W.I.R.C. INITIATION INTO IFRS KISHOR M.PARIKH Lecture - IAS 1_ 22-01-2011... · similar financial...
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Transcript of W.I.R.C. INITIATION INTO IFRS KISHOR M.PARIKH Lecture - IAS 1_ 22-01-2011... · similar financial...
IFRS Comprises
International Accounting Standards (IAS)
International Financial Reporting Standards (IFRS)
Standing Interpretations Committee (SIC)
International Financial Reporting Interpretations
Committee (IFRIC)
List of Standards currently applicable
IFRS-1 – First-time adoption of International FinancialReporting Standards
IFRS-2 – Share-based PaymentIFRS-3 – Business CombinationsIFRS-4 – Insurance ContractsIFRS-5 – Non-current assets held for sale and discontinued
operationsIFRS-6 – Exploration for and evaluation of mineral resourcesIFRS-7 – Financial Instruments and DisclosuresIFRS-8 – Operating SegmentsIFRS 9 – Financial InstrumentsIAS-1 – Presentation of Financial StatementsIAS-2 – InventoriesIAS-7 – Cash Flow StatementsIAS-8 – Net Profits or Loss for the period, fundamentals errors
and changes in accounting policiesIAS-10 – Events after the Balance Sheet DateIAS-11 – Construction ContractsIAS-12 – (Revised) Income TaxesIAS-14 – Segment ReportingIAS-16 – Property, Plant and EquipmentIAS-17 – LeasesIAS-18 – Revenue
IAS-19 – (Revised) Employee BenefitsIAS-20 – Accounting for Government Grants and Disclosure of
Government AssistanceIAS-21 – The Effects of Changes in Foreign Exchange RatesIAS-23 – Borrowing CostsIAS-24 – Related Party DisclosuresIAS-26 – Accounting and reporting by retirement benefit plansIAS-27 – Consolidated Financial statements and accounting for
investment in subsidiariesIAS-28 – Investments in associatesIAS-29 – Financial Reporting in hyperinflationary economiesIAS-30 – Disclosures in the Financial Statements of Banks and
similar financial InstitutionsIAS-31 – Financial Reporting of Interests in Joint VenturesIAS-32 – Financial Instruments: PresentationIAS-33 – Earnings per ShareIAS-34 – Interim financial reportingIAS-36 – Impairment of AssetsIAS-37 – Provisions, Contingent liabilities and ContingentAssetsIAS-38 – Intangible AssetsIAS-39–Financial instruments: Recognition and measurementsIAS-40 – Investment PropertyIAS-41 – Agriculture
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List of Interpretations currently applicable
• IFRIC - 1 - Changes in Existing Decommissioning, Restoration and Similar Liabilities
• IFRIC - 2 - Members' Shares in Co-operative Entities and Similar Instruments
• IFRIC - 4 - Determining Whether an Arrangement Contains a Lease
• IFRIC - 5 Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
• IFRIC - 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment
• IFRIC - 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies
• IFRIC - 8 Scope of IFRS 2 Withdrawn effective 1 January 2010
• IFRIC - 9 Reassessment of Embedded Derivatives
• IFRIC - 10 Interim Financial Reporting and Impairment
• IFRIC - 11 IFRS 2: Group and Treasury Share Transactions Withdrawn effective 1 January 2010
• IFRIC - 12 Service Concession Arrangements
• IFRIC - 13 Customer Loyalty Programmes
• IFRIC - 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
• IFRIC - 15 Agreements for the Construction of Real Estate
• IFRIC - 16 Hedges of a Net Investment in a Foreign Operation
• IFRIC - 17 Distributions of Non-cash Assets to Owners
• IFRIC - 18 Transfers of Assets from Customers
• IFRIC – 19 Extinguishing Financial Liabilities with Equity Instruments
Final Interpretations Issued by the Standing Interpretations Committee
SIC 7 - Introduction of the Euro SIC 10 - Government Assistance – No Specific Relation to
Operating Activities SIC 12 - Consolidation – Special Purpose Entities SIC 13 - Jointly Controlled Entities – Non-Monetary
Contributions by Venturers SIC 15 - Operating Leases – Incentives SIC 21 - Income Taxes – Recovery of Revalued Non-
Depreciable Assets SIC 25 - Income Taxes – Changes in the Tax Status of an
Enterprise or its Shareholders SIC 27 - Evaluating the Substance of Transactions in the Legal
Form of a Lease SIC 29 - Disclosure – Service Concession Arrangements SIC 31 - Revenue – Barter Transactions Involving Advertising
Services SIC 32 - Intangible Assets – Web Site Costs
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Total no. of IFRS 9
Total no. of IAS 29
Total no. of IFRIC 18
Total no. of SIC 11
Complete set of IFRS Financials 67
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Classification of IFRS
Table showing broad categories under which the IFRSs can be segregated
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List of Standards currently applicable as
compared to IND ASIFRS IND-AS Description IFRS IND-AS Description
