why the entity’s controls have failed to identify and disclose the transaction
• Perform appropriate substantive audit procedures
These might include making inquiries regarding the nature of the entity’s relationships with the
newly identified related party, conducting an analysis of accounting records for transactions with
the newly identified related party and verifying the terms and conditions of the newly identified
related party transaction
• Reconsider the risk that other unidentified related parties or significant related party transactions
may exist
• If the non-disclosure by management appears intentional and therefore indicates possible fraud
evaluate the implications for the rest of the audit
Identified significant related party transactions outside the entity’s normal course of business
Where significant related party transactions outside the entity’s normal course of business are
identified, the auditor must do the following:
• Inspect the underlying contracts and agreements and evaluate whether:
– the business rationale or lack of suggests fraud;
– the terms are consistent with the management’s explanations; and
– the transaction has been appropriately accounted for and disclosed.
• Obtain audit evidence that transactions have been appropriately authorised and approved
Management assertions
If management has made assertions in the financial statements to the effect that a related party
transaction was conducted on terms equivalent to those prevailing in an arm’s length transaction, the
auditor must obtain evidence to support this. The nature of the evidence obtained will depend on
the support management has obtained to substantiate their claim but may involve:
• considering the appropriateness of management’s process for supporting the assertion;
• verifying the source of internal and external data supporting the assertion and testing it for
accuracy, completeness and relevance; and
• evaluating the reasonableness of any significant assumptions on which the assertion is based.

9.5.6 Evaluation of accounting and disclosure

The auditor is required to evaluate whether related parties and related party transactions have been
properly accounted for and disclosed and do not prevent the financial statements from achieving fair
presentation.

9.5.7 Written representations

The auditor is required to obtain written representations from management and, where appropriate,
those charged with governance that all related parties and related party transactions have been
disclosed to the auditor and that these have been appropriately accounted for and disclosed.
In the UK, an entity may require its management and those charged with governance to sign
individual declarations in relation to related party matters. It may be helpful if any such declarations
are addressed jointly to a designated official of the entity and also to the auditor.

9.5.8 Documentation
The auditor is required to include in the audit documentation the identity of related parties and the
nature of related party relationships.
Note: The law regarding transactions with directors was covered in Chapter 1 of this Workbook.

ICAEW 2021 9: Reporting financial performance 495

 9.6 Related parties: practical application
The ICAEW Audit faculty has produced guidance in its publication The Audit of Related Parties in
Practice. This proposes a five point action plan as follows:
• Plan your work on the audit of related party relationships and transactions thoroughly.
• Focus on the risk of material misstatement that might arise from related party transactions.
• Understand the internal controls at the company to identify related parties and to record related
party transactions.
• Design procedures to respond to risks identified.
• Perform completion procedures.

9.6.1 Identifying undisclosed related parties

It is often difficult to identify related party relationships and transactions which should have been
disclosed, but are not.
ISA 550 points out that the existence of the following relationships may indicate the presence of
control or significant influence:
(a) Direct or indirect equity holdings or other financial interests in the entity
(b) The entity’s holdings of direct or indirect equity or other financial interests in other entities
(c) Being part of those charged with governance or key management (that is, those members of
management who have the authority and responsibility for planning, directing and controlling
the activities of the entity)
(d) Being a close family member of any person referred to in subparagraph (c)
(e) Having a significant business relationship with any person referred to in subparagraph (c)
The related parties described in subparagraph (c) above, and by extension those described in (d)
and (e), are often the hardest to identify. While entities related through equity interest should be fairly
clearly documented, auditors frequently struggle to identify related party transactions established
through connected persons.
The following risk assessment procedures are relevant when testing for the existence of undisclosed
related parties:
• Enquire of management and the directors as to whether transactions have taken place with
related parties that are required to be disclosed by the disclosure requirements that are
applicable to the entity
• Review prior year working papers for names of known related parties
• Review minutes of meetings of shareholders and directors and other relevant statutory records,
such as the register of directors’ interests
• Review accounting records for large or unusual transactions or balances, in particular transactions
recognised at or near the end of the financial period
• Review confirmations of loans receivable and payable and confirmations from banks. Such a
review may indicate the relationship, if any, of guarantors to the entity
• Review investment transactions, for example purchase or sale of an interest in a joint venture or
other entity
• Enquire as to the names of all pension and other trusts established for the benefit of employees
and the names of their management and trustees
• Enquire as to the affiliation of directors and officers with other entities
• Review the register of interests in shares to determine the names of principal shareholders
• Enquire of other auditors currently involved in the audit, or predecessor auditors, as to their
knowledge of additional related parties
• Review the entity‘s tax returns, returns made under statute and other information supplied to
regulatory agencies for evidence of the existence of related parties
• Review invoices and correspondence from lawyers for indications of the existence of related
parties or related party transactions

496 Corporate Reporting ICAEW 2021

 9.7 First-time adoption of IFRS
Companies adopting IFRS for the first time are required to produce comparative financial statements,
restating prior period figures in accordance with IFRS.
Auditing the financial statements of a company adopting IFRS for the first time poses a special
challenge to the auditor, as set out in ISA (UK) 710, Comparative Information: Corresponding Figures
and Comparative Financial Statements. We have discussed the auditing of comparatives in detail in
Chapter 8.

