Every hedge fund needs to prepare NAV (Net Asset Value) and other accounting reports for their investors, as often as monthly and at least once a year. Funds also need to provide investors with annual income tax reports, Form K-1 tax reports and complex tax instructions. The above accounting reports are the building blocks of generating a "performance record" – the cornerstone for attracting investors to a fund.
Accounting and tax compliance services for hedge funds are complex. A hedge fund will face great trouble in trying to use off-the-shelf consumer accounting programs and/or accounting professionals who are not highly experienced with hedge funds.
Other Disclosures
An undertaking shall disclose in the notes:
(i) the amount of dividends proposed (or declared) before the financial statements were approved for issue, but not recorded as a distribution to owners during the period, and the related amount per share; and
(ii) the amount of any cumulative preference dividends not recorded.
An undertaking shall disclose the following, if not disclosed elsewhere in information published with the financial statements:
(i) the domicile, and legal form, of the undertaking, its country of incorporation and the address of its registered office (or principal place of business, if different from the registered office);
(ii) a description of the nature of the undertaking’s operations, and its principal activities; and
(iii) the name of the parent and the ultimate parent of the group.
(i) the amount of dividends proposed (or declared) before the financial statements were approved for issue, but not recorded as a distribution to owners during the period, and the related amount per share; and
(ii) the amount of any cumulative preference dividends not recorded.
An undertaking shall disclose the following, if not disclosed elsewhere in information published with the financial statements:
(i) the domicile, and legal form, of the undertaking, its country of incorporation and the address of its registered office (or principal place of business, if different from the registered office);
(ii) a description of the nature of the undertaking’s operations, and its principal activities; and
(iii) the name of the parent and the ultimate parent of the group.
Capital
An undertaking shall disclose information that enables users to evaluate the undertaking’s objectives, policies and processes for managing capital.
The undertaking discloses the following:
1. qualitative information about its objectives, policies and processes for managing capital, including:
a description of what comprises its capital;
when an undertaking is subject to externally imposed capital requirements, the nature of those requirements and how those requirements are incorporated into the management of capital; and
iii. how it is meeting its objectives for managing capital.
2. summary quantitative data about what comprises its capital. Some undertakings regard some financial liabilities (eg some forms of subordinated debt) as part of capital. Other undertakings regard capital as excluding some components of equity (eg components arising from cash flow hedges).
3. any changes in (1) and (2) from the previous period.
4. whether during the period it complied with any externally imposed capital requirements to which it is subject.
5. when the undertaking has not complied with such externally imposed capital requirements, the consequences of such non-compliance.
These disclosures shall be based on the information provided internally to the undertaking’s key management personnel.
An undertaking may manage capital in a number of ways and be subject to a number of different capital requirements and restrictions.
For example, a conglomerate may include undertakings that undertake insurance activities and banking activities, and those undertakings may also operate in several jurisdictions.
The undertaking shall disclose separate information for each capital requirement (rather than aggregate information) to which the undertaking is subject where this would be aid the understanding of users.
The undertaking discloses the following:
1. qualitative information about its objectives, policies and processes for managing capital, including:
a description of what comprises its capital;
when an undertaking is subject to externally imposed capital requirements, the nature of those requirements and how those requirements are incorporated into the management of capital; and
iii. how it is meeting its objectives for managing capital.
2. summary quantitative data about what comprises its capital. Some undertakings regard some financial liabilities (eg some forms of subordinated debt) as part of capital. Other undertakings regard capital as excluding some components of equity (eg components arising from cash flow hedges).
3. any changes in (1) and (2) from the previous period.
4. whether during the period it complied with any externally imposed capital requirements to which it is subject.
5. when the undertaking has not complied with such externally imposed capital requirements, the consequences of such non-compliance.
These disclosures shall be based on the information provided internally to the undertaking’s key management personnel.
An undertaking may manage capital in a number of ways and be subject to a number of different capital requirements and restrictions.
For example, a conglomerate may include undertakings that undertake insurance activities and banking activities, and those undertakings may also operate in several jurisdictions.
The undertaking shall disclose separate information for each capital requirement (rather than aggregate information) to which the undertaking is subject where this would be aid the understanding of users.
Statement of comprehensive income
An undertaking shall present all items of income and expense recognised in a period:
(i) in a single statement of comprehensive income, or
(ii) in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income).
Information to be presented in the statement of comprehensive income
As a minimum, the face of the statement of comprehensive income
shall include line items that present the following amounts for the period:
(a) revenue;
(b) finance costs;
(c) share of the income statement of associates, and joint ventures accounted for using the equity method;
d) tax expense;
(e) 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 or on the disposal of the assets or disposal group(s) constituting the discontinued operation;
(f) profit or loss;
(g) each component of other comprehensive income classified by nature (excluding amounts in (h));
(h) share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and
(i) total comprehensive income.
An undertaking shall disclose the following items in the statement of comprehensive income as allocations of profit or loss for the period:
(a) profit or loss for the period attributable to:
(i) minority interest, and
(ii) owners of the parent.
(b) total comprehensive income for the period attributable to:
(i) minority interest, and
(ii) owners of the parent.
Additional line items, headings and subtotals shall be presented on the face of the statement of comprehensive income and the separate income statement (if presented), when such presentation is relevant to understanding the financial performance.
As the impacts of various transactions differ in frequency, potential for gain (or loss) and predictability, disclosing the components of financial performance assists in an understanding of the performance achieved, and in making projections.
Additional line items are included on the face of the statement of comprehensive income and the separate income statement (if presented), and the descriptions used (and the ordering of items) are amended, when this is necessary to explain the elements of financial performance.
EXAMPLE- Order of presentation of the income statement’s components
Issue
The description and ordering of items on the face of the income statements should be amended when this is necessary to explain the elements of performance.
Can management present the lines in the income statement in a different order from that described in IAS 1?
Background
Undertaking A’s management wishes to present the results of the undertaking’s share of profits and losses of associates accounted for using equity method before the line of finance costs.
Presented below is an extract from the undertaking’s proposed income statement
Share of results of associates
XXX
Finance costs
(XX)
Profit before tax
XXX
Solution
There is a suggested ordering of items to be reported on the face of the income statement: finance costs are presented before the results of associates.
Deviation from this general sequence would be rare, although permitted when this is necessary to explain the elements of performance.
Additionally, management should present and classify items in the income statement consistently from one period to the next.
Factors to be considered include materiality, and the nature (and function) of the components of income, and expenses. For example, a bank amends the descriptions to apply the requirements in IFRS 7. Income and expense items are not offset unless the criteria above are met.
No item should be described as extraordinary items, either on the face of the income statement, or in the notes.
Profit or loss for the period
An undertaking shall recognise all items of income and expense in a period in profit or loss unless an IFRS requires or permits otherwise.
Some IFRSs specify circumstances when an undertaking recognises particular items outside profit or loss in the current period. IAS 8 specifies two such circumstances: the correction of errors and the effect of changes in accounting policies.
Other IFRSs require or permit components of other comprehensive income that meet the Framework’s definition of income or expense to be excluded from profit or loss
Other comprehensive income for the period
An undertaking shall disclose the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments, either in the statement of comprehensive income or in the notes.
An undertaking may present components of other comprehensive income
either:
(i) net of related tax effects, or
(ii) before related tax effects with one amount shown for the aggregate
amount of income tax relating to those components.
An undertaking shall disclose reclassification adjustments relating to components of other comprehensive income.
Other IFRSs specify whether and when amounts previously recognised in other comprehensive income are reclassified to profit or loss. Such reclassifications are referred to in IAS 1as reclassification adjustments.
A reclassification adjustment is included with the related component of other comprehensive income in the period that the adjustment is reclassified to profit or loss.
For example, gains realised on the disposal of available-for-sale financial assets are included in profit or loss of the current period. These amounts may have been recognised in other comprehensive income as unrealised gains in the current or previous periods.
Those unrealised gains must be deducted from other comprehensive income in the period in which the realised gains are reclassified to profit or loss to avoid including them in total comprehensive income twice.
An undertaking may present reclassification adjustments in the statement of comprehensive income or in the notes. An undertaking presenting reclassification adjustments in the notes presents the components of other comprehensive income after any related reclassification adjustments.
Reclassification adjustments arise, for example, on disposal of a foreign operation (see IAS 21), on derecognition of available-for-sale financial assets (see IAS 39) and when a hedged forecast transaction affects profit or loss (see IAS 39 in relation to cash flow hedges).
EXAMPLE- Presentation of currency translation differences
Issue
Exchange differences arise from the translation of a foreign undertaking’s financial statements for incorporation in a reporting undertaking’s financial statements.
Management should classify such differences as equity until the disposal of the net investment [IAS21].
How should management present exchange differences in the undertaking’s statement of changes in equity?
Background
An undertaking has subsidiaries in several different countries. All of them are consolidated, and management classifies the currency translation differences arising from the translation of these subsidiaries’ financial statements as translation reserve in equity.
