IAS 1: Presentation of Financial Statements
Key Requirement: All income and expenses must be presented in a statement of profit or loss and other comprehensive income.
- IAS 1 does not allow entities to choose whether to present income and expenses in the P/L or the OCI section
- Tax relating to OCI items is shown either as a separate line or netted against each component
- Items in OCI are not considered when measuring earnings per share
- Operating expenses should be presented based on either their nature or function
Definition: Assets held for sale in ordinary course of business, in production process, or materials to be consumed in production.
Recognition Criteria
- Controlled by the entity as a result of past event
- Measured reliably
- Probable future economic benefit
Measurement
Inventories are measured at the lower of cost and net realizable value (NRV).
Net Realizable Value (NRV): Estimated selling price less estimated costs of completion and estimated costs to make the sale.
NRV must be reassessed at each period end. If NRV increases after a write-down, the previous write-down must be reversed.
Accounting Policy: Specific principles, bases, rules and practices applied in preparing financial statements.
Changes in Accounting Policies
Applied retrospectively - comparative figures are based on the new policy. Opening balance of retained earnings is restated.
Changes in Accounting Estimates
Applied prospectively - new estimates applied in future without changing previously published amounts.
Accounting Estimate: Made to implement accounting policies (e.g., change in fair value of an asset).
Definition: Events occurring between the end of the reporting period and the date financial statements are authorized for issue.
Classification
- Adjusting events: Provide evidence of conditions existing at the reporting date
- Non-adjusting events: Indicate conditions arising after the reporting date
Adjusting events are recognized in financial statements. Non-adjusting events are disclosed unless they impact going concern.
Example: Post year-end sale of inventory held at year-end is an adjusting event.
Temporary Differences: Differences between carrying amount of asset/liability and its tax base.
Types of Temporary Differences
- Taxable temporary differences: Result in deferred tax liabilities
- Deductible temporary differences: Result in deferred tax assets
Tax Base
- Asset: Future tax deduction available when asset generates taxable benefits
- Liability: Carrying amount less future tax deduction available when liability settled
Deferred Tax
Deferred tax liabilities are recognized on all taxable temporary differences and shown in non-current liabilities.
Deferred tax assets are recognized when expected to generate taxable income in foreseeable future.
When revaluation gains/losses are recognized in OCI, related deferred tax is also recognized there.
Definition: Tangible assets held for use in production/supply, rental, or administrative purposes, expected to be used for more than one period.
Recognition Criteria
- Probable future economic benefits will flow to entity
- Cost can be measured reliably
Initial Measurement
Cost includes purchase price plus directly attributable costs to bring asset to location and condition for intended use.
Depreciation starts when asset is ready to use, not when brought into use.
Subsequent Measurement
- Cost model: Asset at cost less accumulated depreciation and impairment
- Revaluation model: Asset at fair value less accumulated depreciation and impairment
Revaluation increases up to previous decreases recognized in P/L, excess in OCI. Decreases reduce OCI first, then P/L.
On disposal of revalued asset, revaluation surplus can be transferred to retained earnings or kept in revaluation surplus.
Defined Contribution Plans
- Value of benefits depends on value of plan contributions
- Risk borne by employee/contributor
- Entity liability limited to contributions payable
- Contributions shown as employment expense in P/L
Defined Benefit Plans
- Value of benefits defined in advance
- Risk borne by plan operator/entity
- Difference between PV of obligation and FV of plan assets reflected as net liability/asset in SOFP
- Current service cost shown as operating expense
- Net interest cost recognized in P/L
- Remeasurements recognized in OCI
Movements in Defined Benefit Item
- Cash contributions to plan
- Current service cost (to P/L)
- Past service cost (to P/L)
- Gains/losses on settlement (to P/L)
- Net interest (expense/income in P/L)
- Remeasurement of net defined benefit liability (OCI)
PV of the defined obligation = interest + service cost – benefit paid – settlement
Recognition: Grants recognized as income over relevant periods to match with related costs.
Presentation of Grants
Grants related to assets:
- Presented as deferred income
- Or deducted from asset's carrying amount
Grants related to income:
- Presented separately as 'other income'
- Or deducted from related expense
Initial recognition: PPE and associated liabilities recognized using exchange rate at transaction date.
PPE (non-monetary item measured under cost model) not affected by future currency fluctuations.
Liabilities (monetary items) remeasured using rate at reporting date or settlement date.
Exchange differences recognized in P/L.
Capitalization: Borrowing costs directly attributable to acquisition of asset included in carrying amount.
Capitalization begins when expenditure is incurred and ends when asset is ready for use.
