Fundamentals of Strategic

Reporting

Chapter 2
 Overview
• Presentation of Financial Statements
– The statement of financial position
– The statement of comprehensive income
– The statement of changes in equity
– The notes to the financial statements
– Statement of Cash Flows
• Interim Financial Reporting
• Accounting Policies, Estimates and Errors
• Provisions, Contingent Assets and Contingent
Liabilities
• Events After the Reporting Period
Presentation of Financial Statements
Components of financial statements
• Statement of financial position
• Statement of profit or loss and other
comprehensive income
• Statement of changes in equity
• Statement of cash flows (IAS7)
• Notes

For the sake of brevity, the statement of profit or

loss and other comprehensive income may be
referred to as the "statement of comprehensive
income"
 General features
• Fair presentation
• Compliance with international standards
• Going concern basis
• Accruals basis
• Frequency of reporting
• Comparative information and
Consistency of presentation
Identification of the financial statements

• Name of the reporting entity

• Whether a single entity or a group
• Date at the end of the reporting period or the
period covered
• Presentation currency used
• Level of rounding (e.g. £000 or £m)
 Statement of financial position
• formerly referred to in the standards as the
"balance sheet"
• the current/non-current distinction
• information that must be presented in the
statement of financial position
• information that may be presented in the
statement of financial position or in the
notes
 Current and non-current assets
An asset is a current asset if it satisfies any of the
following criteria:
(a) it is expected to be realized within the entity's
normal operating cycle;
(b) it is held for the purpose of being traded;
(c) it is expected to be realized within 12 months
after the reporting period;
(d) it is cash or a cash equivalent as defined by IAS7.
All other assets are non-current assets.
 Current/non-current liabilities
A liability is a current liability if it satisfies any of the
following criteria:
(a) it is expected to be settled within the entity's
normal operating cycle;
(b) it is held for the purpose of being traded;
(c) it is due to be settled within 12 months after the
reporting period;
(d) the entity does not have the right to defer
settlement for at least 12 months after the
reporting period.
All other liabilities are non-current liabilities.
Information to be presented in the statement of
financial position
• property, plant and equipment
• investment property
• intangible assets
• financial assets
• inventories
• trade receivables
• cash and cash equivalents
• trade payables
• provisions
• financial liabilities
• tax assets and liabilities
• equity capital and reserves
To be presented in the statement of financial position
or in the notes

• Sub-classification of line items as appropriate

to the entity's operations and/or as required
by other international standards.
(e.g. analysis of property, plant and
equipment as required by IAS16)
• Analysis of share capital and reserves.
 Samples Statement of Financial Position

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13
 Statement of comprehensive income
All items of income and expense recognised in an
accounting period must be presented in either:
(a) a single statement of comprehensive income, or
(b) two separate statements, comprising:
(i) a statement showing the components of profit
or loss, and
(ii) a second statement beginning with the profit or
loss for the period and showing the entity's
"other comprehensive income".
 Information to be presented in the statement
of comprehensive income
• revenue
• finance costs
• tax expense
• profit or loss from discontinued operations
• profit or loss for the period
• each class of other comprehensive income
• total comprehensive income for the period.

The first five items on this list may be presented in a

separate statement of profit or loss.
To be presented in the statement of comprehensive
income or in the notes

• further items of income and expense should be

disclosed separately, if material
• an analysis of expenses should be presented using a
classification based on either:
– the nature of the expenses, or
– the function of the expenses within the entity
(e.g. cost of sales, distribution costs,
administrative expenses).
Entities are encouraged to present the analysis of expenses in the
statement of comprehensive income, but may present it in the notes
instead.
 Statement of Comprehensive Income

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 Nature of Expense presentation
Revenue X
Other income X
Changes in inventories X
Raw materials and consumables used X
Employee benefits expense X
Depreciation and amortization expense X x
Other expenses X
Total expenses (X)
Profit before tax XX

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 Statement of changes in equity
• shows how each component of equity has changed
during an accounting period
• items presented include:
– total comprehensive income for the period;
– effects of any changes in accounting policies;
– share issues; and
– dividends paid.
• provides a reconciliation of the opening and closing
balance on each component of equity
 C. Statement of Changes in Equity

