IFRS Essentials E-Book

Dieter Christian

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Regulatory Reporting
• Sprache: Englisch

Seitenzahl: 900

Veröffentlichungsjahr: 2013

Beschreibung

Gain a deeper understanding of financial reporting under IFRS through clear explanations and extensive practical examples.

IFRS can be a complex topic, and books on the subject often tackle its intricacies through dense explanation across thousands of pages. Others seek to provide an overview of IFRS and these, while useful for the general reader, lack the depth required by practitioners and students.

IFRS Essentials strikes a balance between the two extremes, offering concise interpretation of the crucial facts supported by a wealth of examples. Problems and their solutions are demonstrated in a manner which is short, straightforward and simple to understand, avoiding complex language; jargon and redundant detail.

This book is suitable for students and lecturers at universities and other educational institutions, auditing and accounting trainees, and employees in the area of accounting and auditing who seek to develop their practical skills and deepen their knowledge of IFRS.

Leseprobe

Contents

Cover

Title Page

Copyright

Preface

Abbreviations

The Conceptual Framework for Financial Reporting

1 Introduction

2 The objective of general purpose financial reporting

3 Going Concern

4 Qualitative Characteristics of Useful Financial Information

5 The cost constraint on useful financial reporting

6 The elements of financial statements

7 Examples with solutions

IAS 1 Presentation of Financial Statements

1 Introduction and scope

2 Going concern

3 Fair presentation of the financial statements and compliance with IFRSs

4 General principles relating to presentation

5 Components of the financial statements

6 Structure and content of the components of the financial statements

7 Examples with solutions

IAS 2 Inventories

1 Scope

2 Measurement

3 Presentation and derecognition

4 Examples with solutions

IAS 7 Statement of Cash Flows

1 Introduction

2 Preparation of the statement of cash flows

3 Special topics

4 Consolidated statements of cash flows

5 Examples with solutions

IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors

1 Introduction

2 Accounting policies

3 Changes in accounting estimates

4 Correction of prior period errors

5 Examples with solutions

IAS 10 Events after the Reporting Period

1 Overview

2 Examples with solutions

IAS 11 Construction Contracts

1 Introduction

2 Contract revenue

3 Contract costs

4 Percentage of completion method

5 When the outcome of a contract cannot be estimated reliably

6 Examples with solutions

IAS 12 Income Taxes

1 Introduction

2 Current tax

3 Deferred tax

4 Tax (or Tax Rate) Reconciliation

5 Examples with solutions

IAS 16 Property, Plant, and Equipment

1 Introduction

2 Recognition

3 Measurement at recognition

4 Measurement after recognition

5 Derecognition

6 Examples with solutions

IAS 17 Leases

1 Introduction and scope

2 Definitions relating to time

3 Classification of leases as finance leases or operating leases

4 Accounting of leases by lessees

5 Accounting of leases by lessors

6 Sale and leaseback transactions

7 Examples with solutions

IAS 18 Revenue

1 Introduction and scope

2 Measurement of revenue

3 Sale of goods

4 Rendering of services

5 Interest, royalties, and dividends

6 Multiple element transactions and linked transactions

7 Examples with solutions

IAS 19 Employee Benefits and IAS 26 Accounting and Reporting by Retirement Benefit Plans

1 Introduction

2 Financial reporting without early application of the amendments to IAS 19 issued in June 2011

3 The amendments to IAS 19 issued in June 2011

IAS 20 Government Grants

1 Introduction and scope

2 Recognition and measurement

3 Presentation

4 Repayment of Government Grants

5 Examples with solutions

IAS 21 The Effects of Changes in Foreign Exchange Rates

1 Scope

2 Monetary vs. non-monetary items

3 Translation of foreign currency transactions

4 Translation of financial statements of foreign operations when preparing the consolidated financial statements

5 Examples with solutions

IAS 23 Borrowing Costs

1 Introduction

2 Specific and general borrowings

3 Period of capitalization

4 Examples with solutions

IAS 24 Related Party Disclosures

1 Introduction

2 Related parties and relationships with them

3 Disclosures

4 Application of IAS 24 in the consolidated financial statements

5 Examples with solutions

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 (2008) Consolidated and Separate Financial Statements, IAS 27 (2011) Separate Financial Statements, and IFRS 10 (2011) Consolidated Financial Statements

1 Introduction

2 Financial reporting without early application of IFRS 10 and IAS 27 (2011)

3 IFRS 10 (issued in May 2011)

4 The new version of IAS 27 (issued in May 2011)

IAS 28 Investments in Associates and IAS 28 (2011) Investments in Associates and Joint Ventures

1 Introduction

2 Financial reporting without early application of the amendments to IAS 28 issued in May 2011

3 The amendments to IAS 28 issued in May 2011

IAS 29 Financial Reporting in Hyperinflationary Economies

1 Introduction

2 Application of IAS 29 relating to foreign operationsthe “7-step-approach”

3 Reporting period in which an entity identifies hyperinflation when the currency was not hyperinflationary in the prior period