9.7.1 Scope of the audit

Comparative financial statements refer to a full set of financial statements for the prior period,
included in the current period’s annual report. This differs from corresponding figures, where prior
period figures are set out next to current period figures in a set of financial statements for
comparison.
While the auditor does not express an opinion on corresponding figures, where comparative
financial statements are issued, the auditor is required to express an opinion on both the restated
prior period and the current period.

9.7.2 Audit procedures

ISA 710 requires the auditor to evaluate:
• Whether the comparative information agrees with the amounts and other disclosures presented
in the prior period or, when appropriate, have been restated; and
• Whether the accounting policies reflected in the comparative information are consistent with
those applied in the current period or, if there have been changes in accounting policies, whether
those changes have been properly accounted for and adequately presented and disclosed.
If the auditor identifies any possible misstatement, they should carry out additional audit procedures
to obtain sufficient, appropriate audit evidence about whether a material misstatement actually
exists.
In addition, auditors must obtain written representations for all the periods referred to in the
auditor’s report. This means that written representations must be obtained for the restated period, as
well as the current period.

9.7.3 Audit reporting

ISA 710 states that ‘the auditor’s opinion shall refer to each period for which the financial statements
are presented’.
It is possible for different audit opinions to be expressed for each period. Where a modified audit
opinion is given for the restated period, an Other Matter paragraph should be included, explaining
the reason for the modification.

ICAEW 2021 9: Reporting financial performance 497

Summary

498 Corporate Reporting ICAEW 2021

ICAEW 2021 9: Reporting financial performance 499
500 Corporate Reporting ICAEW 2021
 Further question practice
1 Knowledge diagnostic
Before you move on to question practice, complete the following knowledge diagnostic and check
you are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from the topic indicated.

Confirm your learning

1. Do you understand the IAS 1 rules on presenting comparatives? (Topic 1)

2. Do you understand what is meant by an operating segment? (Topic 3)

3. Can you measure assets held for sale as per IFRS 5? (Topic 4)

4. What are the minimum components of interim financial statements under IFRS 34? (Topic
7)

5. Do you understand the role of the auditor in relation to segment information? (Topic 10)

2 Question practice
Aim to complete all self-test questions at the end of this chapter. The following self-test questions are
particularly helpful to further topic understanding and guide skills application before you proceed to
the next chapter.

Question Learning benefit from attempting this question

AZ This is a very good question to revise your knowledge of IAS 1 and

preparation of financial statements, which you covered at Professional
Level.

Ndombe This tests IFRS 5, specifically classifying and valuing non-current assets
held for sale. This should be assumed knowledge from earlier studies, but
if you struggle you may need to go back to your earlier study material.

Mareotis This is a comprehensive question on related parties, an area that could be

tested as part of a longer question.

Once you have attempted the self-test questions, you can continue your studies by moving onto the
next chapter. In later chapters, we will recommend questions from the Question Bank for you to
attempt.
Refer back to the learning in this chapter for any questions which you did not answer correctly or
where the suggested solution has not provided sufficient explanation to answer all your queries.
Once you have attempted these questions, you can continue your studies by moving on to the next
chapter.

ICAEW 2021 9: Reporting financial performance 501

 Technical reference
1 IFRS 8, Operating Segments
• Requires an entity to report its operating segments based on the data reported internally to
management. Geographical disclosures of external revenue and non-current assets are also
required. – IFRS 8 Paragraph 20–22
• The minimum disclosure is of profit/loss by segment.
• Geographical disclosures of external revenue and non-current assets are also required.

2 IFRS 5, Non-current Assets Held for Sale and Discontinued Operations

• Discontinued operations
• Definition – IFRS 5.31–32
• Disclosures on the face of the statement of profit or loss and other comprehensive income: – IFRS
5.33(a)
– A single amount comprising the total of:
◦ The post-tax profit or loss of discontinued operations, and
◦ The post-tax gain or loss recognised on related assets
• Disclosures on the face or in the notes – IFRS 5.33(b) (c)
– An analysis of the single amount on the face
• Comparative figures must be restated – IFRS 5.34
• Narrative disclosures are also required – IFRS 5.41

3 IAS 24, Related Party Disclosures

• Definition of a related party and related party transaction – IAS 24.9
• Exclusions from definition of related party – IAS 24.11
• Disclosures – IAS 24.12, 16, 17, 18

4 IFRS 1, First-time Adoption of International Financial Reporting Standards

• Opening IFRS SOFP – IFRS 1.6
• Accounting policies – IFRS 1.7–12
• Estimates – IFRS 1.23-33
• Transition process – IFRS 1 App C,D
• Exemptions – IFRS 1.20–33
• Disclosure

5 IAS 34, Interim Financial Reporting

• Minimum components of an interim financial report – IAS 34.8
• Form and content of interim financial statements – IAS 34.9–11
• Selected explanatory notes – IAS 34.16
• Disclosure of compliance with IFRSs – IAS 34.19
• Periods for which interim financial statements are required to be presented – IAS 34.20
• Materiality – IAS 34.23

6 IAS 1, Presentation of Financial Statements

• Applies to all general purpose financial statements
• Links back to much in the IASB Framework
• Presentation and disclosure rules apply only to material items – IAS 1.31 and IAS 1.7
• Statement of financial position – IAS 1.54, 56, 60, 66, 69, 79