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 Notes to the financial statements
• measurement bases and other accounting
policies
• further information required by international
standards
• additional information relevant to an
understanding of the financial statements
Cross-referenced to the statement of financial position, the
statement of comprehensive income, the statement of cash flows
and the statement of changes in equity.
Statement of Cash Flows
(IAS7)
 Purpose of a statement of cash flows
The statement of cash flows is a financial statement
which reports on the flows of cash in and out of a
business entity during an accounting period.
Cash is a vital resource. Without cash a business
cannot pay its employees, suppliers etc. and will
eventually fail.
Profit is not a reliable indicator of an entity's cash
situation since profits are computed on the accruals
basis, not the cash basis.
The statement of cash flows focuses on the entity's
cash flows and draws attention to any cash
problems.
 Cash and cash equivalents
IAS7 states that cash comprises "cash on hand
and demand deposits". Bank overdrafts are
generally treated as negative cash.
Cash equivalents are "short-term, highly liquid
investments that are readily convertible to known
amounts of cash and which are subject to
insignificant risk of changes in value".

The total of cash and cash equivalents could be

negative if the business has a bank overdraft.
Classification of cash flows by activity
Cash flows should be classified by activity.
IAS7 identifies three classes of activity:
• Operating activities are "the principal revenue-
producing activities of the entity".
• Investing activities consist of "the acquisition
and disposal of long-term assets and other
investments not included in cash equivalents".
• Financing activities are "activities that result in
changes in the size and composition of the
contributed equity and borrowings of the
entity".
 Operating activities
Cash flows arising from operating activities
include:
(a) cash receipts from the sale of goods and services
(b) cash receipts from royalties, fees, commissions and
other revenue
(c) cash payments to suppliers for goods and services
(d) cash payments to and on behalf of employees
(e) cash payments or cash refunds of taxes unless
specifically identified with investing or financing
activities.
 Investing activities
Cash flows arising from investing activities include:
(a) cash payments to acquire property, plant and equipment
or other long-term assets
(b) cash receipts from the sale of property, plant and
equipment or other long-term assets
(c) cash payments to acquire shares or debt instruments of
other entities
(d) cash receipts from the sale of shares or debt instruments
of other entities
(e) cash advances and loans made to other parties
(f) cash receipts from the repayment of advances and loans
made to other parties.
 Financing activities
Cash flows arising from financing activities
include:
(a) cash proceeds from issuing shares
(b) cash payments to owners to acquire or redeem the
entity's own shares
(c) cash proceeds from issuing debentures, loans and
other borrowings
(d) cash repayments of amounts borrowed
(e) cash payments by a lessee for the reduction of the
outstanding liability relating to a finance lease (IAS17)
or lease liability (IFRS16).
 Interest, dividends and taxes
In general:
• Interest received and dividends received are treated as
cash inflows from investing activities.
• Interest paid on a loan acquired for operating purposes is
classified under operating activities. Alternatively, interest
paid might be classified under financing activities.
• Dividends paid might be classified under operating
activities or financing activities.
• Cash flows arising from taxes are classified under
operating activities unless specifically associated with
investing or financing activities.

Interest, dividends and taxes should be classified consistently from

period to period.
 Reporting cash flows from
operating activities
Cash flows from operating activities may be reported
using either:
a) the DIRECT method, whereby major classes of receipts
and payments arising from operating activities are
disclosed individually, or
b) the INDIRECT method, which begins with the profit or loss
for the period (before tax) and then makes a number of
adjustments so as to calculate the total amount of cash
generated from operations.

Obviously, both methods will give the same bottom-line result for cash
generated from operations.
 Disclosure requirements of IAS7
Entities must disclose the components of their cash
and cash equivalents and present a reconciliation of
these amounts in the statement of cash flows with
the equivalent items reported in the statement of
financial position.
Entities are also encouraged (but not required) to
supply further information, such as:
• the amount of any undrawn borrowing facilities
• an analysis of cash flows by segment (where a
segment is a distinguishable component of a
business entity).
Accounting Policies, Accounting Estimates
and Errors
(IAS8)
 Accounting policies
IAS8 defines accounting policies as "the
specific principles, bases, conventions, rules
and practices applied by an entity in
preparing and presenting financial
statements".
For example, one of an entity's accounting
policies might be to measure property,
plant and equipment at a current valuation
rather than at historical cost.
 Selection of accounting policies
An accounting policy should be selected so as to
comply with applicable international standards (if any).
Otherwise, the entity should refer to:
• international standards which deal with similar and
related issues
• the IASB Conceptual Framework
• the pronouncements of other standard-setting
bodies
• accounting literature and accepted industry
practices.
 Changes in accounting policies
An accounting policy may be changed only if:
• the change is required by an international
standard, or
• the change results in reliable and more relevant
information.
 Accounting for a change in accounting
policy
If a change in policy results from the application of
an international standard, the change is accounted
for in accordance with the transitional provisions
(if any) provided in that standard.
Otherwise, the change is accounted for
retrospectively i.e. comparative figures are
adjusted and are presented as if the new policy
had always been applied.
 Disclosure of a change in
accounting policy
• for changes caused by the initial application of an
international standard:
– the title of the standard and a description of any
transitional provisions in that standard
• for voluntary changes in accounting policies:
– the reasons for making the change
• for all changes in accounting policies:
– the nature of the change
– adjustments made in the current period and in each
prior period presented
 Accounting estimates
IAS8 states the following:
"many items in financial statements cannot be measured
with precision but can only be estimated"
"the use of reasonable estimates is an essential part of the
preparation of financial statements and does not
undermine their reliability"