IAS 1 IND-AS 1 Presentation of Financial Statements IAS 29 IND-AS 34 Financial Reporting in Hyperinflationary Economies
IAS 2 IND-AS 2 Inventories IAS 31 IND-AS 27 Interests in Joint Ventures
IAS 7 IND-AS 3 Cash Flow Statements IAS 32 IND-AS 31 Financial Instruments: Presentation
IAS 8 IND-AS 4 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 33 IND-AS 20 Earnings Per Share
IAS 10 IND-AS 5 Events After the Balance Sheet Date IAS 34 IND-AS 25 Interim Financial Reporting
IAS 11 IND-AS 7 Construction Contracts IAS 36 IND-AS 28 Impairment of Assets
IAS 12 IND-AS 22 Income Taxes IAS 37 IND-AS 29 Provisions, Contingent Liabilities and Contingent Assets
IAS 16 IND-AS 10 Property, Plant and Equipment IAS 38 IND-AS 26 Intangible Assets
IAS 17 IND-AS 19 Leases IAS 39 IND-AS 30 Financial Instruments: Recognition and Measurement
IAS 18 IND-AS 9 Revenue IAS 40 IND-AS 37 Investment Property
IAS 19 IND-AS 15 Employee Benefits IAS 41 IND-AS 38 Agriculture
IAS 20 IND-AS 12 Accounting for Government Grants and Disclosure IFRS 1 IND-AS 41 First time Adoption of IFRS
IAS 21 IND-AS 11 The Effects of Changes in Foreign Exchange Rates IFRS 2 IND-AS 33 Share-based Payment
IAS 23 IND-AS 16 Borrowing Costs IFRS 3 IND-AS 14 Business Combinations
IAS 24 IND-AS 18 Related Party Disclosures IFRS 4 IND-AS 39 Insurance Contracts
IAS 26 IND-AS 36 Accounting and Reporting by Retirement Benefit Plans IFRS 5 IND-AS 24 Non-current Assets Held for Sale and Discontinued Operations
IAS 27 IND-AS 21 Consolidated Financial Statements IFRS 6 IND-AS 35 Exploration for and Evaluation of Mineral Resources
IAS 28 IND-AS 23 Investments in Associates IFRS 7 IND-AS 32 Financial Instruments: Disclosures
IFRS 8 IND-AS 17 Operating Segments
Introduction• Issued in September 2007
• Replaces the previous version of 2003
• Mandatory for period starting on or after January 1, 2009
• Earlier adoption permitted
• Equivalent Indian GAAP
▫ Schedule VI
▫ AS 1 : Disclosure of Accounting Policies
Presentation of Financial Statements (IAS - 1)
Terms used in standard
General Purpose
Fair Presentation and compliance with IFRS.
Explicit Statement of Compliance
Prohibit to correct inappropriate accounting policy in disclosure
Faithful Representation
Extremely rare circumstances
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Faithful Representation
A fair representation is achieved by compliance with applicable IFRSs. A fairrepresentation also requires the following from an entity:
• To select and apply accounting policies in accordance with IAS 8 –Accounting policies, changes in accounting estimates and errors. IAS 8 setsout hierarchy of authoritative guidance that management considers in theabsence of a standard or an interpretation that specifically applies to anitem.
• To present information, including accounting policies, in a manner thatprovides relevant, reliable, comparable and understandable information.
• To provide additional disclosures when compliance with the specificrequirements in IFRSs is insufficient to enable users to understand theimpact of particular transactions, other events and conditions on theentity’s financial position and financial performance.
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Extremely Rare Circumstances
• If management believes that compliance with a particular requirement of IFRS is so misleading that it would conflict with the objectives of the financial statements as laid down in the IASB’s framework, then the entity is allowed to depart from that requirement (of the IFRS).
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Consideration for preparing Financial
Statements
Accrual basis of accounting
Frequency of Reporting
Going concern
Materiality and Aggregation
Offsetting
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Going Concern• How to assess:
▫ Consider all available information about the future (minimum 12 months from the reporting date) particularly
Current and expected profitability
Debt repayment schedules
Potential sources of replacement financing
▫ Depends on the facts of each case
Materiality and Aggregation• Definition:
▫ Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of financial statements.
▫ Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances
▫ The determining factor could be The size or nature of the item, or a combination of both
Offsetting• Not to offset
▫ Assets and liabilities
▫ Income and expenses
unless permitted by an IFRS
Characteristics of Financial Statements
Understandability – The objective of understandability is achieved with the help
of the following essentials components:
1. Those preparing the statements present/disclose full information that is material
for the understanding of the statement and present it in an understandable
manner.