502 Corporate Reporting ICAEW 2021

 7 Disclosure in annual financial statements
• If an estimate of an amount reported in an interim period is changed significantly during the final
interim period of the financial year but a separate financial report is not published for that final
interim period, the nature and amount of that change in estimate shall be disclosed in a note to
the annual financial statements for that financial year. – IAS 34.26

8 Recognition and measurement

• An entity should apply the same accounting policies in its interim financial statements as are
applied in its annual financial statements, except for accounting policy changes made after the
date of the most recent annual financial statements that are to be reflected in the next annual
financial statements. However, the frequency of an entity’s reporting (annual, half-yearly, or
quarterly) should not affect the measurement of its annual results. To achieve that objective,
measurements for interim reporting purposes should be made on a year-to-date basis. – IAS
34.28

9 Revenues received seasonally, cyclically, or occasionally

• Revenues that are received seasonally, cyclically, or occasionally within a financial year shall not be
anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate
at the end of the entity’s financial year. – IAS 34.37

10 Costs incurred unevenly during the financial year

• Costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred
for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type
of cost at the end of the financial year. – IAS 34.39
• Applying the recognition and measurement principles – IAS 34.40
• Use of estimates – IAS 34.41
• Restatement of previously reported interim periods – IAS 34.43

11 IFRS 14, Regulatory Deferral Accounts

• Specifies the financial reporting requirements for ‘regulatory deferral account balances’ that arise
when an entity provides goods or services to customers at a price or rate that is subject to rate
regulation. – IFRS 14.1
• Eligible entities can continue to apply the accounting policies used for regulatory deferral
account balances under the basis of accounting used immediately before adopting IFRS
(‘previous GAAP’) when applying IFRSs, subject to the presentation requirements of IFRS 14. –
IFRS 14.11
• The impact must be presented separately. – IFRS 14.20
• Specific disclosures are required. – IFRS 14.27

12 ISA 501
• Audit of segment information – ISA 501.13

13 ISA 550
• Definition of related parties – ISA 550.10
• Auditor’s responsibilities in relation to related parties – ISA 550.3–7
• Audit procedures in respect of related parties – ISA 550.11–28

14 ISA 710
• Audit procedures in respect of comparative financial statements – ISA 710.7–9
• Audit reporting in respect of comparative financial statements – ISA 710.10–19

ICAEW 2021 9: Reporting financial performance 503

 Self-test questions

Answer the following questions.

1 AZ
AZ is a quoted manufacturing company. Its finished products are stored in a nearby warehouse until
ordered by customers. AZ has performed very well in the past, but has been in financial difficulties in
recent months and has been reorganising the business to improve performance.
The trial balance for AZ at 31 March 20X3 was as follows:

$’000 $’000
Sales 124,900
Cost of goods manufactured in the year to 31 March 20X3
(excluding depreciation) 94,000
Distribution costs 9,060
Administrative expenses 16,020
Restructuring costs 121
Interest received 1,200
Loan note interest paid 639
Land and buildings (including land $20,000,000) 50,300
Plant and equipment 3,720
Accumulated depreciation at 31 March 20X2:
Buildings 6,060
Plant and equipment 1,670
Investment properties (at market value) 24,000
Inventories at 31 March 20X2 4,852
Trade receivables 9,330
Bank and cash 1,190
Ordinary shares of $1 each, fully paid 20,000
Share premium 430
Revaluation surplus 3,125
Retained earnings at 31 March 20X2 28,077
Ordinary dividends paid 1,000
7% loan notes 20X7 18,250
Trade payables 8,120
Proceeds of share issue – 2,400
214,232 214,232

Additional information provided:

(1) The property, plant and equipment are being depreciated as follows:
Buildings 5% per annum straight line.

504 Corporate Reporting ICAEW 2021

 Plant and equipment 25% per annum reducing balance.
Depreciation of buildings is considered an administrative cost while depreciation of plant and
equipment should be treated as a cost of sale.
(2) On 31 March 20X3 the land was revalued to $24,000,000.
(3) Income tax for the year to 31 March 20X3 is estimated at $976,000. Ignore deferred tax.
(4) The closing inventories at 31 March 20X3 were $5,180,000. An inspection of finished goods
found that a production machine had been set up incorrectly and that several production
batches, which had cost $50,000 to manufacture, had the wrong packaging. The goods cannot
be sold in this condition but could be repacked at an additional cost of $20,000. They could then
be sold for $55,000. The wrongly packaged goods were included in closing inventories at their
cost of $50,000.
(5) The 7% loan notes are 10-year loans due for repayment by 31 March 20X7. Interest on these
loan notes needs to be accrued for the six months to 31 March 20X3.
(6) The restructuring costs in the trial balance represent the cost of a major restructuring of the
company to improve competitiveness and future profitability.
(7) No fair value adjustments were necessary to the investment properties during the period.
(8) During the year the company issued 2 million new ordinary shares for cash at $1.20 per share.
The proceeds have been recorded as ‘Proceeds of share issue’.
Requirement
Prepare the statement of profit or loss and other comprehensive income and statement of changes in
equity for AZ for the year to 31 March 20X3 and a statement of financial position at that date.
Notes to the financial statements are not required, but all workings must be clearly shown.