Solution
Management should present the gain/loss on currency translations on the face of the statement of changes in equity.
Additionally, management should present, in a note to the financial statements, a reconciliation of the amount of such exchange differences at the beginning and end of the period.
Reclassification adjustments do not arise on changes in revaluation surplus recognised in accordance with IAS 16 or IAS 38 or on actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19.
These components are recognised in other comprehensive income and are not reclassified to profit or loss in subsequent periods.
Changes in revaluation surplus may be transferred to retained earnings in subsequent periods as the asset is used or when it is derecognised (see IAS 16 and IAS 38).
Actuarial gains and losses are reported in retained earnings in the period that they are recognised as other comprehensive income (see IAS 19).
Income statement presentation - IFRS News - June 2005
Any group with international operations, whether listed or not, can benefit from making it easier for its major stakeholders to understand its financial statements.
Income statement presentation is an essential part of stakeholder communications and IFRS aims to add transparency and comparability to this communication. IAS 1, the standard which deals with the presentation of financial statements, contains broad guidelines on presentation format. The qualitative characteristics for the financial statements in the IFRS framework only represent general guidance.
Stakes are high for companies: broad guidelines offer opportunities to drive their communication based on financial statement presentation. The abuse of this flexibility, however, may do more harm than good in the medium term.
Analysts may be confused by presentations of ‘results before bad news and things management didn’t expect’. Regulators will not endorse such flexibility and will request strict rules to be applied. Restatements may occur and companies’ reputations will be tarnished by such behaviour.
How can companies acquire a useful and transparent presentation of their results?
How presentation format can make a difference
Most users look at the income statement first for information on the company’s financial performance. The notes may provide useful additional information but the size and complexity of these often prevent most users from considering them in detail.
The income statement presentation could influence the user’s decision-making. IAS 1 allows companies to report income statements on a functional (costs of sales, selling, marketing, etc...) or a nature (salaries, rent, depreciation, etc...) basis.
The temptation to combine both presentations is high, but will transparency and comparability result from doing so?
Imagine two similar companies: one excludes depreciation from its cost-of-sales figure to derive its gross profit figure, while presenting depreciation as a separate line item; the other includes depreciation of production equipment in costs of sales to reflect a complete functional presentation.
It would seem that the company that mixes function and nature expense categories generates more gross profit. This only reflects a choice of presentation and not the actual performance of the company.
The first presentation could create confusion for the user and it would not be comparable between different companies.
‘Industry practice’: slippery slope
Many companies suggest that analysts require certain disclosures on the face of the income statement, which are not defined or required under IFRS. ‘Earnings before interest, depreciation and amortisation’ (EBITDA) is an example, which is used in many capital intensive industries.
Many different calculation methods exist. Some companies exclude all amortisation and depreciation from the subtotal; others exclude all significant non-cash charges such as restructurings and impairments. This makes ‘EBITDA’ a wide category that is non-comparable.
Analysts must then make various adjustments to the published EBITDA figures based on information from the notes. Disclosing partial information on the face of the income statement (often without an explanation on its calculation) does not add value for users.
Transparency
Transparent reporting would result from use of a format similar to the examples in the application guidance to IAS 1. Subtotals and further line items only result in clearer presentation if certain criteria are met (see box below).
Other common reporting issues
The use of the ‘operating profit’ subtotal: many companies disclose ‘operating profit’ even though IFRS no longer requires it. If this subtotal is presented, IAS 1 states that all activities are presumed to be part of operations apart from the results of financing activities, equity-accounted investments, discontinued operations and taxation.
‘Non-recurring’ or ‘exceptional’ results: another commonly-used subtotal is the division of operating profit to ‘recurring’ and ‘non-recurring’ portions (or similar). Management may wish to make this separation to exclude ‘difficult debits’ or because the items were treated as ‘extraordinary’ under local GAAP.
These subtotals do not usually help to achieve clear and consistent presentation, but may be acceptable if the general criteria for a mixed presentation are met (see box below).
Restructuring: as restructuring provisions are not separate ‘functions’, it is unlikely that a separate line item for restructuring can be used in a functional expense presentation.
Conclusion
The income statement presentation can make a difference between companies even if the underlying results are similar. A company that follows IAS 1 will reduce subjectivity and aid comparability between different undertakings.
When is a mixed presentation acceptable?
The mixture of function and nature, and the use of subtotals, are only acceptable when all of the following requirements are met:
The proposed presentation is not misleading: the income statement presentation should be unbiased. The proposed breakdown should not result in a misleading cost-of-sales figure and overstate gross profit.
A potential for bias can exist if the subtotal gets undue prominence over the line items and the subtotals normally required by IFRS;
The presentation should be applied consistently across all years and the ‘rules’ should be set out in the accounting policies.
An undertaking that wishes to present a subtotal for non-recurring items should have an accounting policy which describes the classification rules (to avoid the cherry-picking of items to be classified as non-recurring); and
The breakdown of expenses by nature is presented in the notes to the financial statements, as required by IAS 1: the breakdown should be made in a separate note, which could be tied to the total of expenses presented on the face of the income statement.
(i) in a single statement of comprehensive income, or
(ii) in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income).
Information to be presented in the statement of comprehensive income
As a minimum, the face of the statement of comprehensive income
shall include line items that present the following amounts for the period:
(a) revenue;
(b) finance costs;
(c) share of the income statement of associates, and joint ventures accounted for using the equity method;
d) tax expense;
(e) 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 or on the disposal of the assets or disposal group(s) constituting the discontinued operation;
(f) profit or loss;
(g) each component of other comprehensive income classified by nature (excluding amounts in (h));
(h) share of the other comprehensive income of associates and joint ventures accounted for using the equity method; and
(i) total comprehensive income.
An undertaking shall disclose the following items in the statement of comprehensive income as allocations of profit or loss for the period:
(a) profit or loss for the period attributable to:
(i) minority interest, and
(ii) owners of the parent.
(b) total comprehensive income for the period attributable to:
(i) minority interest, and
(ii) owners of the parent.
Additional line items, headings and subtotals shall be presented on the face of the statement of comprehensive income and the separate income statement (if presented), when such presentation is relevant to understanding the financial performance.
As the impacts of various transactions differ in frequency, potential for gain (or loss) and predictability, disclosing the components of financial performance assists in an understanding of the performance achieved, and in making projections.
Additional line items are included on the face of the statement of comprehensive income and the separate income statement (if presented), and the descriptions used (and the ordering of items) are amended, when this is necessary to explain the elements of financial performance.
EXAMPLE- Order of presentation of the income statement’s components
Issue
The description and ordering of items on the face of the income statements should be amended when this is necessary to explain the elements of performance.
Can management present the lines in the income statement in a different order from that described in IAS 1?
Background
Undertaking A’s management wishes to present the results of the undertaking’s share of profits and losses of associates accounted for using equity method before the line of finance costs.
Presented below is an extract from the undertaking’s proposed income statement
Share of results of associates
XXX
Finance costs
(XX)
Profit before tax
XXX
Solution
There is a suggested ordering of items to be reported on the face of the income statement: finance costs are presented before the results of associates.
Deviation from this general sequence would be rare, although permitted when this is necessary to explain the elements of performance.
Additionally, management should present and classify items in the income statement consistently from one period to the next.
Factors to be considered include materiality, and the nature (and function) of the components of income, and expenses. For example, a bank amends the descriptions to apply the requirements in IFRS 7. Income and expense items are not offset unless the criteria above are met.
No item should be described as extraordinary items, either on the face of the income statement, or in the notes.
Profit or loss for the period
An undertaking shall recognise all items of income and expense in a period in profit or loss unless an IFRS requires or permits otherwise.
Some IFRSs specify circumstances when an undertaking recognises particular items outside profit or loss in the current period. IAS 8 specifies two such circumstances: the correction of errors and the effect of changes in accounting policies.
Other IFRSs require or permit components of other comprehensive income that meet the Framework’s definition of income or expense to be excluded from profit or loss
Other comprehensive income for the period
An undertaking shall disclose the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments, either in the statement of comprehensive income or in the notes.
An undertaking may present components of other comprehensive income
either:
(i) net of related tax effects, or
(ii) before related tax effects with one amount shown for the aggregate
amount of income tax relating to those components.
An undertaking shall disclose reclassification adjustments relating to components of other comprehensive income.
Other IFRSs specify whether and when amounts previously recognised in other comprehensive income are reclassified to profit or loss. Such reclassifications are referred to in IAS 1as reclassification adjustments.
A reclassification adjustment is included with the related component of other comprehensive income in the period that the adjustment is reclassified to profit or loss.
For example, gains realised on the disposal of available-for-sale financial assets are included in profit or loss of the current period. These amounts may have been recognised in other comprehensive income as unrealised gains in the current or previous periods.