Changes in accounting estimates should be accounted for

prospectively. Comparative figures for prior periods should
not be restated.
 Prior period errors
IAS8 defines prior period errors as "omissions from, and
misstatements in, the entity's financial statements for
one or more prior periods arising from a failure to use, or
misuse of, reliable information that:

(a) was available when financial statements for those

periods were authorised for issue; and
(b) could reasonably be expected to have been obtained
and taken into account in the preparation and
presentation of those financial statements".
 Correction of a prior period error
Material prior period errors must be corrected
retrospectively. This involves:
• restating comparative figures for the prior
period(s) in which the error occurred, or
• if the error occurred before the earliest prior
period for which comparatives are presented,
restating the opening balances of assets,
liabilities and equity for the earliest prior period
presented.
 Disclosure of prior period errors
• the nature of the prior period error
• for each prior period presented, the amount of the
correction to each affected line item in the financial
statements
• the amount of the correction at the beginning of
the earliest prior period presented
• if retrospective restatement is impracticable for a
particular prior period, a description of the
circumstances that have led to this condition and a
description of how (and from when) the error has
been corrected.
Provisions, Contingent Liabilities and
Contingent Assets
(IAS37)
 Definition of a provision (IAS37)
IAS37 defines a provision as "a liability of uncertain
timing or amount" and states that a provision should
be recognised when all of the following conditions
are satisfied:
• the entity has a present obligation (legal or
constructive) as a result of a past event
• it is probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation
• a reliable estimate can be made of the amount of the
obligation.
 Obligating events
A past event which leads to a present obligation is
an "obligating event". For a past event to be an
obligating event, the entity must have no realistic
alternative but to settle the obligation created by the
event. This will be the case if:
a) the obligation is legally enforceable, or
b) the event has given rise to a "constructive
obligation", where the entity has created a valid
expectation that it will discharge the obligation,
even though this is not legally enforceable.
 Measurement of a provision
The amount of a provision should be the best estimate
of the expenditure required to settle the obligation
concerned.
• If the effect of the time value of money is material, the
amount of a provision should be calculated as the present
value of the expenditure required to settle the obligation.
• Future events that may affect the amount required to
settle an obligation should be taken into account when
measuring a provision, so long as there is sufficient
objective evidence that these events will occur.
 Specific applications of IAS37
• Future operating losses. Provisions should not be recognised
for future operating losses.
• Onerous contracts. An onerous contract is one "in which the
unavoidable costs of meeting the obligations under the
contract exceed the economic benefits expected to be received
under it". The present obligation under such a contract should
be measured and recognised as a provision.
• Restructuring costs. A provision for restructuring costs (e.g.
the costs of a major reorganisation) should be recognised
only if the general recognition criteria of IAS37 are satisfied.
 Contingent liabilities
IAS37 defines a contingent liability as:
a) a possible obligation that arises from past events and
whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity;
or
b) a present obligation that arises from past events but is
not recognised because the recognition criteria for a
provision are not satisfied.
Contingent liabilities should not be recognised but should instead be
disclosed in the notes, unless the possibility of an outflow of
economic benefits is remote.
 Contingent assets
A contingent asset is "a possible asset that arises
from past events and whose existence will be
confirmed only by the occurrence or non-
occurrence of one or more uncertain future
events not wholly within the control of the entity".