2 Viscum
The Viscum Company accounts for non-current assets using the cost model.
On 25 April 20X6 Viscum classified a non-current asset as held for sale in accordance with IFRS 5,
Non-current Assets Held for Sale and Discontinued Operations. At that date the asset’s carrying
amount was £30,000, its fair value was estimated at £22,000 and the costs to sell at £3,000.
On 15 May 20X6 the asset was sold for net proceeds of £18,400.
Requirement
In accordance with IFRS 5, what amount should be included as an impairment loss in Viscum’s
financial statements for the year ended 30 June 20X6?

3 Reavley
The Reavley Company accounts for non-current assets using the cost model.
On 20 July 20X6 Reavley classified a non-current asset as held for sale in accordance with IFRS 5,
Non-current Assets Held for Sale and Discontinued Operations. At that date the asset’s carrying
amount was £19,500, its fair value was estimated at £26,500 and the costs to sell at £1,950.
The asset was sold on 18 October 20X6 for £26,000.
Requirement
In accordance with IFRS 5, at what amount should the asset be stated in Reavley’s statement of
financial position at 30 September 20X6?

4 Smicek
The Smicek Company classified an asset as being held for sale on 31 December 20X6. The asset had
been purchased for a cost of £1.2 million on 1 January 20X4, and then had a 12-year useful life. On
31 December 20X6 its carrying amount was £900,000, its fair value was £860,000 and the expected
sale costs were £20,000.
On 31 December 20X7 the board of Smicek, having failed to sell the asset during 20X7, decided to
reverse their original decision and therefore use the asset in the business. At 31 December 20X7 the

ICAEW 2021 9: Reporting financial performance 505

 asset had a fair value of £810,000 and expected sale costs of £20,000. The directors estimate that
annual cash flows relating to the asset would be £200,000 per year for the next 6 years. The effect of
discounting is not material.
Requirement
What is the effect on profit or loss of Smicek’s ceasing to classify the asset as held for sale, according
to IFRS 5, Non-current Assets Held for Sale and Discontinued Operations?

5 Ndombe
The Ndombe Company classified a group of assets as held for sale on 31 December 20X6. Their fair
value less costs to sell was £1,180,000.
During 20X7 the company decided that one of the assets, a polishing machine, should no longer be
treated as an asset held for sale. The sale of the other assets was delayed due to events beyond the
control of Ndombe and the company remains committed to their sale, which is highly probable in
20X8.
Asset values and dates are as follows:

Polishing machine Other assets

£ £
Cost at 1 January 20X5 400,000 1,500,000
Accumulated depreciation to 31 December 20X6 (160,000) (600,000)
Carrying amount on 31 December 20X6 240,000 900,000
Useful life 5 years 5 year
Fair value less costs to sell 31 December 20X6 210,000 970,000
Fair value less costs to sell 31 December 20X7 190,000 880,000
Value in use at 31 December 20X7 170,000 810,000

Requirement
Under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations what are the amounts
that should be shown under assets on the statement of financial position at 31 December 20X6 and
31 December 20X7?

6 Sapajou
The Sapajou Company bought a property with a useful life of 10 years for £1,200,000 on 1 January
20X4.
On 1 July 20X6 the board of Sapajou made a decision to sell the property, and immediately vacated
it and advertised it for sale. At this date fair value less costs to sell was estimated at £880,000.
Negotiations with a buyer appeared successful, and a sale was provisionally agreed for 1 August
20X7 for £880,000. At the last minute the buyer withdrew and Sapajou had to re-advertise the
property.
A new buyer was found in November 20X7 and a new price was agreed at fair value less costs to sell
of £995,000. The sale is scheduled to take place in February 20X8.
Requirement
What are the amounts that should be included in profit or loss for the years ending 31 December
20X6 and 31 December 20X7?

7 Sulafat
The Sulafat Company has a 70% subsidiary Vurta and is a venturer in Piton, a joint venture company.
During the financial year to 31 December 20X6, Sulafat sold goods to both companies.

506 Corporate Reporting ICAEW 2021

 Consolidated financial statements are prepared combining the financial statements of Sulafat and
Vurta.
Requirement
Which transactions should be disclosed under IAS 24, Related Party Disclosures, in the separate
financial statements of Sulafat for 20X6?

8 Phlegra
In the year ended 31 December 20X7, the Phlegra Company undertook transactions with the
following entities to the value stated.
(1) The Nereidum Company, one of whose non-executive directors is an executive director of
Phlegra: £300,000.
(2) The Chub Company, which sources 100% of its raw materials requirements from Phlegra:
£190,000.
Requirement
Under IAS 24, Related Party Disclosures, what is the total amount to be disclosed in respect of
transactions with related parties in Phlegra’s financial statements for the year ended 31 December
20X7?

9 Mareotis
The Mareotis Company is a partly owned subsidiary of the Bourne Company. In the year ended 31
December 20X7 Mareotis undertook transactions with the following entities to the value stated.
(1) The Hayles Company, in which the Wrasse Company holds 55% of the equity. Bourne holds 40%
of the equity of Wrasse and has the power to appoint 3 out of the 5 members of Wrasse’s board
of directors: £300,000.
(2) The Galaxius Company, which is controlled by Danielle (the aunt of Agnes, a member of
Mareotis’s board of directors): £500,000.
Requirement
Under IAS 24, Related Party Disclosures, what is the total amount of transactions with related parties
to be disclosed in Mareotis’s financial statements for the year ended 31 December 20X7?

