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Elements of financial statements
and formal requirements
Elements of financial statements (I) Framework
Asset Liability
Def
init
ion
Resource controlled by
the entity as a result of
past events and from
which future economic
benefits are expected
to flow to the entity
Equity
Rec
og
nit
ion
,
if …
Present obligation of the
entity arising from past
events, the settlement of
which is expected to result
in an outflow from the entity
of resources embodying
economic benefits
Residual interest in the
assets of an entity that
remains after
deducting its liabilities.
Generally subdivided
for presentation
purposes
• probable that the
future economic
benefits will flow to the
entity, and
• the asset has a cost or
value that can be
measured reliably
• probable that an outflow of
resources embodying
economic benefits will result
from the settlement of a
present obligation, and
• the amount can be
measured reliably
Elements of financial statements (II) Framework
Income: Increases in economic benefits during the
accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity
participants.
Expenses: Decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity
participants.
para. 74-77: income para. 78-80: expenses
revenue
ordinary activities
- sales
- fees
- interest
- dividends
- royalties
- rent
gains
- disposal of non- current assets
- unrealised gains
- revaluation of marketable securities
- increases in carrying amount of long-term assets
losses
- disposal of non- current assets
- increases in the rate of exchange in respect of borrowings
expenses
ordinary activities
- cost of sales
- wages
- depreciation
Elements of financial statements (III) Framework
Components of financial statements IAS 1
Statement of
financial position
Statement of
Comprehensive
income
Statement of changes in
equity
Statement of cash flows
Accounting policies and
explanatory notes
►only capital transactions with
owners and distributions to owners
►single statement OR
►two statements i.e.
separate income
statement and
statement of
comprehensive
income
5
Components of financial statements Statement of financial position
No defined table or schedule, but IAS 1.54 specifies a catalogue
of line items as a minimum to be presented in the statement of
financial position
IAS 1.60: Breakdown in current und non-current line items
Further breakdown in case of materiality or required by other
standards
Option to present in the notes or statement of financial position
dependent of options in the standards
Statement of financial position (I) Minimum content - IAS 1 -
Assets Property, plant and equipment
Investment property
Intangible assets
Financial assets
Investments accounted for using the equity method
Biological assets
Inventories
Trade and other receivables
Cash and cash equivalents
Non-current assets held for sale and discontinued operations
Assets for current tax
Deferred tax assets
Equity and Liabilities
Trade and other liabilities
Provisions
Financial liabilities
Liabilities for current tax
Deferred tax liabilities
Liabilities associated with non-current assets held for sale and discontinued operations
Non-controlling interests, presented within equity
Issued capital and reserves attributable to owners of the parent
Statement of financial position (II) Current/non-current distinction - IAS 1 -
Current/non-current layout effectively mandatory.
Exception: Presentation of assets and liabilities based on liquidity is possible, if this provides information that is reliable and more relevant.
Current assets expected to be realised in, or held for sale or consumption in, the normal
course of operating cycle;
held for trading or for short-term and expected to be realised within 12 months of the balance sheet date;
cash or a cash equivalent asset not restricted in its use;
includes assets that are sold, consumed or realised as part of the normal operating cycle even when they are not expected to be realised within twelve months after the balance sheet date; and
held primarily for the purpose of being traded and the current portion of non-current financial assets.
Statement of financial position (III) Current/non-current distinction - IAS 1 -
Current liabilities
expected to be settled in the normal course of operating cycle;
held for trading or due to be settled within 12 months of balance sheet date;
no unconditional right to defer settlement for at least 12 month after balance sheet
date;
liabilities classified according to their contractual terms at the balance sheet date;
current liabilities refinanced after balance sheet but before accounts approved date
cannot be „non-current”;
a liability that is in breach even rectified after balance sheet but before accounts
approved date cannot be „non-current”.
Long-term interest bearing liability should be non-current even if to be settled
within 12 months if:
original term > 12 months;
intends to refinance on a long-term basis; and
intention is supported by an agreement before the financial statements are
approved.