4 Example with solution

IAS 31 Interests in Joint Ventures and IFRS 11 Joint Arrangements

1 Introduction

2 IAS 31 “Interests in Joint Ventures”

3 IFRS 11 “Joint Arrangements” (issued in May 2011)

IAS 32 Financial InstrumentsPresentation

1 The term “financial instrument”

2 Scope

3 Differentiation between equity and liabilities

4 Accounting for a convertible bond after recognition by the issuer

5 Treasury shares

6 Costs of an equity transaction

7 Offsetting

8 Examples with solutions

IAS 33 EARNINGS PER SHARE

1 Introduction and scope

2 Ordinary shares and potential ordinary shares

3 Basic earnings per share

4 Diluted earnings per share

5 Presentation and disclosure

6 Examples with solutions

IAS 34 Interim Financial Reporting

1 Introduction

2 Content of an interim financial report

3 Materiality

4 Recognition and measurement

5 Examples with solutions

IAS 36 Impairment of Assets

1 Introduction and scope of IAS 36

2 When to test for impairment

3 When to reverse an impairment loss

4 Determining the recoverable amount for an individual asset or for an asset's CGU?

5 Determining the recoverable amount

6 Determining the carrying amount of a CGU

7 Goodwill

8 Corporate assets

9 Recognizing and reversing an impairment loss

10 Non-controlling interests

11 Examples with solutions

IAS 37 Provisions, Contingent Liabilities, and Contingent Assets

1 Scope

2 Definition and recognition of provisions

3 Contingent liabilities

4 Contingent assets

5 Measurement

6 Reimbursements

7 Changes in provisions

8 Specific issues

9 Examples with solutions

IAS 38 Intangible Assets

1 Scope of IAS 38

2 The Term “Intangible Asset”

3 Recognition and Initial Measurement

4 Further prohibitions of capitalization

5 Measurement after recognition

6 Derecognition

7 Examples with solutions

IAS 39 Financial InstrumentsRecognition and Measurement

IAS 40 Investment Property

1 The concept of “investment property”

2 Recognition

3 Measurement at recognition

4 Measurement after recognition

5 Derecognition

6 Presentation

7 Examples with solutions

IAS 41 Agriculture

1 Introduction and scope

2 Recognition

3 Measurement

4 Government grants

5 Examples with solutions

IFRS 1 First-time Adoption of International Financial Reporting Standards

1. Introduction and Scope

2 Recognition and Measurement

3 Presentation and Disclosure

4 Examples with Solutions

IFRS 2 Share-based Payment

1 A General Introduction to Employee Share Options

2 Scope of Ifrs 2

3 The Accounting of Employee Share Options

4 Examples with Solutions

IFRS 3 Business Combinations

1 Introduction and Scope

2 Acquisition of Shares vs. Acquisition of the Individual Assets

3 Identifying the Acquirer

4 Acquisition Date

5 Acquisition-related Costs

6 Accounting for a Business Combination on the Acquisition Date

7 Subsequent measurement and accounting

8 Deferred tax

9 Entries necessary in order to prepare the consolidated financial statements

10 Determining what is part of the business combination transaction

11 Examples with solutions

IFRS 4 Insurance Contracts

1 Introduction and scope

2 Insurance Contracts, Insurance Risk, and the Scope of IFRS 4

3 Financial reporting for insurance contracts

4 Example with solution

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

1 Introduction and overview

2 Scope

3 Non-current assets and disposal groups held for sale

4 Presentation of discontinued operations

5 Examples with solutions

IFRS 6 Exploration for and Evaluation of Mineral Resources

1 Introduction and scope

2 Financial reporting

3 Stripping costs in the production phase of a surface mine

4 Example with solution

IFRS 7 Financial InstrumentsDisclosures

1 Introduction

2 Significance of financial instruments for financial position and performance

3 Nature and extent of risks arising from financial instruments

4 Transfers of financial assets

5 Examples with solutions

IFRS 8 Operating Segments

1 Introduction

2 Scope

3 Operating Segments and Chief Operating Decision Maker

4 Reportable Segments

5 Segment disclosures

6 Entity-wide disclosures

7 Examples with solutions

IFRS 9 Financial Instruments and IAS 39 Financial InstrumentsRecognition and Measurement

1 Introduction

2 Financial instruments accounting according to IFRS 9 (as issued in 2010) and its consequential amendments to IAS 39

3 Financial instruments accounting prior to IFRS 9

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

1 Introduction

2 The term “structured entity”

3 The individual disclosure requirements of IFRS 12

4 Examples with solutions

IFRS 13 Fair Value Measurement

1 Introduction

2 Scope

3 The measurement requirements of IFRS 13

4 Illustration of the application of selected valuation techniques

5 Examples with solutions

Index

This edition first published 2013 © 2013 Dieter Christian and Norbert Lüdenbach

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Library of Congress Cataloging-in-Publication Data

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-49471-4 (paperback) ISBN 978-1-118-50134-4 (ebk) ISBN 978-1-118-50138-2 (ebk) ISBN 978-1-118-50137-5 (ebk)

PREFACE

There are several IFRS commentaries that exceed several thousands of pages. The reading and utilization of such commentaries requires the investment of large amounts of time as well as previous knowledge to be able to understand and apply the information. Such publications are of particular relevance for experts. However, their content goes far beyond the needs of students and most readers. Alternatively, the IFRS book market also includes books that promise to convey an understanding of IFRS in several days. These books do not and cannot have the depth that many readers need.

Consequently, the authors have aimed at striking a balance between the two: this book does not include every single detail because such an approach would overload the book with information not relevant for most readers. Therefore, this book is not an encyclopedia. However, it does convey an understanding of IFRS that gives students and readers an in-depth introduction to the topics. It illustrates the essentials of IFRS relevant to the audience described above.

The workbook is characterized by a balanced ratio of “theory” (explanation of the rules) and “practice” (illustration of the application of the rules by means of examples). It aims to capture problems and their solutions by using explanations that are short, simple, and easy to understand. Obscure language and incomplete illustrations are avoided.

The book can be used by lecturers at universities and other educational institutions. Students as well as auditing trainees will gain access into IFRS in a fast and comprehensive manner. However, the book is also suitable, among others, for employees in the areas of accounting and auditing in order to develop their skills and deepen their knowledge of IFRS. Due to the extensive explanations of the rules and solutions in each of the examples, the book is also suitable for self-study.

The German edition of the book can be ordered at www.nwb.de.

Finally, we would like to thank Ms Kathryn Crotzer for the linguistic review of the entire book.