10 Marmoset
The Marmoset Company offers the service of transport consultations. Its accounting year ends on 31
December each year and it is currently preparing half-yearly interim financial statements for the six
months to 30 June 20X7.
During 20X7 the directors drew up a plan to introduce a new bonus scheme for all junior consultants
in order to provide incentives and improve retention. The details of the scheme were announced to
employees the day before the interim financial statements were released on 15 August 20X7. Under
the planned scheme any bonus would be paid on 31 March 20X8.
The bonus will be equal to 1% of profit before tax (calculated before recognising the bonus) of the
year ended 31 December 20X7.
The business is seasonal such that 60% of the annual profit before tax is earned in the first six months
of the year. The profit before tax in the interim financial statements for the six months to 30 June
20X7 is £6 million.
Requirement
What amount should be recognised in profit or loss for Marmoset for the six months to 30 June 20X7
in respect of the bonus, according to IAS 34, Interim Financial Reporting?

11 Aconcagua
The Aconcagua Company sells fashion shoes, the price of which varies during the year. Its
accounting year ends on 31 December and it prepares half-yearly interim financial statements.

ICAEW 2021 9: Reporting financial performance 507

At 30 June 20X7 it has inventories of 2,000 units which cost £30 each. The net realisable value of the
inventories at 30 June, when the shoes are out of season, is £20 each. No sales are expected in the
period to 31 December 20X7, but the expected net realisable value of the shoes at that date (when
they are about to come back into season) is £28 each.
Requirement
Should any changes in inventory values be reflected in the interim financial statements of Aconcagua
for the six months ending 30 June 20X7 and for the six months ending 31 December 20X7,
according to IAS 34, Interim Financial Reporting?

Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.

508 Corporate Reporting ICAEW 2021

Answers to Interactive questions

Answer to Interactive question 1

IFRS 8, Operating Segments states that an operating segment is separately reportable if it has been
identified as a separate operating segment meeting the operating segment definition, and:
• its reported revenue is 10% or more of the combined revenue (external and internal) of all
operating segments, or
• the absolute amount of its reported profit or loss is 10% or more of the greater of the combined
profit of all operating segments that did not report a loss and the combined reported loss of all
operating segments that reported a loss, or
• its assets are 10% or more of the combined assets of all operating segments.

Profit or loss as % of
Revenue as % of total profit of all segments in Assets as % of total
revenue (£238m) profit (£29m) assets (£336m)
Chemicals * 33.6% 48.3% 32.4%
Pharmaceuticals
wholesale 28.2% 31.0% 31.0%
Pharmaceuticals retail 9.2% 6.9% 8.9%
Cosmetics 6.3% 6.9% 5.4%
Hair care 5.0% 13.8% 6.3%
Body care 17.6% 20.7% 16.1%

* The chemicals segments are aggregated due to their similar economic characteristics
At 31 December 20X5 four of the six operating segments are reportable operating segments:
Chemicals
All size criteria are met.
Pharmaceuticals wholesale
All size criteria are met.
Pharmaceuticals retail
The Pharmaceuticals retail segment is not separately reportable, as it does not meet the quantitative
thresholds. It can, however, still be reported as a separate operating segment if management
believes that information about the segment would be useful to users of the financial statements.
Alternatively, the group could consider amalgamating it with the Pharmaceuticals wholesale
segment, providing the two operating segments have similar economic characteristics and share a
majority of the ‘aggregation’ criteria which, excluding the type of customer, may be the case.
Otherwise it would be disclosed in an ‘All other segments’ column.
Cosmetics
The Cosmetics segment does not meet the quantitative thresholds and therefore is not separately
reportable. It can also be reported separately if management believes the information would be
useful to users. Alternatively the group may be able to amalgamate it with the Body care segment,
providing the operating segments have similar economic characteristics and share a majority of the
‘aggregation’ criteria. Otherwise it would also be disclosed in an ‘All other segments’ column.
Hair care
The Hair care segment is separately reported due to its profitability being greater than 10% of total
segments in profit.
Body care
All size criteria are met.

ICAEW 2021 9: Reporting financial performance 509

Note: IFRS 8.15 states that at least 75% of total external revenue must be reported by operating
segments. This condition has been met, as the reportable segments account for 82% of total external
revenue (158/192).

Answer to Interactive question 2

The facility will not be transferred until the backlog of orders is completed; this demonstrates that the
facility is not available for immediate sale in its present condition. The facility cannot be classified as
‘held for sale’ at 31 December 20X3. It must be treated in the same way as other items of property,
plant and equipment: it should continue to be depreciated and should not be separately disclosed.

Answer to Interactive question 3

Because the steel works is being closed, rather than sold, it cannot be classified as ‘held for sale’. In
addition, the steel works is not a discontinued operation. Although at 31 December 20X3 the group
was firmly committed to the closure, this has not yet taken place and therefore the steel works must
be included in continuing operations. Information about the planned closure could be disclosed in
the notes to the financial statements.

Answer to Interactive question 4

In its financial statements S must disclose all benefits provided in exchange for services rendered to S
(but not those rendered to P), whether they are provided by S, by P, or on behalf of S (as are the
pension benefits and the share options). All the amounts listed should be disclosed by S, with the
exception of the £20,000 payable in respect of services rendered to P.