Statement of financial position (IV) Presentation of liabilities - IAS 1 -
Example 1
Year End Financial
Statements
Issued
Refinancing –
Extending > 12 months
Loan due 6 months
(originally for 5 years)
Example 2
Year End Financial
Statements
Issued Refinancing –
Extending > 12 months
Loan due 6 months
(originally for 5 years)
Statement of financial position (V) Presentation of liabilities - IAS 1 -
Example 3
Year End Financial
Statements
Issued
Breach rectified Breach
Identified
Example 4
Year End Financial
Statements
Issued Breach rectified
Breach
Identified
Statement of financial position (VI) Presentation of liabilities - IAS 1 -
Entity expects, and has the discretion, to refinance or roll over an obligation for
at least twelve months after the reporting date:
non-current obligation, even if it would otherwise be due within a
shorter period.
when refinancing or rolling over is not at the discretion of the
entity, the obligation is classified as current.
Entity breaches an undertaking under a long-term loan agreement on or before
the reporting date with the effect that the liability becomes payable on demand:
current obligation
Only if the lender agreed by the reporting date to provide a period of
grace ending at least 12 months after the reporting date, within which
the entity can rectify the breach and during which the lender cannot
demand immediate repayment, the liability is classified as non-current.
Statement of financial position (VII) Assets held for sale and discontinued operations – IFRS 5
Non-current assets, classified as „held for sale“ as well as
disposal groups are presented in the statement of financial
position in a separate line item within current assets.
It is not allowed to set-off assets against liabilities of a disposal
group i.e. they have to be presented gross.
Prerequisites for assets held for sale:
Available for immediate sell in ist present condition
Sale must be highly probable (within 12 month)
Measurement at lower of carrying amount and fair value less
costs to sell.
Presentation and disclosure requirements, especially for
discontinued operations (major line of business or
geographical area of operation).
Statement of comprehensive income (I) Single or two statements - IAS 1
Statement
of Changes
in Equity
Statement
of Changes
in Equity
Transactions
with
Shareholders
Statement
of
Comprehensive
Income
Other
Comprehensive
Income
Statement
Of
Comprehensive
Income
Income
Statement
Profit & Loss
Option II
Option I
Effective: 1.1.2009
Statement of comprehensive income (II) Single or two statements - IAS 1
2 Presentation Options
Single Statement Approach
Statement of Comprehensive Income with subtotal „profit/loss for the period“
Two Statement Approach
Separate Income Statement (profit/loss for the period) Statement of Other Comprehensive Income Income Statement and Statement of Other Comprehensive Income
have to be shown consecutively
Separation of OCI that will be recycled in the future and OCI
that will not
Examples for OCI
Non-recycling
Revaluation of property, plant and equipment Actuarial gains/losses of defined benefit plans
Recycling
Gains/losses from cah-flow hedges Unrealised gains/losses from available for sale assets
Statement of comprehensive income (III) Minimum content - IAS 1
revenue;
finance costs;
share of the after-tax profit or loss of associates and joint ventures accounted for using the equity method;
tax expense;
a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised
on the measurement to fair value less costs to sell; and on the disposal of the assets or disposal group(s) constituting
the discontinued operation;
profit or loss for the period (subdivided in profit or loss attributable to non-controlling interest; profit or loss attributable to owners of the parent)
Each component of other comprehensive income classified by nature;
Share of the other comprehensive income of associates and joint ventures accounted for using the equity method
Total comprehensive Income (subdivided in profit or loss attributable to non-controlling interest; profit or loss attributable to owners of the parent)
Statement of comprehensive income (IV) Presentation - IAS 1
Analysis of expenses (on face of the statement of
comprehensive income / income statement or in notes): nature of expenses, or function of expenses
additional disclosure of depreciation/amortization expense as well as employee benefits expense required in the notes
Additional line items, headings and sub-totals shall be
presented on the face of the income statement when relevant
to an understanding of the entity’s financial performance
NO “extraordinary items”
Other comprehensive income for the period
amount of income tax relating to each component of OCI
reclassification adjustments (“recycling” to profit and
loss)
17
Excursion: Earnings per Share
Disclosure of the Earnings per Share for the reported financial
year (basic and diluted Earnings per Share)
Income of the period 10.000.000 €
Ordinary shares (average per year) 2.000.000
Convertible bond with a coupon of 5 %
- Nominal amount 100.000.000 €
- Conversion ratio 1.000 € nominal amount = 20 ordinary shares
Tax rate 30 %
18
Excursion: Earnings per Share
Basic Earnings per Share Income of the
period
Ordinary
shares
Earnings per
Share
10.000.000 € 2.000.000 5,00 €