2. Users have a reasonable knowledge of business and economic activities and
accounting principles and show willingness to study the information.
Relevance – Information has the quality of relevance when it influences the
economic decisions of users by helping them evaluate past, present or future
events or confirming, or correcting, their past evaluations.
Reliability – if users are to take decisions based on the financial statements, the
information in the statements has to be reliable; otherwise it cannot be recognised
even if it is relevant.
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• Comparability –
1. Within the entity over time: the user should be able to compare the amounts of
different periods and identity trends, if any, in the financial position and
performance.
2. Between different entities: the user should find it possible to evaluate the relative
financial position, changes in the financial position and performance of the
entity.
3. Present
▫ When an entity
Applies an accounting policy retrospectively
Makes a retrospective restatement of items in its financial statements
Reclassifies items in its financial statements
▫ disclosing comparative information, as a minimum
Three statements of financial position
Two of each of the other statements
Related notes
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Structure of Financial Statements
Statement of Comprehensive Income
Statement of Other Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Notes to Accounts
Statement of Cash Flow
- Components of cash flow statement Opening and Closing cash and cash equivalents
Operating activities
Investing activities
Financing activities
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Statement of Comprehensive Income
• Nature Of Expenses Method
PARTICULARS AMT AMT
Revenue X
Other Income X
Changes in inventories of finished goods and work in progress
X
Raw Materials and consumables used X
Employees benefits expenses X
Depreciation and amortization expense X
Other expenses X
Total Expenses (X)
Profit Before Tax X
• Function of Expenses Method
PARTICULARS AMT
Revenue X
Cost of Sales (X)
Gross Profit X
Other Income X
Distribution Cost (X)
Administrative Expenses (X)
Other Expenses (X)
Profit Before Tax X
Separate disclosure in the income statement
• Write down of inventory to net realizable valueof P.P.E. to recoverable amount as well asreversal
• Provision for restructuring cost and reversal.
• Disposal of P.P.E.
• Disposal of investment.
• Discontinued operations.
• Litigation settlement.
• Other reversals of provisions.
Statement of Other Comprehensive
IncomeOther comprehensive income would include the income or expense recognized outside the income statement. The following are the instances of comprehensive income:
1. Changes in revaluation surplus.
2. Actuarial gains and losses n defined benefit plans.
3. Gains and losses arising from translating the financial statements of a foreign operations.
4. Gains and losses on re-measuring available for-sale financial assets the effective portion of gains and losses on hedging instruments in a cash flow hedge.
5. Share of other comprehensive income of associates and joint ventures accounted for using the equity method;
Statement of Financial Position
As a minimum, the statement of financial position shall include line items that present the following amounts:
a. Property, plant and equipment;b. Investment property;c. Intangible assets;d. Financial assets (excluding amounts shown under (e), (h) and (i));e. Investments accounted for using the equity method;f. Biological assets;g. Inventories;h. Trade and other receivables;i. Cash and cash equivalents;j. Total assets classified as held for sale in accordance with IFRS5;k. Trade and other payables;l. Provisions;m. Financial liabilities (excluding amounts shown under (j) and (k));n. Liabilities and assets for current tax, as defined in IAS 12 Income Taxes;o. Deferred tax liabilities and deferred tax assets, as defined in IAS 12;p. Liabilities included in disposal groups classified as held for sale in accordance with IFRS 5;q. Non- controlling interest, presented within equity; andr. Issued capital and reserves attributable to owners of the parent.
Presentation of financial statements
PARTICULARS AMOUNT
Assets
Non Current Assets X
Total Non Current Assets X
Current Assets X
Total Current Assets X
Equity and Liabilities
Equity attributable to equity holders of the parent X
Share Capital X
Retained Earnings X
Other components of equity X
Non Controlling interest X
Total Equity X
Non Current Liabilities X
Total Non Current Liabilities X
Current Liabilities X
Total Current Liabilities X
Total Liabilities X
Total equity and liabilities X
Format of Statement of Changes in
Equity
Particulars Share
Capital
Share
Prem
Reven
Res.
Retained Earnings
Actuarial
Gain/Loss
NCI Total
Op. Bal
Dividend
Comp income
Other items
Clo. Bal
Non-adjusting events in respect of
Loans classified as Current Liabilities• Refinancing on a long term basis
• Rectification of a breach of a long term arrangement
• Granting by the lender of grace to rectify a breach of a long term arrangement ending atleast 12 months after the reporting period
Cash Flow Statement
• Cash flow information provides users with a basis to asses the ability to generate cash and the needs of the undertaking to utilize those cash flows.IAS 7 sets out requirement for the presentation of the cash flow statement and related disclosures.