Those unrealised gains must be deducted from other comprehensive income in the period in which the realised gains are reclassified to profit or loss to avoid including them in total comprehensive income twice.
An undertaking may present reclassification adjustments in the statement of comprehensive income or in the notes. An undertaking presenting reclassification adjustments in the notes presents the components of other comprehensive income after any related reclassification adjustments.
Reclassification adjustments arise, for example, on disposal of a foreign operation (see IAS 21), on derecognition of available-for-sale financial assets (see IAS 39) and when a hedged forecast transaction affects profit or loss (see IAS 39 in relation to cash flow hedges).
EXAMPLE- Presentation of currency translation differences
Issue
Exchange differences arise from the translation of a foreign undertaking’s financial statements for incorporation in a reporting undertaking’s financial statements.
Management should classify such differences as equity until the disposal of the net investment [IAS21].
How should management present exchange differences in the undertaking’s statement of changes in equity?
Background
An undertaking has subsidiaries in several different countries. All of them are consolidated, and management classifies the currency translation differences arising from the translation of these subsidiaries’ financial statements as translation reserve in equity.
Solution
Management should present the gain/loss on currency translations on the face of the statement of changes in equity.
Additionally, management should present, in a note to the financial statements, a reconciliation of the amount of such exchange differences at the beginning and end of the period.
Reclassification adjustments do not arise on changes in revaluation surplus recognised in accordance with IAS 16 or IAS 38 or on actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19.
These components are recognised in other comprehensive income and are not reclassified to profit or loss in subsequent periods.
Changes in revaluation surplus may be transferred to retained earnings in subsequent periods as the asset is used or when it is derecognised (see IAS 16 and IAS 38).
Actuarial gains and losses are reported in retained earnings in the period that they are recognised as other comprehensive income (see IAS 19).
Income statement presentation - IFRS News - June 2005
Any group with international operations, whether listed or not, can benefit from making it easier for its major stakeholders to understand its financial statements.
Income statement presentation is an essential part of stakeholder communications and IFRS aims to add transparency and comparability to this communication. IAS 1, the standard which deals with the presentation of financial statements, contains broad guidelines on presentation format. The qualitative characteristics for the financial statements in the IFRS framework only represent general guidance.
Stakes are high for companies: broad guidelines offer opportunities to drive their communication based on financial statement presentation. The abuse of this flexibility, however, may do more harm than good in the medium term.
Analysts may be confused by presentations of ‘results before bad news and things management didn’t expect’. Regulators will not endorse such flexibility and will request strict rules to be applied. Restatements may occur and companies’ reputations will be tarnished by such behaviour.
How can companies acquire a useful and transparent presentation of their results?
How presentation format can make a difference
Most users look at the income statement first for information on the company’s financial performance. The notes may provide useful additional information but the size and complexity of these often prevent most users from considering them in detail.
The income statement presentation could influence the user’s decision-making. IAS 1 allows companies to report income statements on a functional (costs of sales, selling, marketing, etc...) or a nature (salaries, rent, depreciation, etc...) basis.
The temptation to combine both presentations is high, but will transparency and comparability result from doing so?
Imagine two similar companies: one excludes depreciation from its cost-of-sales figure to derive its gross profit figure, while presenting depreciation as a separate line item; the other includes depreciation of production equipment in costs of sales to reflect a complete functional presentation.
It would seem that the company that mixes function and nature expense categories generates more gross profit. This only reflects a choice of presentation and not the actual performance of the company.
The first presentation could create confusion for the user and it would not be comparable between different companies.
‘Industry practice’: slippery slope
Many companies suggest that analysts require certain disclosures on the face of the income statement, which are not defined or required under IFRS. ‘Earnings before interest, depreciation and amortisation’ (EBITDA) is an example, which is used in many capital intensive industries.
Many different calculation methods exist. Some companies exclude all amortisation and depreciation from the subtotal; others exclude all significant non-cash charges such as restructurings and impairments. This makes ‘EBITDA’ a wide category that is non-comparable.
Analysts must then make various adjustments to the published EBITDA figures based on information from the notes. Disclosing partial information on the face of the income statement (often without an explanation on its calculation) does not add value for users.
Transparency
Transparent reporting would result from use of a format similar to the examples in the application guidance to IAS 1. Subtotals and further line items only result in clearer presentation if certain criteria are met (see box below).
Other common reporting issues
The use of the ‘operating profit’ subtotal: many companies disclose ‘operating profit’ even though IFRS no longer requires it. If this subtotal is presented, IAS 1 states that all activities are presumed to be part of operations apart from the results of financing activities, equity-accounted investments, discontinued operations and taxation.
‘Non-recurring’ or ‘exceptional’ results: another commonly-used subtotal is the division of operating profit to ‘recurring’ and ‘non-recurring’ portions (or similar). Management may wish to make this separation to exclude ‘difficult debits’ or because the items were treated as ‘extraordinary’ under local GAAP.
These subtotals do not usually help to achieve clear and consistent presentation, but may be acceptable if the general criteria for a mixed presentation are met (see box below).
Restructuring: as restructuring provisions are not separate ‘functions’, it is unlikely that a separate line item for restructuring can be used in a functional expense presentation.
Conclusion
The income statement presentation can make a difference between companies even if the underlying results are similar. A company that follows IAS 1 will reduce subjectivity and aid comparability between different undertakings.
When is a mixed presentation acceptable?
The mixture of function and nature, and the use of subtotals, are only acceptable when all of the following requirements are met:
The proposed presentation is not misleading: the income statement presentation should be unbiased. The proposed breakdown should not result in a misleading cost-of-sales figure and overstate gross profit.
A potential for bias can exist if the subtotal gets undue prominence over the line items and the subtotals normally required by IFRS;
The presentation should be applied consistently across all years and the ‘rules’ should be set out in the accounting policies.
An undertaking that wishes to present a subtotal for non-recurring items should have an accounting policy which describes the classification rules (to avoid the cherry-picking of items to be classified as non-recurring); and
The breakdown of expenses by nature is presented in the notes to the financial statements, as required by IAS 1: the breakdown should be made in a separate note, which could be tied to the total of expenses presented on the face of the income statement.
Information to be Presented either on the Face of the Statement of Financial Position, or in the Notes
An undertaking shall disclose, either on the face of the statement of financial
position, or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the operations.
The detail provided in subclassifications depends on the requirements of IFRSs and on the size, nature and function of the amounts involved.
The disclosures vary for each item, for example:
(i) items of property, plant and equipment are disaggregated into classes in accordance with IAS 16;
(ii) receivables are disaggregated into amounts receivable from:
trade customers,
receivables from related parties,
prepayments and
other amounts;
(iii) inventories are subclassified, into classifications such as:
merchandise,
production supplies,
materials,
work in progress and
finished goods;
(iv) provisions are disaggregated into provisions for staff benefits, and other items; and
(v) equity capital and reserves are disaggregated into various classes, such as:
paid-in capital,
share premium and
reserves.
An undertaking shall disclose the following, either on the face of the statement of financial position, or in the notes:
(1) for each class of share capital:
(i) the number of shares authorised;
(ii) the number of shares issued and fully paid, and issued but not fully paid;
(iii) par value per share, or that the shares have no par value;
(iv) a reconciliation of the number of shares outstanding at the beginning, and end, of the period;
(v) the rights, preferences and restrictions attaching to that class, including restrictions on the distribution of dividends, and the repayment of capital;
(vi) shares in the undertaking held by the undertaking, or by its subsidiaries, or associates; and
(vii) shares reserved for issue under options, and contracts for the sale of shares, including the terms and amounts; and
(ii) a description of the nature, and purpose, of each reserve within equity.
EXAMPLE- ‘legal’ reserves
Some jurisdictions require firms to donate 10% of annual profit to a reserve, sometimes called a legal reserve, that cannot be distributed to shareholders (except in liquidation after all creditors have been paid).
Such regulations may be of concern to investors, as this will limit dividends.
An undertaking without share capital, such as a partnership or trust, shall disclose information equivalent to that required above, showing changes during the period in each category of equity interest, and the rights, preferences, and restrictions attaching to each category of equity interest
position, or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the operations.
The detail provided in subclassifications depends on the requirements of IFRSs and on the size, nature and function of the amounts involved.
The disclosures vary for each item, for example:
(i) items of property, plant and equipment are disaggregated into classes in accordance with IAS 16;
(ii) receivables are disaggregated into amounts receivable from:
trade customers,
receivables from related parties,
prepayments and
other amounts;
(iii) inventories are subclassified, into classifications such as:
merchandise,
production supplies,
materials,
work in progress and
finished goods;
(iv) provisions are disaggregated into provisions for staff benefits, and other items; and
(v) equity capital and reserves are disaggregated into various classes, such as:
paid-in capital,
share premium and
reserves.