Diluted by
Convertible
bond
Increased
interest income
after tax
3.500.000 € 2.000.000
13.500.000 € 4.000.000 3,375 €
Dilution by convertible bonds: Increase of income due to less interest payments after tax
100.000.000 € * 5 % * (100-30 %) = 3.500.000 €
Increased number of shares due to implicit conversion of bonds
100.000.000 € * 20 shares / 1.000 € = 2.000.000 shares
Statement of changes in equity (I) Presentation - IAS 1
Total change in equity for the period
Comprehensive income Transactions with
owners
Profit or loss
Other
Comprehensive
Income
Transactions with
owners
Statement of changes in equity (II) Minimum content - IAS 1
Total comprehensive income for the period, showing separately
the total amounts attributable to owners of the parent and to non-controlling interests
For each component of equity, the effects of retrospective application or retrospective restatement recognised in accordance with IAS 8
For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing different changes resulting from
Profit or loss
Other comprehensive income
Transactions with owners in their capacity as owners
Transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control
Statement of cash flows (I) IAS 7
IAS 7 establishes standards for cash flow reporting, and
requires a cash flow statement as an integral part of
the financial statement for all entities.
Provides users of financial statements with a basis to assess:
the ability of the entity to generate cash and cash equivalents and
the needs of the entity to utilise those cash flows.
Cash flows are inflows and outflows of cash and cash
equivalents.
Statement of cash flows (II) Cash and cash equivalents - IAS 7
Cash comprises cash on hand and demand deposits.
Bank overdrafts?
usually considered part of company’s borrowings.
Considered cash if integral part of cash management i.e. bank
balance often fluctuates from positive to overdrawn.
Cash equivalents are short-term, highly liquid
investments that
are readily convertible to known amounts of cash, AND
are subject to an insignificant risk of changes in value
has to have short maturity: three months or less from the
date of acquisition.
Statement of cash flows (III) Presentation – IAS 7
Cash flows
Operating activities Investing activities Financing activities
Statement of cash flows (IV) Classification of cash flows – IAS 7
Operating activities: 'the principal revenue-producing
activities of the entity and other activities that are not
investing or financing activities'.
Operating is the 'default category' with all cash flows
which do not fall within either the investing or financing
classifications being automatically deemed to be of an
operating nature.
Cash flows from operating activities generally result from
transactions and other events that enter into the
determination of profit or loss.
Statement of cash flows (V) Classification of cash flows – IAS 7
Examples of operating activities: cash receipts from the sale of goods and the rendering of services;
cash receipts from royalties, fees, commissions and other
revenue;
cash payments to suppliers for goods and services;
cash payments to and on behalf of employees;
cash payments of income taxes (unless linked to investing or
financing items);
cash payments or refunds of income taxes unless they can be
specifically identified with financing and investing activities; AND
cash receipts and payments from contracts held for dealing or
trading purposes.
Statement of cash flows (VI) Classification of cash flows – IAS 7
Investing activities: 'the acquisition and disposal of long-term assets and other investments not included in cash equivalents'.
Represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
Examples: cash payments and receipts for:
the purchase or sale of tangible or intangible fixed assets and
other long-term assets;
the purchase or sale of equity or debt instruments of other
entities and interests in joint ventures;
loans made to or repaid by other parties.
Financing activities: 'activities that result in changes in the size and composition of the contributed equity and borrowings of the entity'.
Information is useful in predicting claims on future cash flows by providers of capital to the entity.
Examples for financing activities: cash proceeds from issuing shares or other equity instruments
cash payments to owners to acquire or redeem the entity’s shares
cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other borrowings
cash repayments of amounts borrowed
cash payments by a lessee for the reduction of the outstanding liability under a finance lease
Statement of cash flows (VII) Classification of cash flows – IAS 7
Statement of cash flows (X) Reporting operating cash flows – IAS 7
An enterprise should report cash flows from
operating activities using either: the direct method
disclose major classes of cash receipts and payments
for example, receipts from customers, payments to
suppliers
OR
the indirect method
adjust net profit or loss for non-cash entries, and other
elements that do not affect operating cash flows for the
period
for example, depreciation, provisions, changes in
working capital items
Statement of cash flows (XI) Other issues – IAS 7
Non-cash investing and financing activities should be excluded
from a cash flow statement.