Answer to Interactive question 5

5.1 Europa’s first IFRS financial statements will be for the year ended 31 December 20X8. IFRS 1
requires that at least one year’s comparative figures are presented and therefore the date of
transition to IFRSs is the beginning of business on 1 January 20X7 (or close of business on 31
December 20X6).
Therefore the procedure for adopting IFRSs is:
• Identify accounting policies that comply with IFRSs effective at 31 December 20X8 (the
reporting date for the first IFRS financial statements).
• Restate the opening statement of financial position at 1 January 20X7 (the date of transition)
using these IFRSs retrospectively, by:
– Recognising all assets and liabilities whose recognition is required by IFRSs
– Not recognising items as assets or liabilities if IFRSs do not permit such recognition
– Reclassifying items that were recognised under previous GAAP as one type of asset,
liability or component of equity, but are a different type of asset, liability or component of
equity under IFRSs
– Measuring all recognised assets and liabilities in accordance with IFRSs
The company will almost certainly need to change some of its accounting policies and to adjust
some of the amounts that it reported previously at the same dates using previous GAAP. It
should recognise these adjustments directly in retained earnings (ie, in equity).
• Explain the effect of the transition from previous GAAP to IFRSs, by presenting:
– A reconciliation of equity reported under previous GAAP to equity under IFRSs at the date
of transition and at the latest previous GAAP reporting date
– A reconciliation of the profit or loss reported under previous GAAP to profit or loss
reported under IFRSs for the last period presented under previous GAAP
If Europa presented a statement of cash flows under previous GAAP, it should also explain any
material adjustments to the statement of cash flows.
Although the general rule is that all IFRSs should be applied retrospectively, a number of
exemptions are available. These are intended to cover cases in which the cost of complying
fully with a particular requirement would outweigh the benefits to users of the financial
statements. Europa may choose to take advantage of any or all of the exemptions.

510 Corporate Reporting ICAEW 2021

5.2 Changing from previous GAAP to IFRSs is likely to be a complex process and should be
carefully planned. Although previous GAAP and IAS/IFRS may follow broadly the same
principles, there are still likely to be many important differences in the detailed requirements of
individual standards.
If Europa has foreign subsidiaries outside Molvania it will need to ensure that they comply with
any previous reporting requirements. This may mean that subsidiaries have to prepare two sets
of financial statements: one using their previous GAAP; and one using IFRSs (for the
consolidation).
The process will be affected by the following:
• The differences between previous GAAP and IFRSs as they affect the group financial
statements in practice. The company will need to carry out a detailed review of current
accounting policies, paying particular attention to areas where there are significant
differences between previous GAAP and IFRSs. These will probably include deferred tax,
business combinations, employee benefits and foreign currency translation. It should be
possible to estimate the effect of the change by preparing pro forma financial statements
using IFRSs.
• The level of knowledge of IFRSs of current finance staff (including internal auditors). It will
probably be necessary to organise training and the company may need to recruit additional
personnel.
• The group’s accounting systems. Management will need to assess whether computerised
accounting systems can produce the information required to report under IFRSs. They will
also need to produce new consolidation packages and accounting manuals.
Lastly, the company should consider the impact of the change to IFRSs on investors and their
advisers. For this reason management should try to quantify the effect of IFRSs on results and
other key performance indicators as early as possible.
5.3 Advice
(1) Accounting estimates
Estimates under IFRSs at the date of transition must be consistent with those made at the same
date under previous GAAP (after adjustments to reflect any difference in accounting policies).
The only exception to this is if the company has subsequently discovered that these estimates
were in error. This is not the case here and therefore the estimates are not adjusted in the first
IFRS financial statements.
(2) Court case
The treatment of this depends on the reason why Europa did not recognise a provision under
previous GAAP at 31 December 20X7.
If the requirements of previous GAAP were consistent with IAS 37, Provisions, Contingent
Liabilities and Contingent Assets, presumably the directors concluded that an outflow of
economic benefit was not probable and that the recognition criteria were not met. In this case,
Europa’s assumptions under IFRSs are consistent with its previous assumptions under previous
GAAP. Europa does not recognise a provision at 31 December 20X7 and accounts for the
payment in the year ended 31 December 20X8.
If the requirements of previous GAAP were not consistent with IAS 37, Europa must determine
whether it had a present obligation at 31 December 20X7. The directors should take account of
all available evidence, including any additional evidence provided by events after the reporting
period up to the date the 20X7 financial statements were authorised for issue in accordance
with IAS 10, Events After the Reporting Period.
5.4 The outcome of the court case confirms that Europa had a liability in September 20X7 (when
the events that resulted in the case occurred), but this event occurred after the 20X7 financial
statements were authorised for issue. Based on this alone, the company would not recognise a
provision at 31 December 20X7 and the $10 million cost of the court case would be recognised
in the 20X8 financial statements. If the company’s lawyers had advised Europa that it was
probable that they would be found guilty and suggested the expected settlement amount
before the financial statements were authorised for issue, the provision would be recognised in
the 20X7 financial statements reporting under IFRSs for that amount.

ICAEW 2021 9: Reporting financial performance 511

Answer to Interactive question 6
30% × £4m = £1.2m
The tax rate for the entire year is applied to the profits for the interim period.