An undertaking shall disclose the following, either on the face of the statement of financial position, or in the notes:
(1) for each class of share capital:
(i) the number of shares authorised;
(ii) the number of shares issued and fully paid, and issued but not fully paid;
(iii) par value per share, or that the shares have no par value;
(iv) a reconciliation of the number of shares outstanding at the beginning, and end, of the period;
(v) the rights, preferences and restrictions attaching to that class, including restrictions on the distribution of dividends, and the repayment of capital;
(vi) shares in the undertaking held by the undertaking, or by its subsidiaries, or associates; and
(vii) shares reserved for issue under options, and contracts for the sale of shares, including the terms and amounts; and
(ii) a description of the nature, and purpose, of each reserve within equity.
EXAMPLE- ‘legal’ reserves
Some jurisdictions require firms to donate 10% of annual profit to a reserve, sometimes called a legal reserve, that cannot be distributed to shareholders (except in liquidation after all creditors have been paid).
Such regulations may be of concern to investors, as this will limit dividends.
An undertaking without share capital, such as a partnership or trust, shall disclose information equivalent to that required above, showing changes during the period in each category of equity interest, and the rights, preferences, and restrictions attaching to each category of equity interest
Information to be Presented on the Face of the Statement of financial position (balance sheet)
As a minimum, the face of the statement of financial position shall include line items that present the following amounts:
(i) property, plant and equipment;
(ii) investment property;
(iii) intangible assets;
(iv) financial assets (excluding amounts shown under (v), (viii) and (ix));
(v) investments, accounted for using the equity method;
(vi) biological assets;
(vii) inventories;
(viii) trade and other receivables;
(ix) cash and cash equivalents;
(x) the total of assets classified as held for sale and assets included in
disposal groups classified as held for sale in accordance with IFRS 5 (see below)
(xi) trade and other payables;
(xii) provisions;
(xiii) financial liabilities (excluding amounts shown under (x) and (xi));
(xiv) liabilities and assets for current tax (as defined in IAS 12 Income Taxes);
(xv) deferred tax liabilities and deferred tax assets (as defined in IAS 12);
(xvi) minority interest, presented within equity; and
(xvii) issued capital, and reserves attributable to equity holders of the parent.
The face of the statement of financial position shall include line items that present the following amounts:
i. the total of assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with IFRS 5; and
ii. liabilities included in disposal groups classified as held for sale in accordance with IFRS 5.
Additional line items, headings and subtotals shall be presented on the face of the statement of financial position, when such presentation is relevant to an understanding of the financial position.
EXAMPLE –tax losses
You have large tax losses carried forward in your home country, but tax liabilities abroad. You chose to expand the tax liability lines to show both local tax (none) and foreign tax to clarify the position.
Deferred tax assets (and liabilities) are always non-current assets (liabilities).
Line items are included when the size, nature or function of an item (or aggregation of similar items) is such that separate presentation is relevant to an understanding of the financial position.
The descriptions used, and the ordering of items (or aggregation of similar items) may be amended according to the nature of the undertaking, and its transactions, to provide information that is relevant to an understanding of the financial position.
For example, a bank amends the above descriptions to apply the requirements in IFRS 7.
The judgement on whether additional items are presented separately is based on an assessment of:
(i) the nature and liquidity of assets;
(ii) the function of assets; and
(iii) the amounts, nature and timing of liabilities.
EXAMPLE-assets categorised by function
You lease photocopiers and drinks machines. Identifying the results and
net assets (assets and liabilities) employed by each function of the business helps users.
The use of different measurement bases, for different classes of assets, suggests that their nature (or function) differs and, therefore, that they should be presented as separate line items.
Different classes of property, plant and equipment can be carried at cost, or revalued amounts, in accordance with IAS 16.
(i) property, plant and equipment;
(ii) investment property;
(iii) intangible assets;
(iv) financial assets (excluding amounts shown under (v), (viii) and (ix));
(v) investments, accounted for using the equity method;
(vi) biological assets;
(vii) inventories;
(viii) trade and other receivables;
(ix) cash and cash equivalents;
(x) the total of assets classified as held for sale and assets included in
disposal groups classified as held for sale in accordance with IFRS 5 (see below)
(xi) trade and other payables;
(xii) provisions;
(xiii) financial liabilities (excluding amounts shown under (x) and (xi));
(xiv) liabilities and assets for current tax (as defined in IAS 12 Income Taxes);
(xv) deferred tax liabilities and deferred tax assets (as defined in IAS 12);
(xvi) minority interest, presented within equity; and
(xvii) issued capital, and reserves attributable to equity holders of the parent.
The face of the statement of financial position shall include line items that present the following amounts:
i. the total of assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with IFRS 5; and
ii. liabilities included in disposal groups classified as held for sale in accordance with IFRS 5.
Additional line items, headings and subtotals shall be presented on the face of the statement of financial position, when such presentation is relevant to an understanding of the financial position.
EXAMPLE –tax losses
You have large tax losses carried forward in your home country, but tax liabilities abroad. You chose to expand the tax liability lines to show both local tax (none) and foreign tax to clarify the position.
Deferred tax assets (and liabilities) are always non-current assets (liabilities).
Line items are included when the size, nature or function of an item (or aggregation of similar items) is such that separate presentation is relevant to an understanding of the financial position.
The descriptions used, and the ordering of items (or aggregation of similar items) may be amended according to the nature of the undertaking, and its transactions, to provide information that is relevant to an understanding of the financial position.
For example, a bank amends the above descriptions to apply the requirements in IFRS 7.
The judgement on whether additional items are presented separately is based on an assessment of:
(i) the nature and liquidity of assets;
(ii) the function of assets; and
(iii) the amounts, nature and timing of liabilities.
EXAMPLE-assets categorised by function
You lease photocopiers and drinks machines. Identifying the results and
net assets (assets and liabilities) employed by each function of the business helps users.
The use of different measurement bases, for different classes of assets, suggests that their nature (or function) differs and, therefore, that they should be presented as separate line items.
Different classes of property, plant and equipment can be carried at cost, or revalued amounts, in accordance with IAS 16.
Current Liabilities
A liability shall be classified as current, when it satisfies any of the following criteria:
(i) it is expected to be settled in normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the end of the reporting period; or
(iv) the undertaking does not have an unconditional right to defer settlement of the liability, for at least twelve months after the end of the reporting period.
All other liabilities shall be classified as non-current.
Some current liabilities, such as trade payables and some accruals for staff and other operating costs, are part of the working capital used in the normal operating cycle.
TRADE AND OTHER PAYABLES summary
What are trade and other payables?
Trade and other payables are current liabilities for which the amount to be settled is usually known rather than uncertain (as for provisions). Undertakings, almost without exception, carry some type of trade and other payables on their statement of financial position.
Items generally included in trade and other payables are: trade payables; amounts payable under statutory obligations such as social security obligations and payroll taxes.
These items are presented within the "Trade and other payables" line item on the face of the statement of financial position.
Current liabilities are those expected to be settled in the normal course of the undertaking’s operating cycle; due to be settled within twelve months of the date of the end of the reporting period; held primarily for the purpose of being traded; or those for which the undertaking does not have an unconditional right to defer settlement for at least twelve months after the date of the end of the reporting period.
Most trade and other payables fall within the definition of financial liabilities and are subject to the recognition and measurement rules that apply to those liabilities.
Initial recognition
An undertaking should recognise trade and other payables when it becomes a party to the contractual provisions of the instrument.
An undertaking’s obligations concerning trade and other payables are usually easily identified and the point of recognition is clear.
Most obligations are legally enforceable and arise under contractual arrangements. These include amounts owed for assets purchased or services obtained (trade creditors), and obligations to provide goods and services where an external party has paid in advance.
Obligations are often imposed by statute. An undertaking should recognise these obligations on the basis of notices and requests for payment from the relevant authority. Constructive obligations should be recognised on the basis of amounts promised to third parties.
An undertaking often incurs obligations in the form of financial and performance guarantees. For example, an undertaking may sell its receivables yet retain a portion of the credit risk in these receivables through guarantees.
The recognition of guarantees depends on their nature. Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be recognised as part of provisions or, when the recognition criteria are not met, disclosed as contingent liabilities.
Financial guarantees that provide for payments to be made in response to changes in a specified index such as a credit rating should be recognised as financial instruments.
Accrued expenses are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier.
The recognition of accrued expenses results directly from the recognition of expenses for items of goods and services consumed during the period. Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
Initial measurement
Initial measurement of trade and other payables is usually at fair value. The initial measurement of financial liabilities not at fair value through profit or loss includes transaction costs directly attributable to the acquisition or issue of the financial liability.
Initial fair value is established by reference to amounts agreed between the undertaking and the supplier and amounts invoiced from statutory authorities. Accrued expenses are measured at management’s estimate of the fair value of the goods and services received but not yet invoiced.
Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should initially be recognised at fair value.
Subsequent measurement
Items classified within trade and other payables are not usually re-measured, as the obligation is usually known with a high degree of certainty and its settlement is short-term.
Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be re-measured at the higher of (i) the amount recognised under IAS 37 and (ii) the amount initially recognised (that is, fair value) less, where appropriate, cumulative amortisation recognised in accordance with IAS 18.
Derecognition
Derecognition occurs when the contractual obligation is cancelled, expired or discharged, for example through payment of the amount due, or through the counterparty forgiving the debt.
Presentation and disclosure
Trade and other payables should be presented as a separate line item on the face of the statement of financial position.
Such items are classified as current liabilities, even if they are due to be settled more than twelve months after the end of the reporting period.
The same normal operating cycle applies to the classification of assets and liabilities. When the undertaking’s normal operating cycle is not identifiable, it is assumed to be twelve months.
Examples of current liabilities are financial liabilities, classified as ‘held for trading’, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables.
EXAMPLE- Presentation of loan from parent
Issue
An undertaking shall present further sub-classifications of the line items presented in the statement of financial position. Those sub-classifications may be presented either on the face of the statement of financial position or in the notes, classified in a manner appropriate to the undertaking’s operations.
Should a parent, in its single-undertaking financial statements, present amounts due from a subsidiary on the face of its statement of financial position as an asset, and if so how should it be classified?
Background
A parent provides a loan to a subsidiary. Interest of 8% is paid annually. There is no specified repayment date; however, the loan is payable on demand.
Solution
Disclosure on the face of the statement of financial position is not mandatory, but it is best practice. IFRS require separate disclosure of amounts due from subsidiaries, but allow this to be presented in the notes rather than on the face of the statement of financial position.
The liability is current because the subsidiary does not have unconditional right to defer settlement of the liability. The parent, in its separate financial statements, should also classify the amount due from the subsidiary as a current asset.
Financial liabilities that provide financing on a long-term basis (not part of the working capital) and are not due for settlement within twelve months after the end of the reporting period, are non-current liabilities.
EXAMPLE- Classification and presentation of current liabilities
Issue
The following current liabilities should be disclosed on the face of the statement of financial position:
a) trade and other payables;
b) provisions;
c) financial liabilities (excluding trade and other payables and provisions); and
d) current income tax liabilities.
The following example highlights specific classes of current liabilities to be disclosed on the face of the statement of financial position, together with examples of items to be included under the headings.
Solution
a) Trade and other payables, including:
trade creditors;
accruals (for example, accruals for audit fees payable); and
social security taxes and other amounts, such as payroll taxes payable in respect of wages and salaries.
b) Provisions
Provisions for litigation, claims and assessments; and
Current portion of provisions for long term employee benefits such as jubilee payments.
c) Financial liabilities
Current portion of fixed term interest-bearing loans; and
Loans repayable on demand.
d) Current income tax liabilities, including:
corporate income taxes; and income taxes payable on dividends.
Presentation of provisions and other liabilities with current and non-current portion
Issue
How should management present the current and non-current portions of different types of provisions and liabilities in the undertaking’s statement of financial position?
Background
An undertaking has recognised the following liabilities in its statement of financial position:
a) warranty provisions;
b) provisions for environmental liabilities;
c) pension liabilities; and
d) deferred tax liabilities.
Solution
a) Warranty provisions - current or non-current liabilities
The classification will depend on the terms of the warranty. Warranties that guarantee product performance for a twelve-month period are classified as current liabilities. Conversely, warranties that guarantee product performance for an extended period are classified as non-current liabilities.
b) Provisions for environmental liabilities - non-current liabilities
This type of provision is unlikely to be part of an undertaking’s working capital. Management should therefore classify environmental provisions as non-current liabilities.
c) Pension liabilities - non-current liabilities
Considering the nature of these liabilities, management is often not able to reasonably determine the current and non-current portion reliably. It should therefore classify these liabilities as non-current liabilities.
d) Deferred tax liabilities - non-current liabilities
Management should present any deferred tax liabilities as non-current liabilities, even if the temporary differences giving rise to the liabilities are expected to reverse within 12 months.
The treatment of financial liabilities, such as bank loans is strict. The end of the reporting period is the key day by which everything must be in place. If refinancing is to take place, the end of the reporting period is the benchmark.
Failure to refinance by this date may require the undertaking to record a finance liability as current, even if it is being renegotiated to be repaid over a longer period.
This may have severe consequences, even prohibiting the financial statements to be prepared on a going-concern basis.
An undertaking classifies its financial liabilities as current, when they are due to be settled within twelve months after the end of the reporting period, even if:
(i) the original term was for a period longer than twelve months; and
(ii) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the end of the reporting period, and before the financial statements are approved for issue.
EXAMPLE- refinancing after the end of the reporting period
You need to refinance your long-term loan. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February.
The long-term loan is shown as a current liability, as it was not refinanced by the end of the reporting period.
If an undertaking has the discretion to refinance (or roll over) an obligation for at least twelve months after the end of the reporting period, under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period.
EXAMPLE- refinancing after the end of the reporting period, but with an option
You need to refinance your long-term loan. You have an option to renew your facility. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February.
The long-term loan is shown as a non-current liability, as you had the refinancing option.
EXAMPLE- Classification of liability with roll-over facilities
Issue
If an obligation can be refinanced or rolled over at the discretion of the undertaking for at least twelve months after the date of the end of the reporting period under an existing loan facility, it shall be classified as non-current.
This rule applies even if the obligation would otherwise be due within a shorter period. However, when the undertaking has not the discretion to refinance or roll over the obligation (for example, there is no agreement to refinance), the potential to refinance is not considered and the obligation is classified as current.
What are the conditions under which an undertaking might classify borrowings to be repaid within the operating cycle as non-current liabilities?
Background
Undertaking A’s management has entered into a facility arrangement with a financial institution to ensure the availability of A’s bank financing over the long term.
The committed facility has a scheduled maturity and the lender is not able to cancel unilaterally. This facility does not expire within the next 12 months.
Solution
Undertaking A should classify the borrowing as a non-current liability.
The borrowing can be rolled over at the undertaking’s discretion and is not therefore part of its working capital.
Conversely, where an undertaking does not have the discretion to refinance its borrowings, amounts due should be classified as current liabilities.
When refinancing (or rolling over) the obligation is not at the discretion of the undertaking (there is no agreement to refinance), the obligation is classified as current.
When an undertaking breaches a covenant of a long-term loan agreement on, or before, the end of the reporting period, with the impact that the liability becomes payable on demand, the liability is classified as current.
This applies even if the lender has agreed, after the end of the reporting period, and before the approval of the financial statements for issue, not to demand payment, as a consequence of the breach.
EXAMPLE- amending a breach of covenant, after the end of the reporting period
You breach the terms of your long-term loan. It becomes payable on demand.
Your end of the reporting period is December, the lender agrees not to demand payment as a consequence of the breach in January, and you approve your financial statements in February.
The long-term loan is shown as a current liability: you were in breach at the end of the reporting period.
The liability is classified as current because, at the end of the reporting period, the undertaking does not have an unconditional right to defer its settlement for at least twelve months, after that date.
However, the liability is classified as non-current, if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the end of the reporting period, within which the undertaking can rectify the breach, and during which, the lender cannot demand immediate repayment.
(i) it is expected to be settled in normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the end of the reporting period; or
(iv) the undertaking does not have an unconditional right to defer settlement of the liability, for at least twelve months after the end of the reporting period.
All other liabilities shall be classified as non-current.
Some current liabilities, such as trade payables and some accruals for staff and other operating costs, are part of the working capital used in the normal operating cycle.
TRADE AND OTHER PAYABLES summary
What are trade and other payables?
Trade and other payables are current liabilities for which the amount to be settled is usually known rather than uncertain (as for provisions). Undertakings, almost without exception, carry some type of trade and other payables on their statement of financial position.
Items generally included in trade and other payables are: trade payables; amounts payable under statutory obligations such as social security obligations and payroll taxes.
These items are presented within the "Trade and other payables" line item on the face of the statement of financial position.
Current liabilities are those expected to be settled in the normal course of the undertaking’s operating cycle; due to be settled within twelve months of the date of the end of the reporting period; held primarily for the purpose of being traded; or those for which the undertaking does not have an unconditional right to defer settlement for at least twelve months after the date of the end of the reporting period.
Most trade and other payables fall within the definition of financial liabilities and are subject to the recognition and measurement rules that apply to those liabilities.
Initial recognition
An undertaking should recognise trade and other payables when it becomes a party to the contractual provisions of the instrument.
An undertaking’s obligations concerning trade and other payables are usually easily identified and the point of recognition is clear.
Most obligations are legally enforceable and arise under contractual arrangements. These include amounts owed for assets purchased or services obtained (trade creditors), and obligations to provide goods and services where an external party has paid in advance.
Obligations are often imposed by statute. An undertaking should recognise these obligations on the basis of notices and requests for payment from the relevant authority. Constructive obligations should be recognised on the basis of amounts promised to third parties.