Vienna and Düsseldorf, June 2012 Dieter Christian and Norbert Lüdenbach

ABBREVIATIONS

AGApplication Guidance (for an accounting standard)AICPAAmerican Institute of Certified Public AccountantsAPBAccounting Principles Board (of the AICPA, predecessor of the FASB)BCBasis for Conclusions (for an accounting standard)bpBasis pointsCADCanadian dollarCAPMCapital asset pricing modelCEOChief executive officerCFOChief financial officerCGU(s)Cash-generating unit(s)CNYChinese yuan renminbiCODMChief operating decision makerCPIConsumer price indexCrCredit recordCUCurrency unit(s)DrDebit recordEBITEarnings before interest and taxesEBITDAEarnings before interest, taxes, depreciation, and amortizationEDExposure DraftEDPElectronic data processinge.g.Exempli gratia (for example)etc.Et ceteraEUEuropean UnionFConceptual FrameworkFASBFinancial Accounting Standards Board in the USFIFOFirst-in, first-outGAAPGenerally accepted accounting principles/practicesiInterest rateIAS(s)International Accounting Standard(s)IASBInternational Accounting Standards BoardICAEWInstitute of Chartered Accountants in England and Walesi.e.Id est (that is)IEIllustrative Examples (for an accounting standard)IFRICInternational Financial Reporting Interpretations CommitteeIFRS(s)International Financial Reporting Standard(s)IGImplementation Guidance (for an accounting standard)INIntroduction (for an accounting standard)JPYJapanese yenmMillionNCINon-controlling interest(s)OBsee Section 2 of the first chapter (“The objective of general purpose financial reporting”) on the Conceptual FrameworkOCIOther comprehensive incomep.Pagep.a.Per annumP/LProfit or lossPiRPraxis der internationalen Rechnungslegung (IFRS journal in German language)PoC-methodPercentage of completion methodPPIProducer price indexPVIFAPresent value interest factor of annuityQCChapter 3 (“Qualitative characteristics of useful financial information”) of the Conceptual FrameworkROIReturn on investmentSAR(s)Share appreciation right(s)SICStanding Interpretations CommitteeSPE(s)Special purpose entity (entities)tTax rateULUseful life (for tax purposes)USUnited States of AmericaUSAUnited States of Americavs.VersusWACCWeighted average cost of capitalWPIWholesale price index

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

1 INTRODUCTION

The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users (Conceptual Framework, Section “Purpose and status”). The relationship between the Conceptual Framework and individual IFRSs can be described as follows.

In the absence of regulation, management has to develop an accounting policy. That accounting policy has to be compatible with the Conceptual Framework if there are no requirements in IFRSs which deal with similar and related issues (IAS 8.11).In a limited number of cases, there may be a conflict between the Conceptual Framework and the requirements of an IFRS. In such cases, the requirements of the IFRS prevail over those of the Conceptual Framework (Conceptual Framework, Section “Purpose and status”).

2 THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity (e.g. providing loans to the entity or buying equity instruments of the entity) (OB2).

Existing and potential investors, lenders, and other creditors are the primary users to whom general purpose financial reports are directed (OB5). They require useful information in order to be able to assess the future cash flows of the entity they are evaluating. Normally, general purpose financial reports are not primarily prepared for use by management, regulators or other members of the public, although they may also find those reports useful (OB9-OB10).

General purpose financial reports are not designed to show the value of a reporting entity. Instead, they help the primary users to estimate such value (OB7).

Changes in the reporting entity's economic resources and claims against the entity result from that entity's financial performance and from other events or transactions such as issuing debt or equity instruments. To properly assess the entity's future cash flow prospects, users need to be able to distinguish between both of these changes (OB15).

Accrual accounting is applied when preparing the financial statements. Accrual accounting depicts the effects of transactions and other events and circumstances on the reporting entity's economic resources and claims against the entity in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period (OB17). However, the statement of cash flows is not prepared on an accrual basis (IAS 7).

3 GOING CONCERN

The financial statements are normally prepared on the assumption that the entity is a going concern and will continue in operation for the foreseeable future. Thus, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. However, if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed (F.4.1).

4 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

4.1 Introduction

The objective of general purpose financial reporting (see Section 2) is a very broad concept. Consequently, the IASB provides guidance on how to make the judgments necessary to achieve that overall objective. The qualitative characteristics of useful financial information described subsequently identify the types of information that are likely to be most useful to the existing and potential investors, lenders, and other creditors for making decisions about the reporting entity on the basis of information in its financial report (QC1). The following chart represents an overview of the qualitative characteristics.1

4.2 Fundamental Qualitative Characteristics

Financial information must be both relevant and faithfully represented if it is to be useful (QC4 and QC17).

4.2.1 Relevance

Financial information is relevant if it is capable of making a difference in the decisions made by users (QC6). Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value, or both (QC7).

Predictive value means that the financial information can be used as an input to processes employed by users to predict future outcomes. Financial information need not be a prediction or forecast itself in order to have predictive value. Instead, financial information with predictive value is employed by users in making their own predictions (QC8). Confirmatory value means that the financial information provides feedback about (i.e. confirms or changes) previous evaluations (QC9).

The predictive value and confirmatory value are interrelated. Financial information that has predictive value often also has confirmatory value (QC10).

Financial information about a specific reporting entity is material if omitting it or misstating it could influence the decisions of users. In other words, materiality is an entity-specific aspect of relevance based on the magnitude or nature, or both, of the items to which the information relates in the context of an individual entity's financial report. Hence, the IASB cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation (QC11).

4.2.2 Faithful Representation

A faithful representation of economic phenomena would have three characteristics. It would be complete, neutral, and free from error. The IASB intends to maximize those qualities to the extent possible (QC12).

A complete depiction includes all information necessary for a user to understand the economic phenomenon being depicted. That information includes the necessary numerical information, descriptions, and explanations (QC13).

A neutral depiction is without bias in the selection or presentation of information. A neutral depiction is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated in order to increase the probability that the information will be received favorably or unfavorably by users (QC14).

Free from error means that there are no errors or omissions in the description of an economic phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. Nevertheless, free from error does not mean perfectly accurate in all respects. For example, there is always some uncertainty when estimating an unobservable price or value (QC15).

Faithful representation excludes prudence because it was considered to be in conflict with neutrality (FBC3.19 and BC3.27–BC3.28).

In the Conceptual Framework, substance over form does not represent a separate component of faithful representation because it would be redundant. This is because representing a legal form that differs from the economic substance of the underlying economic phenomenon could not result in a faithful representation. Consequently, faithful representation implies that financial information represents the substance of an economic phenomenon rather than merely representing its legal form (FBC3.19 and BC3.26). This means that substance over form is an important principle in IFRS. The following are examples for applying the principle of substance over form with regard to the issue of revenue recognition when selling goods.