Acquisitions/disposals of subsidiaries and other business units
the aggregate cash flows arising should be presented separately
classified as investing activities
Disclosures
An enterprise should report separately major classes of gross
cash receipts and gross cash payments
Statement of cash flows (XII) Disclosures – IAS 7
Components of cash and cash equivalents
disclose the components of cash and cash equivalents
AND
present a reconciliation of the amounts in its cash flow
statement with the equivalent items reported in the
balance sheet
Other disclosures
together with a commentary by management, the amount
of significant cash and cash equivalent balances held by
the entity that are not available for use by the group
#
Notes to the financial statements
Notes to the financial statements (I) Structure
Basis of preparation and accounting policies selected
Information required by IFRS not presented elsewhere in
the financial statements
Information not presented on the face of the financial
statements but necessary for fair presentation
Presented in systematic manner
Reference items on the face of the statement of financial
position, statement of comprehensive income and
statement of cash flows to related information in the
notes
No single standard dealing with notes disclosure
requirements instead disclosures required in each
individual IFRS
33
Judgements management has made in the process of
applying the entity´s accounting policies
Information about the assumptions concerning the future
and other major sources of estimation uncertainty at the
end of the reporting period, that have a significant risk of
resulting in a material adjustment to the carrying
amounts of assets and liabilities within the next financial
year. Therefore, the notes shall include details of their
nature and the carrying amount
Information that enables users of its financial statements
to evaluate the entity´s objectives, policies and
processes for managing capital
Notes to the financial statements (II) Structure
Notes to the financial statements (III) Basis of preparation and accounting policies selected
Select and apply accounting policies to comply with
IFRSs (i.e. IFRS, IAS, IFRIC, SIC)
Disclosure of Compliance with IFRS
Financial Statements cannot be described as complying
with IFRS unless they comply with all the requirements of
all applicable IFRS
It is misleading to describe financial statement as
being 'based on' or 'complying with the significant
requirements of' IFRS
Notes to the financial statements (IV) Basis of preparation and accounting policies selected
Departure from IFRS to achieve „fair” presentation:
Extremely rare circumstances (local regulations)
When compliance with IFRS would be misleading (in
extremely rare circumstances), disclosure of the following is
necessary:
management’s conclusion that the financial statements are fairly
presented
compliance in all material respects with IFRS except for the
departure
the Standard from which the enterprise has departed and the
nature of departure
financial impact of the departure
Probing question (I)
What would be included in the complete set of IFRS?
1. A statement of financial position, a statement of comprehensive income, a
statement of changes in equity, and a statement of cash flows
2. A statement of financial position, a statement of comprehensive income, a
statement of changes in equity, and a statement of cash flows, and notes
comprising a summary of significant accounting policies and other
explanatory notes
3. A statement of financial position, a statement of changes in equity, a
statement of cash flows, a financial review by management, and notes
comprising a summary of significant accounting policies and other
explanatory notes
4. A statement of financial position, a statement of comprehensive income, a
statement of changes in equity,a statement of cash flows, a financial review
by management, value-added statements, and notes comprising a
summary of significant accounting policies and other explanatory notes
Probing question (II)
True or false?
Equity is defined as the difference between assets and
liabilities, and increases and decreases in equity (other
than from transactions with owners of the enterprise)
representing comprehensive income (and expenses).
Probing question (III)
Cash Flow: The following is an example of which
type of activity?
“The purchase or sale of equity or debt instruments
of other entities and interests in joint ventures.”
1. Operating
2. Investing
3. Financing
4. None of the above
Probing question (IV)
True or false?
IAS 7 encourages the direct method of presenting the
operating activities section of the cash flow statement, but in
practice, most entities use the indirect method, which is
easier to produce.
Probing question (V)
Which of the following statements correctly completes the
definition of cash equivalents?