Investment income from temporary investment of borrowings reduces borrowing costs to be capitalized.
Related parties: Directors are key management personnel and automatically related parties.
Close family members of related parties are themselves related parties.
Details of transactions and outstanding balances with related parties must be disclosed.
Related party relationships are material by nature, regardless of financial significance.
Equity method: Investment initially recognized at cost and adjusted for post-acquisition changes in investor's share of investee's net assets.
Investor's P/L includes share of investee's P/L, and OCI includes share of investee's OCI.
Inter-entity profits eliminated to extent of investor's interest.
If investment impaired, written down to recoverable amount.
Basic EPS
Bonus issue: Treated as if always in issue
Rights issue: Includes bonus element, comparative figures restated
Diluted EPS
Calculated as if potential ordinary shares were converted.
Profit adjusted for dividends and interest (after tax).
Disclosed only if lower than basic EPS.
Disclosure
- EPS for total profit and continuing operations
- Basic and diluted EPS on face of P/L
- For each class of ordinary share
- Numerators and denominators used
- Reconciliation of numerator to net profit
Impairment loss: Recognized when carrying amount exceeds recoverable amount.
Recoverable amount: Higher of fair value less costs of disposal and value in use.
Impairment loss charged as expense in P/L. Depreciation revised after impairment.
For revalued assets, impairment charged to revaluation surplus first, then to P/L.
Reversals limited to what carrying amount would have been without impairment.
Cash-Generating Units & Goodwill
If individual asset's recoverable amount cannot be estimated, determine CGU's recoverable amount.
Impairment losses allocated to:
- Damaged assets
- Goodwill
- Other assets pro rata
Goodwill impairment cannot be reversed.
Assets with indefinite useful lives require annual impairment review.
Provision: Liability with uncertain timing or amount, probable future outflow.
Recognition Criteria
- Legal or constructive obligation from past event
- Probable outflow of economic resources
- Reliable estimate can be made
Measured at best estimate of probable outflow.
'Probable' interpreted as 50% or more.
No provisions for future operating losses.
Contingent Liabilities & Assets
Contingent liabilities: Possible obligations disclosed rather than provided for
Contingent assets: Not recognized unless virtually certain, otherwise disclosed
Redundancy Programs
Provision recognized when constructive obligation exists at reporting date after announcement to affected parties.
Definition: Identifiable non-monetary asset without physical existence, controlled by entity.
Recognition Criteria
- Probable economic benefits will flow to entity
- Cost can be measured reliably
Separately purchased intangible assets recognized at cost.
Revaluation model only permitted if active market exists.
Internally Generated Intangibles
Research costs expensed as incurred.
Development costs capitalized if all criteria met:
- Technical feasibility of completion
- Intention to complete
- Ability to use or sell
- Probable future economic benefits
- Ability to measure expenditures reliably
- Costs recoverable
- Resources available to complete
Definition: Property held for rental or capital appreciation rather than for use in operations.
Measurement Models
- Fair value model: Measured at FV, changes in P/L, no depreciation
- Cost model: Measured at cost less accumulated depreciation
Mixed-use properties accounted for separately if can be sold separately.
Shown as non-current asset in separate line.
Change in Use
Investment property to owner-occupied/inventory: FV at transfer date becomes initial measurement
Owner-occupied to investment property: Revalued at transfer date, variance to revaluation surplus
Inventory to investment property: Revalued at transfer date, variance to P/L
Agricultural activity: Management of biological transformation and harvest of biological assets.
Biological assets: Living animals and plants
Agricultural produce: Harvested produce of biological assets
Biological assets measured at fair value less costs to sell, with changes in P/L.
Cost model only if fair value cannot be measured reliably.
Harvested produce recognized in inventory at FV less costs to sell at point of harvest.
Government Grants
Unconditional grants recognized in P/L when receivable.
Conditional grants recognized only when conditions met.
Share Options (Equity-settled)
Measured at fair value of goods/services received.
For employees, based on FV of equity instruments at grant date.
Cost recognized over vesting period based on options expected to vest.
Modifications
If FV increases, additional cost recognized over remaining vesting period.
If FV decreases, continue to recognize original cost.
Cash-settled Transactions
Measured at FV of liability at each reporting date until settled.
Changes in FV recognized in P/L.
Vesting Conditions
All vesting conditions are taken into account by reflecting them in the calculation of the number of options or rights expected to vest.
Acquisition method: Assets and liabilities measured at fair value at acquisition date.
Goodwill Calculation
If negative, recognized as gain in P/L.
Goodwill not amortized but tested annually for impairment.