The assessment of when to recognize revenue is based on the transfer of beneficial ownership and not on the transfer of legal title or the passing of possession (IAS 18.15). For example, when goods are sold under retention of title, the seller recognizes revenue when the significant risks and rewards of ownership have been transferred, the seller retains neither effective control nor continuing managerial involvement to the degree usually associated with ownership, and the general criteria (the revenue and the costs can be measured reliably and it is probable that the economic benefits will flow to the seller) are met (IAS 18.14). This means that revenue is recognized by the seller and the goods are recognized by the buyer when beneficial ownership is transferred.In an agency relationship, an agent may sell goods of the principal in his own name. The agent receives a commission from the principal as consideration. In the agent's statement of comprehensive income, the amounts collected by the agent on behalf of the principal do not represent revenue. Instead, revenue of the agent is the amount of commission (IAS 18.8). This procedure results from the application of the principle “substance over form.” Moreover, the agent does not recognize the goods received from the principal in his statement of financial position because beneficial ownership is not transferred to the agent. The principal recognizes revenue and derecognizes the goods when he loses beneficial ownership as a result of the sale of the goods to a third party (IAS 18.IE2c and IAS 2.34).In an agency relationship in which an agent sells goods of his principal, the accounting treatment described above applies. However, in some cases determining whether an entity is acting as a principal or as an agent is not straightforward. That determination requires judgment and consideration of all relevant facts and circumstances. An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of the goods. Features that indicate that an entity is acting as a principal include (IAS 18.IE21): The entity has the primary responsibility for fulfilling the order, for example by being responsible for the acceptability of the goods.The entity has inventory risk before or after the customer order, during shipping or on return.The entity has latitude in establishing prices, either directly or indirectly (e.g. by providing additional goods or services).The entity bears the customer's credit risk for the amount receivable from the customer.

One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined (being either a fixed fee per transaction or a stated percentage of the amount billed to the customer).

4.3 Enhancing Qualitative Characteristics

The enhancing qualitative characteristics enhance the usefulness of information that is relevant and faithfully represented. However, they cannot make information useful if that information is irrelevant or not faithfully represented. They may also help to determine which of two ways should be used to depict an economic phenomenon if both are considered equally relevant and faithfully represented (QC19 and QC33).

Enhancing qualitative characteristics should be maximized to the extent possible. However, one enhancing qualitative characteristic may have to be diminished in order to maximize another qualitative characteristic (QC33–QC34).

4.3.1 Comparability

Information about a reporting entity is more useful if it can be compared with similar information about the same entity for another period or another date and with similar information about other entities (QC20).

Consistency, although related to comparability, is not the same. Consistency refers to the use of the same methods for the same items, either in a single period across entities or from period to period, within the reporting entity. Comparability is the goal whereas consistency helps to achieve that goal (QC22).

The IASB also notes that permitting alternative accounting methods for the same economic phenomenon diminishes comparability (QC25).

4.3.2 Verifiability

Verifiability means that different knowledgeable and independent observers could reach consensus although not necessarily complete agreement that a particular depiction constitutes a faithful representation (QC26).

Quantified information need not be a single point estimate in order to be verifiable. A range of possible amounts and the related probabilities can also be verified (QC26).

It may not be possible to verify some explanations and forward-looking information until a future period, if at all. To help users decide whether they want to use that information, it is normally necessary to disclose the underlying assumptions, the methods of compiling the information and other factors, and circumstances that support the information (QC28).

4.3.3 Timeliness

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Normally, the older the information is the less useful it is (QC29).

4.3.4 Understandability

Information is made understandable by classifying, characterizing and presenting it clearly and concisely (QC30).

Financial reports are prepared for users who have a reasonable knowledge of business and economic activities and who review and analyze the financial information diligently. Sometimes even well-informed and diligent users may need to seek the aid of an adviser to understand information about complex phenomena (QC32).

5 THE COST CONSTRAINT ON USEFUL FINANCIAL REPORTING

Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting information imposes costs and it is important that those costs are justified by the benefits of reporting that information (QC35). Hence, when applying the cost constraint in developing an IFRS, the IASB assesses whether the benefits of reporting particular information are likely to justify the costs incurred to provide and use that information (QC38).

6 THE ELEMENTS OF FINANCIAL STATEMENTS

6.1 Definitions

The elements directly related to the measurement of financial position are defined as follows in the Conceptual Framework (F.4.4):

An asset is a resource which is controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.A liability is a present obligation of the entity that arises from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Assets and liabilities (as defined above) are not always recognized in the statement of financial position. This is because recognition in the statement of financial position requires that the recognition criteria (see Section 6.2) are met (F.4.5).

Furthermore, the elements of performance are defined in the Conceptual Framework as follows (F.4.25):

Income encompasses increases in economic benefits during the period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.Expenses are decreases in economic benefits during the period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

Income and expenses (as defined above) are not always recognized in the statement of comprehensive income. This is because recognition in the statement of comprehensive income requires that the recognition criteria (see Section 6.2) are met (F.4.26).

Income encompasses both gains (e.g. from the disposal of non-current assets) and revenue (e.g. from the sale of merchandise). Similarly, expenses encompass losses as well as other expenses (F.4.29–4.35).

6.2 Recognition

Recognition is the process of incorporating an element (see Section 6.1) in the statement of financial position or in the statement of comprehensive income (F.4.37).

An asset is recognized in the statement of financial position when it is probable that the future economic benefits associated with the asset will flow to the entity and the asset has a cost or value that can be measured reliably (F.4.44).

A liability is recognized in the statement of financial position when it is probable that an outflow of resources which embody economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably (F.4.46).

The so-called matching principle applies to the recognition of income and expenses in the statement of comprehensive income. Expenses are recognized in the statement of comprehensive income on the basis of a direct association between the costs incurred and the earning of specific items of income. This means that expenses and income that result directly and jointly from the same transactions or other events are recognized simultaneously or combined. For example, the costs of goods sold are recognized at the same time as the income derived from the sale of the goods. However, the application of the matching principle does not allow the recognition of items in the statement of financial position that do not meet the definition of assets or liabilities (F.4.50).

6.3 Measurement

The measurement of the items recognized in the statement of financial position items is defined in the individual standards. The description of different types of measurement in F.4.55 is of no importance in practice.