Answer to Interactive question 7

(a) Production machinery
In this case the key issue is whether or not the asset should be classified as held for sale. In
accordance with IFRS 5 a held-for-sale asset must be available for immediate sale. In this
instance this does not appear to be the case, as the asset is still required for production
purposes until after the year end. It should only be classified as held for sale at the end of
January 20X8 when it has been serviced and uninstalled. Relevant audit evidence would include
orders to be fulfilled compared to goods made by this machine compared to available
inventory, budgets and inquiries of production staff.
Land
The key issue is the valuation of the land. As the entity has adopted the revaluation model the
land should have been revalued to fair value (£210,000) immediately before being reclassified
as held for sale. Any gain would be recognised in the revaluation surplus and disclosed as other
comprehensive income in the statement of profit or loss and other comprehensive income. On
reclassification the £6,000 costs to sell would be recognised in profit or loss as an impairment
loss resulting in a carrying value of the asset of £204,000 (£210,000 – £6,000).
(b) Production machinery
Audit procedures would be as follows:
• Discuss with management intentions to run down production and the timescales involved.
• Review minutes of management/board meetings to confirm management’s intentions.
• If material, agree with the management the reclassification of the asset as part of plant and
machinery.
• Consider whether an impairment adjustment is required as the asset will no longer be used
for its current purpose.
Land
Audit procedures would be as follows:
• Review the process of estimating the fair value of the land on 1 October and the necessary
advertising costs.
• Discuss with management why the land was not revalued on classification as held for sale.

512 Corporate Reporting ICAEW 2021

 Answers to Self-test questions

1 AZ
AZ statement of profit or loss and other comprehensive income for the year ended 31 March 20X3

$’000
Revenue 124,900
Cost of sales (W1) (94,200)
Gross profit 30,700
Distribution costs (W1) (9,060)
Administrative expenses (W1) (17,535)
Other expenses (W1) (121)
Finance income 1,200
Finance costs (18,250 × 7%) (1,278)
Profit before tax 3,906
Income tax expense (976)
PROFIT FOR THE YEAR 2,930
Other comprehensive income:
Gain on land revaluation 4,000
Total comprehensive income for the year 6,930

AZ statement of financial position as at 31 March 20X3

$’000
Non-current assets
Property, plant and equipment (W2) 48,262
Investment properties 24,000
72,262
Current assets
Inventories (5,180 – (W3) 15) 5,165
Trade receivables 9,330
Cash and cash equivalents 1,190
15,685
87,947
Equity
Share capital (20,000 + (W4) 2,000) 22,000
Share premium (430 + (W4) 400) 830
Retained earnings (28,077 – 1,000 + 2,930) 30,007
Revaluation surplus (3,125 + 4,000) 7,125
59,962

ICAEW 2021 9: Reporting financial performance 513

 $’000
Non-current liabilities
7% loan notes 20X7 18,250

Current liabilities
Trade payables 8,120
Income tax payable 976
Interest payable (1,278 – 639) 639
9,735
87,947

AZ statement of changes in equity for the year ended 31 March 20X3

Share Share Retained Revaluation

capital premium earnings surplus Total
$’000 $’000 $’000 $’000 $’000
Balance at 1 April 20X2 20,000 430 28,077 3,125 51,632
Issue of share capital 2,000 400 2,400
Dividends (1,000) (1,000)
Total comprehensive income for
the year – – 2,930 4,000 6,930

Balance at 31 March 20X3 22,000 830 30,007 7,125 59,962

WORKINGS
(1) Expenses

Cost of
sales Distribution Admin Other
$’000 $’000 $’000 $’000
Per TB 94,000 9,060 16,020 121
Opening inventories 4,852
Depreciation on buildings (W2) 1,515
Depreciation on P&E (W2) 513
Closing inventories (5,180 – (W3) 15) (5,165) – –
94,200 9,060 17,535 121

(2) Property, plant and equipment

Land Buildings P&E Total

$’000 $’000 $’000 $’000
Cost b/d 20,000 30,300 3,720 54,020
Acc’d depreciation b/d – (6,060) (1,670) (7,730)
20,000 24,240 2,050 46,290

514 Corporate Reporting ICAEW 2021

 Land Buildings P&E Total
$’000 $’000 $’000 $’000
Depreciation charge for year:
$30,300 × 5% – (1,515) (1,515)
($3,720 – $1,670) × 25% (513) (513)
20,000 22,725 1,537 44,262
Revaluation (balancing figure) 4,000 – – 4,000
Carrying amount c/d 24,000 22,725 1,537 48,262

(3) Inventories

$’000
Defective batch:
Selling price 55
Cost to complete: repackaging required (20)
NRV 35
Cost (50)
Write-off required (15)

(4) Share issue

The proceeds have been recorded separately in the trial balance. This requires a transfer to the
appropriate accounts:

$’000 $’000
DEBIT Proceeds of share issue 2,400
CREDIT Share capital (2,000 × $1) 2,000
CREDIT Share premium (2,000 × $0.20) 400

2 Viscum
£11,000
IFRS 5.15 requires assets classified as held for sale to be measured at the time of classification at the
lower of (1) the carrying value (£30,000) and (2) the fair value less costs to sell (£19,000).
IFRS 5.20 requires recognition of the resulting impairment loss (£30,000 – £19,000). The gain or loss
on disposal is treated separately per IFRS 5.24.

