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- 1. Institute of Chartered Accountants of Nigeria (ICAN) IFRS Certification Technical Programme Financial Statements – Disclosures (Interim Financial Reporting and Operating Segments)
- 2. Interim reporting ICAN IFRS Certification Technical Training Programme
- 3. Interim financial reporting Content Introduction Recognition and measurement Disclosure ICAN IFRS Certification Technical Training Programme
- 4. Slide 4 Interim financial reporting - Introduction Introduction • Requirement to publish interims? - None in IFRS - May be required by local regulator • IAS 34 sets out minimum content • 60 day timeframe recommended • Condensed financial statements ICAN IFRS Certification Technical Training Programme
- 5. Slide 5 Interim financial reporting – Recognition and measurement Principles of IAS 1 • Fundamental principles of IAS 1 Going concern Accruals basis Offsetting Fair presentation Materiality Aggregation ICAN IFRS Certification Technical Training Programme
- 6. Slide 6 Interim financial reporting – Recognition and measurement Same accounting policies • Same accounting policies as in most recent annual financial statements • Unless entity: - plans to change policy before year-end - is required (eg by a new standard) to change policy before year-end ICAN IFRS Certification Technical Training Programme
- 7. Slide 7 Interim financial reporting – Recognition and measurement Discrete period and estimates • Interim period = discrete period • Assets and liabilities should meet recognition criteria at interim date • Greater use of estimates in interims ICAN IFRS Certification Technical Training Programme
- 8. Slide 8 Interim financial reporting – Recognition and measurement Examples and special cases • Provisions, year-end bonuses and holiday pay • Tax • Revaluations • Impairment and IFRIC 10 ICAN IFRS Certification Technical Training Programme
- 9. Slide 9 Interim financial reporting – Recognition and measurement Provisions, year-end bonuses and holiday pay • Same criteria for recognising a provision • Year-end bonus provision recognised if: - legal or constructive obligation - reliable estimate • Accumulating holiday pay ICAN IFRS Certification Technical Training Programme
- 10. Slide 10 Interim financial reporting – Recognition and measurement Tax • Estimate an average annual effective rate • Apply this to pre-tax interim income Example: An entity reports quarterly. It earns 10,000 pre-tax each quarter. Tax rate is 20% on first 20,000 and 30% on rest. How much tax is reported in each quarter? ICAN IFRS Certification Technical Training Programme
- 11. Interim financial reporting – Recognition and measurement Which of the following is the correct answer? Q1 Q2 Q3 Q4 Annual Earnings 10,000 10,000 10,000 10,000 40,000 Tax expense 2,000 2,000 3,000 3,000 10,000 Slide 11 Tax - example Q1 Q2 Q3 Q4 Annual Earnings 10,000 10,000 10,000 10,000 40,000 Tax expense 2,500 2,500 2,500 2,500 10,000 ICAN IFRS Certification Technical Training Programme
- 12. Slide 12 Interim financial reporting – Recognition and measurement Revaluations • Material changes in fair value should be reflected in the interim report • Directors’ estimate vs independent valuation? Example: A property is carried at fair value under IAS 16 . It is valued at 100m at start of year, 110m at interim date, then sold in second half of the year for 104m. Is there a 4m profit on disposal or a 6m loss? A: 6m loss ICAN IFRS Certification Technical Training Programme
- 13. Slide 13 Interim financial reporting – Recognition and measurement Impairment IFRIC 10 • A retailer has goodwill relating to a shop. • In first half, competitor opens a store, shop becomes loss making, goodwill is impaired. • In second half, competitor shuts down, retailer’s shop recovers. • Should impairment be reversed? A: No ICAN IFRS Certification Technical Training Programme
- 14. Slide 14 Interim financial reporting – Disclosure Primary statements Condensed statement of financial position Condensed statement of financial position Condensed statement of cash flows Condensed statement of cash flows Condensed statement of comprehensive income (EPS) Condensed statement of comprehensive income (EPS) Condensed statement of changes in equity Condensed statement of changes in equity ICAN IFRS Certification Technical Training Programme