7 EXAMPLES WITH SOLUTIONS

Example 1

Relevance: Predictive value and confirmatory value

Entity E discloses revenue information for 01 in its financial statements as at Dec 31, 01.

Required

Assess whether E's revenue information is relevant within the meaning of the Conceptual Framework.

Hints for solution

In particular Section 4.2.1.

Solution

Predictive value means that the financial information can be used as an input to processes employed by users to predict future outcomes. Financial information need not be a prediction or forecast itself in order to have predictive value. Instead, financial information with predictive value is employed by users in making their own predictions. E's revenue information for the current period (01) can be used as the basis for predicting revenues in future periods. Consequently, it has predictive value (QC8 and QC10).

Confirmatory value means that the financial information provides feedback about (i.e. confirms or changes) previous evaluations (QC9). E's revenue information for the current period (01) can be compared with revenue predictions for 01 that were made in past periods. Hence, it also has confirmatory value (QC9–QC10).

Financial information is relevant if it has predictive value, confirmatory value or both (QC6–QC7). Since E's revenue information has predictive value as well as confirmatory value, it is relevant within the meaning of the Conceptual Framework.

Example 2

Substance over form – retention of title

On Dec 31, 01, wholesaler W delivers merchandise under retention of title to retailer R. On that date, the significant risks and rewards of ownership are transferred. W retains neither effective control nor continuing managerial involvement to the degree usually associated with ownership. The carrying amount of the merchandise in W's statement of financial position is CU 4. They are sold for CU 5.

Required

Prepare all necessary entries in the financial statements as at Dec 31, 01 of (a) W and (b) R.

Hints for solution

In particular Section 4.2.2.

Solution

General aspects

Irrespective of the retention of title, beneficial ownership is transferred from W to R on Dec 31, 01. This is because the significant risks and rewards of ownership have been transferred and W retains neither effective control nor continuing managerial involvement to the degree usually associated with ownership. Moreover, it can be assumed that the criterion “probability of the inflow of economic benefits” is met because there are no indications to the contrary. In addition, it is obvious that the revenue and the costs can be measured reliably (IAS 18.14).

(a) W's perspective

On Dec 31, 01, W loses beneficial ownership. Therefore, the criteria for revenue recognition are met. The carrying amount of the merchandise sold has to be recognized as an expense in the period in which the related revenue is recognized, i.e. in 01 (IAS 2.34):

(b) R's perspective

R recognizes the merchandise in its statement of financial position when obtaining beneficial ownership:

Example 3

Determining whether the entity is acting as a principal or as an agent

Entity E operates an internet business. E's customers pay via credit card. After a credit card check, the order is automatically sent to producer P who immediately sends the goods to the final customer.

E is responsible for any defects of P's products to the final customers. However, E and P have stipulated that all claims of final customers are forwarded to and resolved by P at P's cost.

E receives commission of 10% of the amount billed to the final customer for each sale. The selling prices and the conditions of sales are determined by P alone.

On Dec 07, 01, E sells goods to the final customer in the amount of CU 50. All payments are carried out on the same day.

Required

Assess whether E is acting as a principal or as an agent and prepare all necessary entries in E's financial statements as at Dec 31, 01.

Hints for solution

In particular Section 4.2.2.

Solution

E considers the following criteria when assessing whether it acts as a principal or as an agent (IAS 18.IE21):

E is responsible for any defects of P's products to the final customers. However, E and P have stipulated that all claims of final customers are forwarded to and resolved by P at P's cost. This means that, in fact (i.e. when applying the principle “substance over form”), E does not have any obligations with regard to defective goods.E has no inventory risk, i.e. no risk of a decline in value of the goods.The selling prices and the conditions of the sales are determined by P alone. Hence, E has no latitude in establishing prices.The amount that E earns is predetermined, being a stated percentage of the amount billed to the final customer.Since the final customers have to pay via credit card, E does not bear the customers' credit risk.

According to the characteristics of E's business, E is acting as an agent. Consequently, E's revenue is the amount of commission:

Example 4

Is recognition of an intangible asset in the statement of financial position appropriate?

In Jun 01, entity E spent CU 100 for employee training. E's management believes that its employees will make a more competent impression on E's clients as a result of the training which will then increase E's revenue.

Required

Assess whether the expenses for employee training have to be recognized as an intangible asset in E's statement of financial position. In doing so, also discuss the impact of the matching principle (F.4.50).

Hints for solution

In particular Sections 6.1 and 6.2.

Solution

Considering the matching principle (F.4.50) would suggest the following procedure: the expense of CU 100 is at first recognized as an intangible asset in E's statement of financial position. It affects profit or loss in the same periods in which the related increases in revenue occur. According to that procedure, the increases in revenue would be recognized in profit or loss in the same periods as the training costs that are necessary for creating the higher revenue.

However, the application of the matching principle does not allow the recognition of items in the statement of financial position that do not meet the definition of assets or liabilities (F.4.50), or of items that are assets but do not meet the recognition criteria.

Consequently, the procedure described above (capitalization of the training costs initially and subsequent recognition in profit or loss when the related increases in revenue occur) cannot be applied because the training costs do not represent an intangible asset that meets the recognition criteria (IAS 38.69b). Consequently, they are recognized in profit or loss in Jun 01.

1See KPMG, Briefing Sheet, Conceptual Framework for Financial Reporting: Chapters 1 and 3, October 2010, Issue 213.

IAS 1 PRESENTATION OF FINANCIAL STATEMENTS

1 INTRODUCTION AND SCOPE

IAS 1 primarily addresses the presentation of financial statements and can be divided into three large areas:

General guidelines going beyond presentation issues (e.g. going concern).General principles relating to presentation (e.g. offsetting, consistency of presentation, and comparative information).Structure and content of the financial statements and most of its components (statement of financial position, statement of comprehensive income, separate income statement, statement of changes in equity, and notes).

With regard to recognition and measurement, IAS 1 refers to other IFRSs (IAS 1.3).

2 GOING CONCERN

When preparing financial statements, management has to make an assessment of the entity's ability to continue as a going concern. Financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern, those uncertainties have to be disclosed. When financial statements are not prepared on a going concern basis, that fact has to be disclosed, together with the basis on which the financial statements were prepared and the reason why the entity is not regarded as a going concern. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, 12 months from the end of the reporting period (IAS 1.25–1.26).