An undertaking often incurs obligations in the form of financial and performance guarantees. For example, an undertaking may sell its receivables yet retain a portion of the credit risk in these receivables through guarantees.
The recognition of guarantees depends on their nature. Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be recognised as part of provisions or, when the recognition criteria are not met, disclosed as contingent liabilities.
Financial guarantees that provide for payments to be made in response to changes in a specified index such as a credit rating should be recognised as financial instruments.
Accrued expenses are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier.
The recognition of accrued expenses results directly from the recognition of expenses for items of goods and services consumed during the period. Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
Initial measurement
Initial measurement of trade and other payables is usually at fair value. The initial measurement of financial liabilities not at fair value through profit or loss includes transaction costs directly attributable to the acquisition or issue of the financial liability.
Initial fair value is established by reference to amounts agreed between the undertaking and the supplier and amounts invoiced from statutory authorities. Accrued expenses are measured at management’s estimate of the fair value of the goods and services received but not yet invoiced.
Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should initially be recognised at fair value.
Subsequent measurement
Items classified within trade and other payables are not usually re-measured, as the obligation is usually known with a high degree of certainty and its settlement is short-term.
Financial guarantees that provide for payments to be made if the debtor fails to make a payment when due should be re-measured at the higher of (i) the amount recognised under IAS 37 and (ii) the amount initially recognised (that is, fair value) less, where appropriate, cumulative amortisation recognised in accordance with IAS 18.
Derecognition
Derecognition occurs when the contractual obligation is cancelled, expired or discharged, for example through payment of the amount due, or through the counterparty forgiving the debt.
Presentation and disclosure
Trade and other payables should be presented as a separate line item on the face of the statement of financial position.
Such items are classified as current liabilities, even if they are due to be settled more than twelve months after the end of the reporting period.
The same normal operating cycle applies to the classification of assets and liabilities. When the undertaking’s normal operating cycle is not identifiable, it is assumed to be twelve months.
Examples of current liabilities are financial liabilities, classified as ‘held for trading’, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables.
EXAMPLE- Presentation of loan from parent
Issue
An undertaking shall present further sub-classifications of the line items presented in the statement of financial position. Those sub-classifications may be presented either on the face of the statement of financial position or in the notes, classified in a manner appropriate to the undertaking’s operations.
Should a parent, in its single-undertaking financial statements, present amounts due from a subsidiary on the face of its statement of financial position as an asset, and if so how should it be classified?
Background
A parent provides a loan to a subsidiary. Interest of 8% is paid annually. There is no specified repayment date; however, the loan is payable on demand.
Solution
Disclosure on the face of the statement of financial position is not mandatory, but it is best practice. IFRS require separate disclosure of amounts due from subsidiaries, but allow this to be presented in the notes rather than on the face of the statement of financial position.
The liability is current because the subsidiary does not have unconditional right to defer settlement of the liability. The parent, in its separate financial statements, should also classify the amount due from the subsidiary as a current asset.
Financial liabilities that provide financing on a long-term basis (not part of the working capital) and are not due for settlement within twelve months after the end of the reporting period, are non-current liabilities.
EXAMPLE- Classification and presentation of current liabilities
Issue
The following current liabilities should be disclosed on the face of the statement of financial position:
a) trade and other payables;
b) provisions;
c) financial liabilities (excluding trade and other payables and provisions); and
d) current income tax liabilities.
The following example highlights specific classes of current liabilities to be disclosed on the face of the statement of financial position, together with examples of items to be included under the headings.
Solution
a) Trade and other payables, including:
trade creditors;
accruals (for example, accruals for audit fees payable); and
social security taxes and other amounts, such as payroll taxes payable in respect of wages and salaries.
b) Provisions
Provisions for litigation, claims and assessments; and
Current portion of provisions for long term employee benefits such as jubilee payments.
c) Financial liabilities
Current portion of fixed term interest-bearing loans; and
Loans repayable on demand.
d) Current income tax liabilities, including:
corporate income taxes; and income taxes payable on dividends.
Presentation of provisions and other liabilities with current and non-current portion
Issue
How should management present the current and non-current portions of different types of provisions and liabilities in the undertaking’s statement of financial position?
Background
An undertaking has recognised the following liabilities in its statement of financial position:
a) warranty provisions;
b) provisions for environmental liabilities;
c) pension liabilities; and
d) deferred tax liabilities.
Solution
a) Warranty provisions - current or non-current liabilities
The classification will depend on the terms of the warranty. Warranties that guarantee product performance for a twelve-month period are classified as current liabilities. Conversely, warranties that guarantee product performance for an extended period are classified as non-current liabilities.
b) Provisions for environmental liabilities - non-current liabilities
This type of provision is unlikely to be part of an undertaking’s working capital. Management should therefore classify environmental provisions as non-current liabilities.
c) Pension liabilities - non-current liabilities
Considering the nature of these liabilities, management is often not able to reasonably determine the current and non-current portion reliably. It should therefore classify these liabilities as non-current liabilities.
d) Deferred tax liabilities - non-current liabilities
Management should present any deferred tax liabilities as non-current liabilities, even if the temporary differences giving rise to the liabilities are expected to reverse within 12 months.
The treatment of financial liabilities, such as bank loans is strict. The end of the reporting period is the key day by which everything must be in place. If refinancing is to take place, the end of the reporting period is the benchmark.
Failure to refinance by this date may require the undertaking to record a finance liability as current, even if it is being renegotiated to be repaid over a longer period.
This may have severe consequences, even prohibiting the financial statements to be prepared on a going-concern basis.
An undertaking classifies its financial liabilities as current, when they are due to be settled within twelve months after the end of the reporting period, even if:
(i) the original term was for a period longer than twelve months; and
(ii) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the end of the reporting period, and before the financial statements are approved for issue.
EXAMPLE- refinancing after the end of the reporting period
You need to refinance your long-term loan. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February.
The long-term loan is shown as a current liability, as it was not refinanced by the end of the reporting period.
If an undertaking has the discretion to refinance (or roll over) an obligation for at least twelve months after the end of the reporting period, under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period.
EXAMPLE- refinancing after the end of the reporting period, but with an option
You need to refinance your long-term loan. You have an option to renew your facility. Your end of the reporting period is December, you sign the refinancing in January and approve your financial statements in February.
The long-term loan is shown as a non-current liability, as you had the refinancing option.
EXAMPLE- Classification of liability with roll-over facilities
Issue
If an obligation can be refinanced or rolled over at the discretion of the undertaking for at least twelve months after the date of the end of the reporting period under an existing loan facility, it shall be classified as non-current.
This rule applies even if the obligation would otherwise be due within a shorter period. However, when the undertaking has not the discretion to refinance or roll over the obligation (for example, there is no agreement to refinance), the potential to refinance is not considered and the obligation is classified as current.
What are the conditions under which an undertaking might classify borrowings to be repaid within the operating cycle as non-current liabilities?
Background
Undertaking A’s management has entered into a facility arrangement with a financial institution to ensure the availability of A’s bank financing over the long term.
The committed facility has a scheduled maturity and the lender is not able to cancel unilaterally. This facility does not expire within the next 12 months.
Solution
Undertaking A should classify the borrowing as a non-current liability.
The borrowing can be rolled over at the undertaking’s discretion and is not therefore part of its working capital.
Conversely, where an undertaking does not have the discretion to refinance its borrowings, amounts due should be classified as current liabilities.
When refinancing (or rolling over) the obligation is not at the discretion of the undertaking (there is no agreement to refinance), the obligation is classified as current.
When an undertaking breaches a covenant of a long-term loan agreement on, or before, the end of the reporting period, with the impact that the liability becomes payable on demand, the liability is classified as current.
This applies even if the lender has agreed, after the end of the reporting period, and before the approval of the financial statements for issue, not to demand payment, as a consequence of the breach.
EXAMPLE- amending a breach of covenant, after the end of the reporting period
You breach the terms of your long-term loan. It becomes payable on demand.
Your end of the reporting period is December, the lender agrees not to demand payment as a consequence of the breach in January, and you approve your financial statements in February.
The long-term loan is shown as a current liability: you were in breach at the end of the reporting period.
The liability is classified as current because, at the end of the reporting period, the undertaking does not have an unconditional right to defer its settlement for at least twelve months, after that date.
However, the liability is classified as non-current, if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the end of the reporting period, within which the undertaking can rectify the breach, and during which, the lender cannot demand immediate repayment.
Current Assets
An asset shall be classified as current, when it satisfies any of the following criteria:
(i) it is expected to be converted to cash (or is intended for sale, or consumption) in the normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is expected to be converted to cash within twelve months, after the end of the reporting period; or
(iv) it is cash (or a cash equivalent, as defined in IAS 7), unless it is restricted from being exchanged (or used to settle a liability), for at least twelve months after the end of the reporting period.