3 Reavley
£19,500
IFRS 5.15 requires that a non-current asset held for sale should be stated at the lower of (1) the
carrying amount (£19,500) and (2) the fair value less costs to sell (£24,550).

4 Smicek
£40,000
At the end of the current year, a non-current asset that has ceased to be classified as held for sale
should be valued at the lower of:

ICAEW 2021 9: Reporting financial performance 515

 (1) The carrying amount had it not been recognised as held for sale, ie, to charge a full year’s
depreciation of £100,000 for 20X7 and reduce the carrying amount from £900,000 at 31
December 20X6 to £800,000.
(2) The recoverable amount, which is the higher of the £790,000 fair value less costs to sell
(£810,000 less £20,000) and value in use (the cash flows generated from using the asset) of
£1,200,000.
Therefore the asset should be carried at £800,000 in the statement of financial position at 31
December 20X7.
At the end of the prior year, when the asset was classified as held for sale, the asset would have been
carried at the lower of carrying amount (£900,000) and fair value less costs to sell of £840,000
(£860,000 less £20,000). Therefore the asset has fallen in value from £840,000 to £800,000 in the
current year, giving a charge to profits of £40,000.

5 Ndombe
31 December 20X6: the assets should be shown in the statement of financial position at a value of
£1,140,000.
31 December 20X7: the assets should be shown in the statement of financial position at a value of
£1,040,000.
At the end of 20X6 the assets are classified as held for sale. The assets should be measured at the
lower of carrying amount and fair value less costs to sell (IFRS 5.15). The carrying amount was
£1,140,000 and the fair value less costs to sell was £1,180,000 so they were measured at £1,140,000.
No depreciation is charged on these assets in 20X7 (IFRS 5.25).
At the end of 20X7, it is still possible to classify the ‘other’ assets as held for sale as the company is
still committed to the sale (IFRS 5.29). These assets would be measured at fair value less costs to sell
of £880,000, as this is lower than the carrying amount of £900,000.
However, the polishing machine should be valued at the lower of £160,000 carrying amount had
classification as held for sale not occurred (£400,000 × 2/5) and the higher of fair value less costs to
sell (£190,000) and value in use (£170,000) (IFRS 5.27). This gives a value of £160,000.
This gives a total value of £1,040,000 at 31 December 20X7.

6 Sapajou
An expense of £20,000 is shown in the profit or loss part of the statement of profit or loss and other
comprehensive income for the year ended 31 December 20X6.
Income of £20,000 is shown in the profit or loss part of the statement of profit or loss and other
comprehensive income for the year ended 31 December 20X7.
Under IFRS 5.15 an asset classified as held for sale is measured at the lower of carrying amount
immediately before the reclassification of £900,000 (£1,200,000 – 2.5 × £120,000), and fair value less
costs to sell of £880,000. The £20,000 impairment loss is charged to profits (IFRS 5.20).
In the following year, the increase in fair value less costs to sell is £115,000, but only £20,000 of this
can be recognised in profit (IFRS 5.21) as this is the reversal of the previous impairment loss.

7 Sulafat
Disclosure is required of transactions with both Vurta and Piton. See IAS 24.3, which states that
entities under both direct and common control are related parties.

8 Phlegra
Nil under IAS 24.11 (a) two entities are not related parties simply because they have a director in
common, nor per IAS 24.11 (b) simply because the volume of transactions between them results in
economic dependence.
So neither Nereidum nor Chub is a related party of Phlegra.

516 Corporate Reporting ICAEW 2021

9 Mareotis
£300,000
Under IAS 24.9, Hayles is a related party of Mareotis. Bourne ‘controls’ Wrasse (by virtue of the power
to appoint the majority of directors) and Wrasse ‘controls’ Hayles (by virtue of holding the majority of
the equity). So Bourne ‘controls’ both Mareotis and Hayles, which are therefore related parties as a
result of being under common control.
Being an aunt does not make Danielle a close member of Agnes’s family so, although Galaxius is
controlled by a relative of Agnes, the relationship is not close enough to make Galaxius a related
party of Mareotis. So only transactions with Hayles have to be disclosed.

10 Marmoset
Nil
Interim reports should apply the normal recognition and measurement criteria, using appropriate
estimates under IAS 34.41.
There is no legal or constructive obligation at the interim reporting date to pay the bonus, as no
announcement had been made at this date. Under IAS 34 App B B6 no expense is required.

11 Aconcagua
Inventory values change

Six months ending 30 June 20X7 £20,000 profit decrease

Six months ending 31 December 20X7 £16,000 profit increase

Interim reports should apply the normal recognition and measurement criteria, using appropriate
estimates under IAS 34.41. IAS 34 App B B25–B26 links these general principles to inventories by
requiring them to be written down to net realisable value at the interim date; the write down is then
reversed at the year end, if appropriate.
So the profit decrease in the six months to 30 June 20X7 is 2,000 × (£30 – £20) = £20,000, while the
profit increase in the six months to 31 December 20X7 is 2,000 × (£28 – £20) = £16,000.

ICAEW 2021 9: Reporting financial performance 517

518 Corporate Reporting ICAEW 2021