3 FAIR PRESENTATION OF THE FINANCIAL STATEMENTS AND COMPLIANCE WITH IFRSS

Financial statements have to present fairly the financial position, financial performance, and cash flows of an entity. It is generally presumed that the application of IFRSs, with additional disclosure when necessary, results in financial statements that achieve such fair presentation (IAS 1.15).

In extremely rare circumstances, compliance with a requirement in an IFRS may conflict with the principle of fair presentation. In such a case, it is generally necessary to depart from that requirement (overriding principle) (IAS 1.19). In the case of such a departure, it is necessary to disclose, among others, how the assets, profit or loss, etc. would have been reported in complying with the requirement (IAS 1.20d). In practice, the overriding principle is hardly ever applied.

An entity whose financial statements comply with IFRSs has to disclose an explicit and unreserved statement of such compliance in the notes (statement of compliance). Disclosing such a statement requires that the entity has complied with all the requirements of IFRSs (IAS 1.16).

4 GENERAL PRINCIPLES RELATING TO PRESENTATION

4.1 Materiality and Aggregation

Items of a dissimilar nature or function have to be presented separately, unless they are immaterial. The materiality threshold that applies to the notes is generally lower than the threshold that applies to the other components of the financial statements. This means, for example, that items which are not itemized in the statement of financial position because they are immaterial in that statement may have to be shown in the notes (IAS 1.29–1.31).

4.2 Offsetting

Offsetting is generally prohibited (IAS 1.32). This means that in general an entity cannot offset assets and liabilities, or income and expenses. However, in certain situations, offsetting may be required or permitted by an IFRS. Regarding the separate income statement or the single statement of comprehensive income, the scope of the prohibition to offset is not straightforward.

4.3 Frequency of Reporting

The financial statements (including comparative information) have to be presented at least annually, i.e. the normal reporting period is 12 months. When an entity changes its balance sheet date (e.g. from Dec 31 to Mar 31), the transition period can be longer or shorter than one year (IAS 1.36). However, this choice may be restricted by national laws.

4.4 Comparative Information

Comparative information regarding the preceding period for all amounts reported in the current period's financial statements has to be presented except when IFRSs permit or require otherwise. This means that, as a minimum, two of each of the components of the financial statements1 have to be presented, as well as related notes (IAS 1.10(ea), 1.38, and 1.38A).

It is necessary to present an additional statement of financial position (i.e. a third balance sheet) as at the beginning of the preceding period, if (IAS 1.10f and 1.40A–1.40D):

an accounting policy is applied retrospectively, a retrospective restatement is made, or when items are reclassified andthis has a material effect on the information in the statement of financial position at the beginning of the preceding period.

If the presentation or classification of items in the financial statements is changed, the comparative amounts have to be reclassified unless reclassification is impracticable (IAS 1.41).

4.5 Consistency of Presentation

The presentation and classification of items in the financial statements have to be retained from one period to the next (consistency of presentation) unless (IAS 1.45):

it is apparent that another presentation or classification would result in reliable and more relevant information (IAS 8.7–8.12), ora new or amended IFRS requires a change in presentation.

5 COMPONENTS OF THE FINANCIAL STATEMENTS

An entity's financial statements consist of the following components (IAS 1.10):

A statement of financial position (balance sheet). (In some cases it is necessary to present an additional statement of financial position as at the beginning of the preceding period.2)Either:3a single statement of comprehensive income (one statement approach), ora separate income statement and a statement of comprehensive income (two statement approach).A statement of changes in equity.A statement of cash flows.Notes: The notes contain information supplementary to that which is presented in the other components of the financial statements (IAS 1.7).

6 STRUCTURE AND CONTENT OF THE COMPONENTS OF THE FINANCIAL STATEMENTS4

6.1 Statement of Financial Position (Balance Sheet)

Apart from an exception that is generally relevant only for financial institutions, current and non-current assets and current and non-current liabilities have to be presented as separate classifications in the statement of financial position (IAS 1.60). Deferred tax assets and deferred tax liabilities must not be classified as current (IAS 1.56).

Assets and liabilities are classified as current when one of the following conditions is met (IAS 1.66 and 1.69):

It is expected to realize the asset or intended to sell or consume it during the normal operating cycle. In the case of a liability, it must be expected to settle the liability in the normal operating cycle.The asset or liability is held primarily for the purpose of trading.It is expected to realize the asset or the liability is due to be settled within 12 months after the reporting period. In the case of a liability, it is sufficient if the creditor has the right to demand settlement within 12 months after the reporting period, even if this is not expected.The asset is cash or a cash equivalent (as defined in IAS 7.6).5

In the case of a manufacturing company, the operating cycle is the time between the acquisition of materials that are processed during production, and the realization of the finished goods in cash or cash equivalents. Sometimes (e.g. in the building industry), the operating cycle may be longer than 12 months. When the normal operating cycle of an entity is not clearly identifiable, it is assumed to be 12 months (IAS 1.68 and 1.70).

Normally the rules of IAS 1.54 result in the minimum structure of the statement of financial position shown below. The order of the items is not prescribed.

ASSETSEQUITY AND LIABILITIESNon-current assetsEquityIntangible assetsIssued capital and reservesProperty, plant, and equipmentNon-controlling interestsInvestment propertyInvestments accounted for using the equity methodNon-current liabilitiesOther non-current financial assetsNon-current financial liabilitiesDeferred tax assetsLong-term provisionsGovernment grants related to assetsCurrent assetsDeferred tax liabilitiesInventoriesTrade and other receivablesCurrent liabilitiesOther current financial assetsTrade and other payablesCurrent tax assetsOther current financial liabilitiesOther non-financial assetsShort-term provisionsCash and cash equivalentsCurrent tax liabilitiesTotal assetsTotal equity and liabilities

When an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, the entire liability has to be classified as current (IAS 1.74).

6.2 Statement of Comprehensive Income and Separate Income Statement

6.2.1 Profit or Loss, Other Comprehensive Income and How They Interrelate Total

comprehensive income includes all components of profit or loss and of other comprehensive income (IAS 1.7).