Cash equivalents are short-term, highly liquid investments
that are _________________.
1. readily convertible to known amounts of cash
2. subject to an insignificant risk of changes in value
3. both readily convertible to known amounts of cash and subject to
an insignificant risk of changes in value
4. readily convertible to known amounts of cash, include demand
deposits, and are subject to an insignificant risk of changes in
value
Probing question (VI)
Cash Flow:
The following statement is an example of which type of
activity?
“Cash proceeds from issuing shares or other equity
instruments.“
1. Operating activities
2. Investing activities
3. Financing activities
4. None of the above
Probing question (VII)
Which of the following measurement approaches are
required by the IASB framework in the preparation of the
financial statements?
1. Historical cost
2. Current cost
3. Realisable (settlement) value
4. Present value
5. None of the above
6. All of the above
Probing question (VIII)
What is disclosed when departing from an international
accounting standard?
1. The title of the Standard or Interpretation from which it has
departed
2. The nature of the departure, and the treatment the Standard
or Interpretation would require
3. The reason why that treatment would be so misleading
4. The treatment adopted
5. The financial impact of the departure on the financial
statements (for each period presented)
6. All of the above
Probing question (V)
Which of the following transactions or events might trigger
the need to change the presentation of financial
statements?
1. A change in a Standard or Interpretation
2. A review of the financial statement presentation
3. A significant acquisition or disposal
4. All of the above
Probing question (VI)
When might it be appropriate to NOT retain the
presentation and classification of items in the financial
statements from one period to the next?
1. When it is apparent that another presentation or classification
would be more appropriate
2. When a change in presentation is required by a Standard or
an Interpretation
3. When the auditor determines that reclassification is needed
4. 1 and 2 are correct.
5. 2, 3 and 4 are correct.
Probing question (VII)
How does IAS 1 define "non-current assets?"
1. They are tangible, intangible and financial assets of a short-term
nature.
2. They are tangible, intangible and financial assets of a long-term
nature.
3. They are the operating and financial assets of a long-term nature.
4. They are operating and financial assets of a short-term nature.
Probing question (VIII)
Which of the following are characteristics of current assets?
1. Expected to be realised in, or intended for sale or consumption
in, the company’s normal operating cycle
2. Held primarily for trading purposes
3. Expected to be realised within 12 months after the balance sheet
date, or cash or a cash-equivalent unless it is restricted from
being exchanged or used to settle a liability for at least twelve
months after the balance sheet date
4. 1 and 2 are characteristics
5. 1, 2 and 3 are characteristics
Probing question (IX)
True or false?
IAS 1 requires all items of income and expense
recognized in a period to be included in profit or loss for
the period unless another Standard or Interpretation
requires otherwise.
#
Management Report
Management Report (I)
The management report has to explain the business development including the company’s result by drawing a true and fair view of the company’s financial and income position.
Necessary components are: Analyses of the business development (adequately to the size
and complexity of the company)
Explanation of the significant financial performance indicators
Explanation of the significant non-financial performance indicators
Outlook on the company’s future development
Research & Development Report
Description of existing subsidiaries
Usage of financial instruments as far as they are important for the judgment of the financial and income position, in this case: Risk management goals and methods, including the hedging
method used for all important planned transactions that used in the accounting for such hedge contracts
Existing risks concerning price, default, liquidity and cash flow
Management Report (II)
Listed companies or companies, which shares are traded in any market have to give additional information about:
Components of the equity
Shares that are traded in a non-regulated market
Classes of shares, including rights and obligations as well as their percentage of the share capital
All restrictions of voting rights and transference, that are known to the board
Statement of holdings (direct and indirect) that increase 10 percent
Owners and description of privileged shares
Types of voting trust agreements concerning capital participation of employees
Conditions of appointment and demotion of the board of management as well as the board of directors
Ordainments for the board of management particularly regarding the issue and buyback of shares
All important agreements that take effect in case of a change in control due to an take-over-bid as well as their effect, excluded are agreements which could cause significant damage to the company caused by their announcement
Compensation agreements between the company and the board or employees in case of a take-over-bid
In addition, listed companies have to report the significant characteristics of their internal control and risk management in view of the accounting process.