Acquisition-related Costs
Expensed as incurred, not included in cost of combination.
IFRS 3 allows adjustments to initial valuations within 12 months of acquisition date.
Criteria: Available for immediate sale in present condition, sale highly probable.
Measured at lower of carrying amount and fair value less costs to sell.
Not depreciated while held for sale.
Presented separately in statement of financial position.
Discontinued Operations
Component of entity that can be distinguished operationally and financially.
Results presented separately in P/L.
Exploration assets: Costs of exploring for mineral resources.
Measured at cost or revaluation model.
Impairment tested when facts suggest possible impairment.
Impairment losses recognized in P/L.
Operating segment: Component regularly reviewed by CODM, generating revenues and expenses.
Reportable if revenue/profit/assets are 10% or more of all segments.
Disclose external revenue, internal revenue, profit/loss, assets, liabilities.
Reconcile segment totals to entity totals.
Classification
- Amortized cost: SPPI test + held to collect contractual cash flows
- FVOCI: SPPI test + held to collect contractual cash flows and sell
- FVTPL: All others
Initial Measurement
At fair value plus transaction costs (except FVTPL).
Subsequent Measurement
- Amortized cost: Effective interest method
- FVOCI: Fair value, interest in P/L, other changes in OCI
- FVTPL: Fair value, changes in P/L
Impairment
Expected credit loss model:
- 12-month ECL if credit risk not increased significantly
- Lifetime ECL if credit risk increased significantly
Hedge Accounting
Fair value hedge: Changes in FV of hedging instrument and hedged item in P/L.
Cash flow hedge: Effective portion in OCI, ineffective in P/L.
Control: Power over investee, exposure to variable returns, ability to use power to affect returns.
Consolidate all subsidiaries.
Eliminate intragroup balances and transactions.
NCI presented in equity.
All group entities should use uniform accounting policies. If different, adjustments made for consolidation.
Types
- Joint operations: Parties have rights to assets and obligations for liabilities
- Joint ventures: Parties have rights to net assets
Joint operations: Recognize assets, liabilities, revenue, expenses according to contractual rights/obligations.
Joint ventures: Use equity method.
Fair value: Price received to sell asset or paid to transfer liability in orderly transaction.
Fair Value Hierarchy
- Level 1: Quoted prices in active markets
- Level 2: Observable inputs other than Level 1
- Level 3: Unobservable inputs
Maximize use of observable inputs.
For non-financial assets, fair value based on highest and best use for potential purchaser.
Five-step model: Identify contract, performance obligations, transaction price, allocate, recognize.
Step 1: Identify Contract
Contract exists when:
- Parties approved and committed
- Rights and payment terms identified
- Commercial substance exists
- Probable collection
Step 2: Identify Performance Obligations
Distinct goods/services promised to customer.
Separate if customer can benefit alone or with resources and separately identifiable.
Step 3: Determine Transaction Price
Amount expected to be entitled to, considering:
- Variable consideration
- Significant financing component
- Non-cash consideration
- Consideration payable to customer
Step 4: Allocate Transaction Price
Based on standalone selling prices.
Step 5: Recognize Revenue
When/as performance obligation satisfied.
Over time if:
- Customer simultaneously receives benefits
- Asset created/enhanced has no alternative use and right to payment
- Performance creates/enhances asset controlled by customer
Otherwise at point in time.
Contract Costs
Incremental costs of obtaining contract capitalized if expected to be recovered.
Costs to fulfill contract capitalized if create/enhance resources used to satisfy performance obligations.
Lease: Contract conveying right to control use of identified asset for period of time.
Lessee Accounting
Recognize right-of-use asset and lease liability.
ROU asset = Lease liability + initial direct costs + prepayments - incentives
Lease liability = PV of lease payments
Depreciate ROU asset over shorter of useful life and lease term.
Lease liability amortized using effective interest method.
Lease Payments
Include:
- Fixed payments
- Variable payments based on index/rate
- Residual value guarantees
- Purchase options if reasonably certain
- Termination penalties if reasonably certain
Short-term & Low-value Leases
Lessee may elect to recognize lease payments as expense.
Lessor Accounting
Finance leases: Recognize net investment, interest income.
Operating leases: Recognize lease income.
Eligibility: Entities without public accountability.
Simplifications
- Goodwill amortized over useful life (max 10 years)
- Borrowing costs expensed
- No equity-settled share-based payment
- Simplified financial instruments
- Simplified deferred tax
- Simplified segment reporting
- Simplified related party disclosures
IFRS for SMEs is only updated once every three years.
Entities not publicly accountable but part of a group using full IFRS can still use SMEs in individual statements.