Other comprehensive income includes the following components (IAS 1.7):

(a) Changes in revaluation surplus (within the meaning of IAS 16 and IAS 38).

(b) Actuarial gains and losses on defined benefit plans recognized in other comprehensive income (IAS 19.93A).

(c) Exchange differences on translating the financial statements of foreign operations according to the current rate method (IAS 21).

(d) Gains and losses on equity instruments measured at fair value through other comprehensive income (IFRS 9).6

(e) The effective portion of gains and losses on hedging instruments in a cash flow hedge (IAS 39).

(f) Changes in credit risk of certain liabilities (IFRS 9).7

Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognized in other comprehensive income in the current or previous periods (IAS 1.7).

Reclassification adjustments may occur in the case of components (c) and (e) of other comprehensive income (see the list at the beginning of this section) (IAS 1.95–1.96). This means that such income or expense is first recognized in other comprehensive income and increases or decreases the appropriate reserve. At a later date it may be necessary to reclassify that amount to profit or loss (“Dr Other comprehensive income (reserve) Cr Profit or loss” or “Dr Profit or loss Cr Other comprehensive income (reserve)”) (IAS 1.93). Reclassification adjustments arise, for instance, upon disposal of a foreign operation that has been translated according to the current rate method (IAS 21) and when a hedged forecast transaction affects profit or loss (IAS 39) (IAS 1.95).8

Reclassification adjustments do not occur in the case of components (a), (b), (d), and (f) of other comprehensive income (see the list at the beginning of this section) (IAS 1.96):

Changes in revaluation surplus may be transferred to retained earnings in subsequent periods as the asset is used or when it is derecognized, but they are not reclassified to profit or loss.Actuarial gains and losses are included in retained earnings in the period that they are recognized as other comprehensive income (IAS 19.93D).An entity may make an irrevocable election at initial recognition to present subsequent changes in the fair value of an equity instrument within the scope of IFRS 9 that is not held for trading in other comprehensive income (IFRS 9.5.7.1b and 9.5.7.5). Amounts presented in other comprehensive income must not be subsequently transferred to profit or loss, i.e. not even when the equity instrument is derecognized. However, the entity may transfer the cumulative gain or loss within equity, e.g. to retained earnings (IFRS 9.B5.7.1 and 9.BC5.25b).It may be necessary to present the fair value change of a financial liability which is attributable to changes in the liability's credit risk in other comprehensive income. Amounts presented in other comprehensive income must not be subsequently transferred to profit or loss. However, the cumulative gain or loss may be transferred within equity (e.g. to retained earnings) (IFRS 9.B5.7.9).

6.2.2 Preparation of the Statement(s)

The items of income and expense are presented in one of the following ways (IAS 1.10A, 1.81A, and 1.82A):

(a) Presentation in a single statement of comprehensive income which includes all components of profit or loss and of other comprehensive income.

(b) Presentation in two statements:

(i) Separate income statement: This statement displays the components of profit or loss.

(ii) Statement of comprehensive income: This statement begins with profit or loss, displays the items of other comprehensive income (including the share of the OCI of associates and joint ventures accounted for using the equity method), and is presented immediately after the separate income statement.

The items of other comprehensive income presented are classified by nature and grouped into those that (in accordance with other IFRSs) (IAS 1.82A and 1.IN18):

will not be reclassified9 subsequently to profit or loss, andare potentially reclassifiable to profit or loss subsequently (i.e. will be reclassified when specific conditions are met).

Operating expenses which are recognized in profit or loss are presented in one of the following ways (IAS 1.99, 1.102, and 1.103):

Nature of expense method: This is a classification based on the nature of the expenses (e.g. employee benefits expense, depreciation, and amortization expense, etc.).Function of expense method (also called cost of sales method): According to this method, expenses are classified based on their function within the entity as part of cost of sales or, for example, as part of distribution costs or administrative expenses.

It is necessary to choose the method (i.e. either the nature of expense method or the function of expense method) that provides information that is reliable and more relevant (IAS 1.99). A combination of both methods is not allowed, i.e. it is not possible to present operating expenses partly according to their nature and partly according to their function in the same statement.

The statement shown below is an example of a single statement of comprehensive income according to the function of expense method in which non-controlling interests are ignored. This statement includes some disclosures which could also be presented in the notes (IAS 1.97–1.105) because in practice, they are usually made in the single statement of comprehensive income (or separate income statement).10

STATEMENT OF COMPREHENSIVE INCOME (for the year 01)PROFIT OR LOSS SECTIONRevenueXXCost of salesXXGross profitXXDistribution costsXXAdministrative expensesXXOther operating incomeXXOther operating expensesXXResults of operating activitiesXXShare of the profit or loss of associatesXXOther finance incomeXXOther finance expensesXXResults of financing activitiesXXProfit before taxXXIncome taxXXPROFIT FOR THE YEARXXOCI SECTIONItems that will not be reclassified to profit or loss (OCI I):Gains on property revaluationXXShare of the gain (loss) on property revaluation of associatesXXActuarial gains and losses on defined benefit plansXXDesignated equity instruments11XXChanges in credit risk of certain liabilities12XXIncome tax relating to items that will not be reclassifiedXXItems that may be reclassified subsequently to profit or loss (OCI II):Cash flow hedgesXXExchange differences on translating foreign operations according to the current rate methodXXIncome tax relating to items that may be reclassifiedXXOTHER COMPREHENSIVE INCOME (net of tax)XXTOTAL COMPREHENSIVE INCOMEXX

If the entity had presented the single statement of comprehensive income according to the nature of expense method, only the first part of that statement would have been different (to the results of operating activities), whereas the rest would have stayed the same:

RevenueChanges in inventories of finished goods and work in progressWork performed by the entity and capitalizedOther operating incomeRaw materials and consumables usedEmployee benefits expenseDepreciation and amortization expenseOther operating expensesResults of operating activities

The items shown below have to be disclosed in the single statement of comprehensive income (IAS 1.81B). In such a statement, they are presented below total comprehensive income.

(a) Profit or loss attributable to owners of the parent.

(b) Profit or loss attributable to non-controlling interests.

(c) Total comprehensive income attributable to owners of the parent.