Prior Period Items…
Correction of Errors
Restating the comparative amounts for the prior period(s)
presented in which the error occurred
If the error before the earliest prior period presented,
restating the opening balances of assets, liabilities and equity
for the earliest prior period presented
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Disclosure of accounting policies.
• An undertaking shall disclose in the summary of significant policies.
• Measurement basis
• Other policies relevant to an understanding of the financial statement.
• key sources of estimation of uncertainty.
• Other disclosures
Disclosure of managing capital
• Qualitative information about its objectives, policiesand processes for managing capital, including:-
1. A description of what it manages as capital;
2. When an entity is subject to externally imposedcapital requirements, the nature of thoserequirements and how those requirements areincorporated into the management of capital; and
3. How it is meeting its objectives for managing capital.
QUESTIONS ON PRESENTATION OF FINANCIAL
STATEMENTS
Q1)
• A company produces airplanes. The length of timebetween first purchasing raw materials to make theplanes to the date the company completes theproduction and delivery is 10 months. The companyreceives payment for the planes 6 months after delivery.
• How should the company show its inventory and tradereceivables in its classified balance sheet?
• Would you answer be different if the production timewas 14 months and the time between delivery andpayment was 15 months?
Q2 The company also has an available for
sale investment that it expects to realize in
15 months. How should this investment be
classified?
Q3 A parent provides a loan to a subsidiary.
Interest of 8% is paid annually. The loan is
repayable on demand. How should the loan be
classified in the parent's balance sheet?
• Q4 Certain employees of a company receive a cash bonus
based on the profits of the year. 50% of this bonus is paid
six months after the year in question and remaining 50% is
paid a year later (that is 18 months after the year end). The
company provides a five year warranty on the goods it sells.
The government has imposed a new law to protect the
environment under which the company has an obligation to
dispose of goods it manufactured at the end of their useful
life, estimated at ten years. How should the company
classify the following liabilities in its balance sheet?
a) Employee bonus accruals?
b) Warranty provisions?
c) Provision for disposal costs?
Q5 M/s XYZ Ltd. needs to refinance its long
term loan. The Balance Sheet is March and it
signs its refinance agreement in April and
authorizes the financial statement in May.
Whether the long term loan can be shown as
a non-current liability?
Q6 Entity X has taken 7% term loan of
Rs.15lakhs from a bank which will fall due for
payment on 30th June; 2007.It has an option to
renew its facility till 30th June, 2009. Entity
finalizes the accounts every December. It signs
refinance agreement in January and authorize
the financial statement in February. Should the
loan be classified as current liability?
Q7 Entity X has taken 10% long term loans of Rs.10,00,000 from a bank
which will fall due for payment on 30 June,2012 provided it is able to
maintain an EBITDA which is 10 times the interest obligation. In case this
financial parameter is not maintained the loan should be paid on demand.
The entity finalizes the accounts every December. It is observed that its
EBITDA is Rs.9,00,000 as on 31-12-2007. The bank has issued a letter
5th January, 2008 allowing a grace to the entity to rectify the breach by
the next year end. The financial statements are authorized for issue on
10th January, 2008.
•Should the loan be classified as non current?
•Would the classification be different had the bank issued the letter
offering grace period on or before the Balance sheet date?
Q8 A company has entered into a facility arrangement
with a bank. It has a committed facility that the bank
cannot cancel unilaterally and the schedule maturity
of this facility is three years from the balance sheet
date. The company has drawn down funds on this
facility and these funds are due to be repaid six
months after the balance sheet date. The company
intends to roll over this debt through the three year
facility arrangement. How should this borrowing be
shown in the company’s balance sheet?
\Would the answer be different if the facility and
existing loan were with different banks?
Q9 An entity has incurred losses for the past four
years and its current liabilities exceed its total assets.
The entity was in breach of its loan covenants and
has been negotiating with the related financial
institutions in order to keep them supporting its
business. These factors raise significant doubt that
the entity will be able to continue as a going concern.
How should the management disclose uncertainties
that affect the entity’s ability to continue as a going
concern?
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Q10 XYZ Inc. is a manufacturer of televisions. The domestic
market for electronic goods is currently not doing well, and
therefore many entities in this business are switching to exports.
As per the audited financial statements for the year ended Dec
31, 20XX, the entity had net losses of $2 millions. At Dec 31,
20XX, its current assets aggregate to $ 20 millions and the
current liabilities aggregate to $ 25 millions. Due to the expected
favorable changes in the government policies for the electronics
industry, the entity is projecting profits in the coming years.
Furthermore, the shareholders of the entity have arranged
alternative additional sources of finance for its expansion plans
and to support its working needs in the next twelve months.
Should XYZ Inc. prepare its financial statements under the going
concern assumption?
Thank You
Mumbai, India
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