EXAMPLE - Presentation of cash subject to restrictions over use
Issue
Should an undertaking include in its consolidated financial statements cash and cash equivalents, held by a subsidiary that is not available for use by other group undertakings?
Background
A subsidiary holds cash and cash equivalent balances with domestic banks. It operates in a country where there are exchange controls and the subsidiary is restricted from sending cash abroad to fellow subsidiaries and to the parent.
The amount of cash held is neither excessive nor short of the subsidiary’s operating needs.
Solution
The existence of currency restrictions in a foreign jurisdiction would not preclude the classification of the subsidiary’s cash and cash equivalent balance as a current asset in the consolidated financial statements.
The subsidiary needs the cash to meet its operating requirements, and will therefore use it freely.
The undertaking should, however, disclose the amount of cash and cash equivalents that is not available for use by the group [IAS7].
The disclosure should include a commentary that will help users understand the impact of these restrictions in the undertaking’s financial position and liquidity.
All other assets shall be classified as non-current.
IAS 1 uses the term ‘non-current’ to include tangible, intangible and financial assets of a long-term nature. It does not prohibit the use of alternative descriptions, if the meaning is clear.
The operating cycle is the time between the acquisition of assets for processing, and their conversion in cash. When the normal operating cycle is not clearly identifiable, it is assumed to be twelve months.
(i) it is expected to be converted to cash (or is intended for sale, or consumption) in the normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is expected to be converted to cash within twelve months, after the end of the reporting period; or
(iv) it is cash (or a cash equivalent, as defined in IAS 7), unless it is restricted from being exchanged (or used to settle a liability), for at least twelve months after the end of the reporting period.
EXAMPLE - Presentation of cash subject to restrictions over use
Issue
Should an undertaking include in its consolidated financial statements cash and cash equivalents, held by a subsidiary that is not available for use by other group undertakings?
Background
A subsidiary holds cash and cash equivalent balances with domestic banks. It operates in a country where there are exchange controls and the subsidiary is restricted from sending cash abroad to fellow subsidiaries and to the parent.
The amount of cash held is neither excessive nor short of the subsidiary’s operating needs.
Solution
The existence of currency restrictions in a foreign jurisdiction would not preclude the classification of the subsidiary’s cash and cash equivalent balance as a current asset in the consolidated financial statements.
The subsidiary needs the cash to meet its operating requirements, and will therefore use it freely.
The undertaking should, however, disclose the amount of cash and cash equivalents that is not available for use by the group [IAS7].
The disclosure should include a commentary that will help users understand the impact of these restrictions in the undertaking’s financial position and liquidity.
All other assets shall be classified as non-current.
IAS 1 uses the term ‘non-current’ to include tangible, intangible and financial assets of a long-term nature. It does not prohibit the use of alternative descriptions, if the meaning is clear.
The operating cycle is the time between the acquisition of assets for processing, and their conversion in cash. When the normal operating cycle is not clearly identifiable, it is assumed to be twelve months.
Identification of the Financial Statements
The financial statements shall be identified clearly, and distinguished from other information in the same document. Users must be able to distinguish information that is prepared using IFRSs, from other information that is not the subject of those requirements.
Survey of income statements IFRS News
April 2007
The financial statements of 2,800 companies were surveyed, specifically looking at the additional income measures companies included in their financial statements beyond the minimum required by IFRS.
The survey also examined how companies present these non-GAAP measures in their income statements.
“Investors tell us that additional income measures are useful and that they take
them into account when making investment decisions,” says Leandro van
Dam, PwC partner in the Netherlands and co-sponsor of the survey.
“They are also looking for non-GAAP measures that management uses to run the business. They want consistency of information over time and comparability among companies.” Debate on the use of non-GAAP measures is gathering interest.
Some highlights from the report are summarised below.
A bridge from old to IFRS
Companies have aligned their choice and presentation of non-GAAP measures under IFRS as much as possible with what they reported under national GAAP.
This has allowed users to compare non-GAAP measures calculated using IFRS recognition and measurement principles with the measures calculated on the previous basis.
No evidence of cherry-picking
Companies do not appear to have cherry-picked additional income measures to show their results in a more positive light; the overall trends (rise or fall) for the alternative income measures reported were similar to the trends for net profit under IFRS.
Companies generally met IFRS presentation requirements for the income statement.
Industry variations
Industry variations in EBITDA and similar measures are consistent between 2004 reporting under national GAAP and 2005 IFRS reporting. Companies already appear to be responding to investor demands for international comparability within industry sectors.
National trends are still strong
Countries that have historically reported certain non-GAAP measures still do so under IFRS; those that did not report specific non-GAAP measures did not start to do so.
International comparability of non-GAAP reporting in the first year of application was unlikely to arise spontaneously. Management had little opportunity to
compare reporting practices with their peers and limited experience of IFRS-related discussions with investors, regulators and other parties.
Many conferences and industry sessions focused on recognition and measurement and paid little attention to format requirements and options for additional line items in the income statement.
There was therefore was no real platform for development of market norms.
Companies may find the research useful in deciding what to communicate to the
market in next year’s IFRS financial statements.
“This research should enable management to look at what peers are doing,” says Leandro, “and consider whether current diversity of non-GAAP measurement and presentation holds any clues for better ways of communicating with investors in future.”
Download the PDF from pwc.com/ifrs
Each component of the financial statements shall be identified clearly. In addition, the following information shall be displayed prominently (and repeated when it is necessary), for a proper understanding of the information presented:
(i) the name of the reporting undertaking, and any change from the preceding end of the reporting period;
(ii) whether the financial statements cover the individual undertaking, or a group;
(iii) the date of the end of the reporting period, or the period covered by the financial statements, whichever is appropriate to that component of the financial statements;
(iv) the presentation currency,
(v) the level of rounding used in presenting amounts in the financial statements.
These requirements are normally met by presenting page headings, and abbreviated column headings, on each page of the financial statements. Judgement is required in determining the best presentation.
When the financial statements are presented electronically, separate pages are not always used; the above items are then presented frequently enough to ensure a proper understanding of the information.
Financial statements are often made more understandable by presenting information in thousands (or millions) of units of the presentation currency. This is acceptable if the level of rounding in presentation is disclosed, and material information is not omitted.
12. Frequency of Reporting
Financial statements shall be presented at least annually.
When the end of the reporting period changes, and the annual financial statements are presented for a period longer (or shorter) than one year, an undertaking shall disclose, (in addition to the period covered):
(i) the reason for using a longer (or shorter) period; and
(ii) the fact that comparative amounts for the financial statements are not entirely comparable.
EXAMPLE- change of end of the reporting period
Your firm has just been purchased by an investor, who wishes to change your year-end from June to December. Your first set of financial statements (under the new regime) will be for a 6 month period, and will not be comparable with prior periods. The above disclosures will need to be made.
Normally, financial statements are consistently prepared covering a one-year period. Some undertakings prefer to report for a 52-week period. IAS 1 does not preclude this practice, because the financial statements are unlikely to be materially different from those that would be presented for one year.
EXAMPLE-52-week period
You operate department stores. Your period is 52 weeks, so that you can end the period on a Sunday, and count inventory on a Monday.
13. Statement of financial position
Current/Non-current Distinction
An undertaking shall present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its statement of financial position, except when a presentation based on liquidity provides information that is more relevant.
When that exception applies, all assets and liabilities shall be presented broadly in order of liquidity.
EXAMPLE-Financial Institutions
Your firm is a financial institution, and you present your statement of financial position items broadly in order of liquidity (see IFRS 7 workbook).
For each asset and liability line item that combines amounts expected to be recovered (or settled)
no more than twelve months after the end of the reporting period, and
more than twelve months after the end of the reporting period,
an undertaking shall disclose the amount expected to be recovered (or settled) after more than twelve months.
When an undertaking supplies goods (or services) within a clearly identifiable operating cycle, separate classification of current and non-current assets (and liabilities) provides useful information, by distinguishing the net assets that are continuously circulating as working capital, from those used in long-term operations.
EXAMPLE-Current and non-current distinction based on operating cycle
Issue
An asset that satisfies any of the following criteria shall be classified as a current asset:
a) its realisation, sale or consumption is expected to occur in the undertaking’s normal operating cycle;
b) it is held for sale;
c) its realisation is expected to occur within twelve months after the date of the end of the reporting period; or
d) it is unrestricted cash or a cash equivalent.
Can an undertaking classify a receivable that it does not expect to realise within twelve months as a current asset in its statement of financial position?
Background
Undertaking A builds airplanes for national airlines. The average operating cycle is 15 months, based on the length of time it takes to build a plane. A’s management presents a classified balance sheet to distinguish its current and non-current assets and liabilities. The undertaking carries accounts receivable that it expects to realise in 15 months.
Solution
Yes, A should classify the receivable as a current asset, as it expects to realise the receivable in the normal course of its 15-month operating cycle.
The undertaking’s accounting policy note should describe the policy on classification of current and non-current items.