(d) Total comprehensive income attributable to non-controlling interests.

If a separate income statement is presented, items (a) and (b) are presented in that statement whereas items (c) and (d) are presented in the statement of comprehensive income (IAS 1.81B).

Additional line items, headings, and subtotals are presented in the statement of comprehensive income and the separate income statement (if presented) when such presentation is relevant to an understanding of the entity's financial performance (IAS 1.85).

IAS 1 does not require presentation of the subtotal “results of operating activities.” However, this subtotal is often presented in practice. If presented, the amount disclosed has to be representative of activities that would normally be regarded as operating. For example, it would not be appropriate to exclude items clearly related to operations (such as inventory write-downs and restructuring expenses) because they occur irregularly or infrequently or are unusual in amount. Similarly, it would not be appropriate to exclude items because they do not involve cash flows, such as depreciation and amortization expenses (IAS 1.BC56).

In the single statement of comprehensive income or in the separate income statement, finance income and finance expenses are presented separately. They are only offset to the extent that they represent (a) profit or loss or (b) other comprehensive income of investments accounted for using the equity method (IAS 1.82 and 1.82A). Items of income or expense must not be presented as extraordinary items. This applies to the statement of comprehensive income, the separate income statement (if presented), and the notes (IAS 1.87).

If the “function of expense method” is applied, additional information on the nature of expenses (including depreciation and amortization expense and employee benefits expense) is disclosed (IAS 1.104).

In the example of a statement of comprehensive income presented above, the items of other comprehensive income are presented before tax and two amounts are shown for the tax relating to those items: (a) income tax relating to items that will not be reclassified and (b) income tax relating to items that may be reclassified. This procedure ensures that the items of profit or loss and other comprehensive income are presented in the same way, i.e. before tax. However, it would also be possible to present each item of other comprehensive income net of tax in the statement of comprehensive income (IAS 1.91 and 1.IG).

The disclosures described below can be made either in the notes or in the statement of comprehensive income. We prefer disclosure in the notes in order to avoid overloading the statement of comprehensive income.

The amount of income tax relating to each item of other comprehensive income (including reclassification adjustments13) (IAS 1.90).Reclassification adjustments14 relating to components of other comprehensive income (IAS 1.92 and 1.94).

6.3 Statement of Changes in Equity

The following statement is an example of a statement of changes in equity for the reporting period and the comparative period.

Explanations relating to the statement of changes in equity presented previously:

Retained earnings represent in particular (a) the accumulated amounts of profit or loss attributable to owners of the parent less distributions to owners of the parent and (b) amounts transferred to retained earnings from accumulated OCI without affecting OCI or profit or loss.15 For example, an entity may transfer the revaluation surplus relating to a piece of land (i.e. accumulated OCI relating to revaluations of that land) to retained earnings when that land is sold (“Dr Revaluation Surplus Cr Retained earnings”).16 In the above statement, such direct transfers within equity which neither affect OCI nor profit or loss are shown in the line “Transfers”.The column “Accumulated OCI I” represents items that will not be reclassified subsequently to profit or loss.17 An example for OCI I is the other comprehensive income resulting from the revaluation of land (see the explanations previously).The column “Accumulated OCI II” represents items that may be reclassified subsequently to profit or loss.18 For example, in the case of a foreign operation that has been translated according to the current rate method, reclassification of exchange differences previously recognized in OCI (“Dr Profit or loss Cr OCI” or “Dr OCI Cr Profit or loss”) takes place when the foreign operation is sold (IAS 21.48).19

If the statement of changes in equity is presented as in the example above, additional disclosures have to be made in the notes (IAS 1.106A, 1.107, and 1.BC74A–BC75).

If an entity decides to present actuarial gains and losses arising on defined benefit plans in other comprehensive income (IAS 19.93A–19.93D), the presentation of the statement of changes in equity has to be modified. This is dealt with in the chapter on IAS 19/IAS 26 (Section 2.3.3.4 and Example 4).

7 EXAMPLES WITH SOLUTIONS20

References to Other Chapters

With regard to the effects of changes in accounting policies and corrections of prior period errors to the statement of financial position, the separate income statement and the statement of changes in equity, we refer to the chapter on IAS 8 (Examples 3–6). Example 4 of the chapter on IAS 19/IAS 26 illustrates the presentation of the statement of comprehensive income and of the statement of changes in equity if actuarial gains and losses are recognized in other comprehensive income.

7.1 Examples that can be Solved Without the Knowledge of Other Chapters of the Book

Example 1

Nature of expense method vs. function of expense method

Entity E operates in retail sales, i.e. E purchases merchandise from wholesalers and resells to customers. The following table presents the expenses from the year 01 according to their nature and function:

Revenue for the year 01 is CU 50.

Required

E prepares its first financial statements according to IFRS as at Dec 31, 01. E decides to prepare a separate income statement (two statement approach). E's chief financial officer would prefer to present the items of the results of operating activities as shown below if possible. In this statement, cost of sales, administrative expenses, and distribution costs would be presented excluding an allocation of depreciation and amortization. Depreciation and amortization expense would therefore be shown as a separate line item:

Revenue50Cost of sales−25Gross profit25Administrative expenses−4Distribution costs−9Depreciation and amortization expense−5Results of operating activities7

Assess whether this presentation of the results of operating activities in E's separate income statement is possible. If not, prepare new versions for E's separate income statement which correspond with IFRS.

For simplification purposes, comparative figures are ignored in this example. It is not intended to shift information to the notes.

Hints for solution

In particular Section 6.2.2.

Solution

The separate income statement above is a mixture between a presentation of expenses according to their function and their nature. Such a mixed presentation is not possible according to IFRS. The chief financial officer can choose between the following two presentations, provided that both of them are reliable and equal in terms of relevance (IAS 1.99).

Function of expense method:

Revenue50Cost of sales−28Gross profit22Administrative expenses−5Distribution costs−10Results of operating activities7

Nature of expense method:

Revenue50Raw materials and consumables used−20Employee benefits expense−9Depreciation and amortization expense−5Other operating expenses−9Results of operating activities7

The solution of this example (presentation of the items of the results of operating activities) would have been the same if E had decided to present a single statement of comprehensive income.

Example 2