Contingent assets should not be recognised but should be

disclosed in the notes if the inflow of economic benefits is
judged to be probable.
 Disclosure requirements of IAS37
For each class of provision that is recognised in the financial statements, the
entity should disclose:

• carrying amount at the beginning and end of the period

• additional provisions or increases made in the period
• amounts used and amounts reversed during the period
• a brief description.
There should also be a brief description of each contingent liability (unless the
possibility of an outflow of benefits is remote) and an estimate of its financial
effect.
Also a brief description of each contingent asset (if an inflow of benefits is
probable) and an estimate of its financial effect.
 Events after the reporting period (IAS10)

Events after the reporting period are defined

as "those events, favourable and
unfavourable, that occur between the end of
the reporting period and the date when the
financial statements are authorised for issue".
 Adjusting events and non-adjusting events
• Adjusting events. Adjusting events are
those "that provide evidence of conditions
that existed at the end of the reporting
period“…. Irrespective whether or not the
fact was actually known at the end of the
reporting date.
• Non-adjusting events. Non-adjusting
events are "those that are indicative of
conditions that arose after the reporting
period“….
• Financial statements should be adjusted to reflect
adjusting events that occur after the reporting period.
– Adjusting events are recognized in the SoFP and Statement of P/L
if they occur prior to the statements being authorized
• Material non-adjusting events should be disclosed in
the notes to the financial statements.
Segmental Analysis
(IFRS8)
 Introduction
An entity whose shares are publicly traded may
engage in a wide variety of business activities and
operate in a number of economic environments.
Each activity or environment may be subject to
differing rates of profitability, differing opportunities for
growth, differing future prospects and differing risks.
A segment report provides separate information about
each of an entity's "segments" and enables users to
evaluate the nature and financial effects of the
activities in which the entity engages and the
economic environments in which it operates.
 Operating segments
IFRS8 defines an operating segment as "a component of an entity:

a) that engages in business activities from which it may earn revenues and incur
expenses…,
b) 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
c) for which discrete financial information is available."

In general, each operating segment will be managed by a segment manager

who reports to the chief operating decision maker.
 Reportable segments
IFRS8 requires an entity to provide separate
information about each of its "reportable
segments". This information is disclosed in the
notes to the financial statements.
A reportable segment will usually comprise a
single operating segment but two or more
operating segments may be combined into one
reportable segment if they have similar economic
characteristics and are similar in certain other
respects.
 The 10% thresholds
A reportable segment is a single or combined
operating segment which meets any of the
following quantitative thresholds:
• its revenue (external and internal) is at least
10% of total revenue, or
• its profit or loss is at least 10% of the total profit
of the segments that reported a profit or the total
loss of the segments that reported a loss,
whichever is the greater
• its assets are at least 10% of total assets.
 The 75% rule
If the total external revenue attributable to reportable
segments is less than 75% of total external revenue,
additional segments must be identified as reportable
(even though they are beneath all the 10% thresholds)
until at least 75% of total external revenue is included
in reportable segments.
 Disclosures required by IFRS8
• General information
• Information about reportable segments
• Reconciliations
• Entity-wide information
Interim Financial Reporting:
IAS 34
 Definition of Terms
• Interim period: is a financial reporting
period shorter than a full financial year.
• Interim financial report: a financial report

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containing either a complete set of FS (as
described in IAS 1)
or
a set of condensed FS (as described in this
Standard) for an interim period.
• IAS 34 prescribes minimum content of an interim
financial report & the principles for recognition &
measurement in complete or condensed FS for an
interim period.

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• IAS34 does NOT mandate which entities have to
publish interim financial reports, how frequently &
when – this is left to OTHER REGULATORS (gov’ts,
stock ex, securities regulators & Acct bodies.)
• Choice by the entity
– May choose not to prepare interim FS at all
– IF you choose to prepare them in accordance with IFRSs
» IAS34 applies!!!
 IAS 34 – Objective and Scope
• Annual reporting
– Often supplemented with interim or quarterly
reports

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• Interim reporting
– Reports provide more relevant and timely
information
– Often mandated by securities regulators,
governments,& stock exchanges
– IASB encourages publicly trading Co. to provide
interim information
 IAS 34 – Content of an Interim Financial Report
• Goal of interim reporting
– To provide info about new events & circumstances and
other changes

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– Not just replicate the information given in the annual FS
• The standard does not prohibit including a complete set of FS
• IAS 34 provides the following about minimum
requirements.
– Minimum components of an interim financial report
– Form and content of interim FS
– Selected explanatory notes
– Disclosure of compliance with IFRSs
– Periods for which interim FS are required to be presented
– Materiality
The End