It also highlights assets that are expected to be converted into cash within the current operating cycle, and liabilities that are due for settlement within the same period.
An undertaking is permitted to present some of its assets and liabilities using a current/non-current classification, and others in order of liquidity, when this provides information that is more relevant.
The need for a mixed basis of presentation might arise when an undertaking has diverse operations.
Information about expected dates of conversion into cash of assets and liabilities is useful in assessing the liquidity, and solvency, of an undertaking. IFRS 7 requires disclosure of the maturity dates of financial assets, and financial liabilities.
Financial assets include trade and other receivables, and financial liabilities include trade and other payables.
Information on the expected date of recovery and settlement of non-monetary assets and liabilities, such as inventories and provisions, is also useful, whether or not assets and liabilities are classified as current or non-current.
An undertaking discloses the amount of inventories that are expected to be sold more than twelve months after the end of the reporting period.
Survey of income statements IFRS News
April 2007
The financial statements of 2,800 companies were surveyed, specifically looking at the additional income measures companies included in their financial statements beyond the minimum required by IFRS.
The survey also examined how companies present these non-GAAP measures in their income statements.
“Investors tell us that additional income measures are useful and that they take
them into account when making investment decisions,” says Leandro van
Dam, PwC partner in the Netherlands and co-sponsor of the survey.
“They are also looking for non-GAAP measures that management uses to run the business. They want consistency of information over time and comparability among companies.” Debate on the use of non-GAAP measures is gathering interest.
Some highlights from the report are summarised below.
A bridge from old to IFRS
Companies have aligned their choice and presentation of non-GAAP measures under IFRS as much as possible with what they reported under national GAAP.
This has allowed users to compare non-GAAP measures calculated using IFRS recognition and measurement principles with the measures calculated on the previous basis.
No evidence of cherry-picking
Companies do not appear to have cherry-picked additional income measures to show their results in a more positive light; the overall trends (rise or fall) for the alternative income measures reported were similar to the trends for net profit under IFRS.
Companies generally met IFRS presentation requirements for the income statement.
Industry variations
Industry variations in EBITDA and similar measures are consistent between 2004 reporting under national GAAP and 2005 IFRS reporting. Companies already appear to be responding to investor demands for international comparability within industry sectors.
National trends are still strong
Countries that have historically reported certain non-GAAP measures still do so under IFRS; those that did not report specific non-GAAP measures did not start to do so.
International comparability of non-GAAP reporting in the first year of application was unlikely to arise spontaneously. Management had little opportunity to
compare reporting practices with their peers and limited experience of IFRS-related discussions with investors, regulators and other parties.
Many conferences and industry sessions focused on recognition and measurement and paid little attention to format requirements and options for additional line items in the income statement.
There was therefore was no real platform for development of market norms.
Companies may find the research useful in deciding what to communicate to the
market in next year’s IFRS financial statements.
“This research should enable management to look at what peers are doing,” says Leandro, “and consider whether current diversity of non-GAAP measurement and presentation holds any clues for better ways of communicating with investors in future.”
Download the PDF from pwc.com/ifrs
Each component of the financial statements shall be identified clearly. In addition, the following information shall be displayed prominently (and repeated when it is necessary), for a proper understanding of the information presented:
(i) the name of the reporting undertaking, and any change from the preceding end of the reporting period;
(ii) whether the financial statements cover the individual undertaking, or a group;
(iii) the date of the end of the reporting period, or the period covered by the financial statements, whichever is appropriate to that component of the financial statements;
(iv) the presentation currency,
(v) the level of rounding used in presenting amounts in the financial statements.
These requirements are normally met by presenting page headings, and abbreviated column headings, on each page of the financial statements. Judgement is required in determining the best presentation.
When the financial statements are presented electronically, separate pages are not always used; the above items are then presented frequently enough to ensure a proper understanding of the information.
Financial statements are often made more understandable by presenting information in thousands (or millions) of units of the presentation currency. This is acceptable if the level of rounding in presentation is disclosed, and material information is not omitted.
12. Frequency of Reporting
Financial statements shall be presented at least annually.
When the end of the reporting period changes, and the annual financial statements are presented for a period longer (or shorter) than one year, an undertaking shall disclose, (in addition to the period covered):
(i) the reason for using a longer (or shorter) period; and
(ii) the fact that comparative amounts for the financial statements are not entirely comparable.
EXAMPLE- change of end of the reporting period
Your firm has just been purchased by an investor, who wishes to change your year-end from June to December. Your first set of financial statements (under the new regime) will be for a 6 month period, and will not be comparable with prior periods. The above disclosures will need to be made.
Normally, financial statements are consistently prepared covering a one-year period. Some undertakings prefer to report for a 52-week period. IAS 1 does not preclude this practice, because the financial statements are unlikely to be materially different from those that would be presented for one year.
EXAMPLE-52-week period
You operate department stores. Your period is 52 weeks, so that you can end the period on a Sunday, and count inventory on a Monday.
13. Statement of financial position
Current/Non-current Distinction
An undertaking shall present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of its statement of financial position, except when a presentation based on liquidity provides information that is more relevant.
When that exception applies, all assets and liabilities shall be presented broadly in order of liquidity.
EXAMPLE-Financial Institutions
Your firm is a financial institution, and you present your statement of financial position items broadly in order of liquidity (see IFRS 7 workbook).
For each asset and liability line item that combines amounts expected to be recovered (or settled)
no more than twelve months after the end of the reporting period, and
more than twelve months after the end of the reporting period,
an undertaking shall disclose the amount expected to be recovered (or settled) after more than twelve months.
When an undertaking supplies goods (or services) within a clearly identifiable operating cycle, separate classification of current and non-current assets (and liabilities) provides useful information, by distinguishing the net assets that are continuously circulating as working capital, from those used in long-term operations.
EXAMPLE-Current and non-current distinction based on operating cycle
Issue
An asset that satisfies any of the following criteria shall be classified as a current asset:
a) its realisation, sale or consumption is expected to occur in the undertaking’s normal operating cycle;
b) it is held for sale;
c) its realisation is expected to occur within twelve months after the date of the end of the reporting period; or
d) it is unrestricted cash or a cash equivalent.
Can an undertaking classify a receivable that it does not expect to realise within twelve months as a current asset in its statement of financial position?
Background
Undertaking A builds airplanes for national airlines. The average operating cycle is 15 months, based on the length of time it takes to build a plane. A’s management presents a classified balance sheet to distinguish its current and non-current assets and liabilities. The undertaking carries accounts receivable that it expects to realise in 15 months.
Solution
Yes, A should classify the receivable as a current asset, as it expects to realise the receivable in the normal course of its 15-month operating cycle.
The undertaking’s accounting policy note should describe the policy on classification of current and non-current items.
It also highlights assets that are expected to be converted into cash within the current operating cycle, and liabilities that are due for settlement within the same period.
An undertaking is permitted to present some of its assets and liabilities using a current/non-current classification, and others in order of liquidity, when this provides information that is more relevant.
The need for a mixed basis of presentation might arise when an undertaking has diverse operations.
Information about expected dates of conversion into cash of assets and liabilities is useful in assessing the liquidity, and solvency, of an undertaking. IFRS 7 requires disclosure of the maturity dates of financial assets, and financial liabilities.
Financial assets include trade and other receivables, and financial liabilities include trade and other payables.
Information on the expected date of recovery and settlement of non-monetary assets and liabilities, such as inventories and provisions, is also useful, whether or not assets and liabilities are classified as current or non-current.
An undertaking discloses the amount of inventories that are expected to be sold more than twelve months after the end of the reporting period.
General Review
The business and accounting knowledge of users is assumed to be reasonable, but they are not assumed to have a comprehensive of your business. This guides the level of detail and explanation that will be provided in the financial statements.
IAS 1 requires particular disclosures on the face of the statement of financial position, income statement, and statement of changes in equity, and requires disclosure of other line items either on the face of those statements, or in the notes. IAS 7 sets out requirements for the presentation of a cash flow statement.
Disclosures are made either on the face of the statement of financial position, income statement, statement of changes in equity or cash flow statement (whichever is relevant), or in the notes.
Structure and Content
Introduction
IAS 1 requires particular disclosures in the statement of financial position or of comprehensive income, in the separate income statement (if presented), or in the statement of changes in equity and requires disclosure of other line items either in those statements or in the notes.
IAS 1 requires particular disclosures on the face of the statement of financial position, income statement, and statement of changes in equity, and requires disclosure of other line items either on the face of those statements, or in the notes. IAS 7 sets out requirements for the presentation of a cash flow statement.
Disclosures are made either on the face of the statement of financial position, income statement, statement of changes in equity or cash flow statement (whichever is relevant), or in the notes.
Structure and Content
Introduction
IAS 1 requires particular disclosures in the statement of financial position or of comprehensive income, in the separate income statement (if presented), or in the statement of changes in equity and requires disclosure of other line items either in those statements or in the notes.
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