- 15. Slide 15 Interim financial reporting – Disclosures Periods to be presented and comparatives Financial position Comprehensive income 3m 3m 6m 6m Ending ending ending ending 30 Jun 30 Jun 30 Jun 30 Jun 2012 2011 2012 2011 As at As at 30 Jun 31 Dec 2012 2011 As at 31 Dec 2007 Cash flow 6m 6m ending ending 30 Jun 30 Jun 2012 2011 Changes in equity 6m ending 6m ending 30 Jun 30 Jun 2012 2011 ICAN IFRS Certification Technical Training Programme
- 16. Slide 16 Interim financial reporting – Disclosures Notes IAS 34 requires minimum note disclosures: • Segmental reporting • Business combinations • Accounting policies • Seasonality • Items of unusual nature, size or incidence • Changes in estimates • Issue and repayment of debt and equity • Dividends paid • Post balance sheet events • Changes in contingent assets or liabilities ICAN IFRS Certification Technical Training Programme
- 17. Slide 17 Interim financial reporting – Disclosures Segmental reporting If IFRS 8 applies: • Revenues from external customers • Intersegment revenues • Segment result • Total assets for which there has been a material change • Changes in segments or the basis of measurement of segment profit • A reconciliation of segment results to the result before tax and discontinued operations ICAN IFRS Certification Technical Training Programme
- 18. Slide 18 Interim financial reporting – Disclosures Business combinations Extensive IFRS 3, ‘Business combinations’ disclosures: • Details of acquiree, date of acquisition, how and why control obtained • Fair value of consideration • Fair value of assets and liabilities acquired • Factors making up goodwill • Revenue and profits of acquiree since acquisition and as if acquisition date was at start of financial year • Covers post balance sheet period too • Provisional accounting ICAN IFRS Certification Technical Training Programme
- 19. Slide 19 Interim financial reporting – Disclosures First time adoption • IFRS 1 applies to interims • First IFRS interim report should include: - full IFRS accounting policies - IFRS 1 reconciliations between previous GAAP and IFRS ICAN IFRS Certification Technical Training Programme
- 20. Slide 20 Interim financial reporting – Disclosures Top ten common issues • Statement of compliance with IFRS • Periods to be presented • IFRS 1 in year of transition • Unusual items – nature, size, incidence • Events material to the current interim period • Business combinations disclosures • New standards effective • Material changes in estimates, e.g. pensions, provisions • Seasonality • Related party transactions ICAN IFRS Certification Technical Training Programme
- 21. Operating segments Segments through the eyes ICAN IFRS Certification Technical Training Programme of management Financial information management uses The Core principle An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.
- 22. Operating segments Content Scope and applicability 4 Step approach Disclosure ICAN IFRS Certification Technical Training Programme
- 23. Operating segments Scope and applicability IFRS 8 applies to entities who: - Have debt/equity that is being traded publicly; or - Are in the process of filing debt/equity on a public market. However, other standards refer to the guidance in IFRS 8: - IFRS 5: Discontinued operations - IAS 36: Impairment testing - Therefore, all entities need to consider the implications of IFRS 8 23 ICAN IFRS Certification Technical Training Programme
- 24. Identify the CODM Operating segments Identify the operating segments Determine the reportable segments Present the required information (and reconcile to primary statements) 1 2 3 4 24 The road to IFRS 8 – 4 simple steps ICAN IFRS Certification Technical Training Programme
- 25. Operating segments – 4 Simple steps Identifying the CODM Chief Operating Decision Maker Slide 25 Allocates resources Assesses performance Function not a title ICAN IFRS Certification Technical Training Programme
- 26. Identify the CODM Operating segments Identify the operating segments Determine the reportable segments Present the required information (and reconcile to primary statements) 1 2 3 4 26 The road to IFRS 8 – 4 simple steps ICAN IFRS Certification Technical Training Programme
- 27. Slide 27 Operating segments – 4 Simple steps Identify the operating segments • Engages in business activities • For example (possible) - Start-up activities - R&D operation - Vertically integrated business - Functional department • Operating results are regularly reviewed by the CODM to assess performance and make decisions • An operating segment would regularly have a segment manager who is directly accountable and in regular contact with the CODM • Has discrete financial information available • Would require: - Balance sheet? - Revenue only? - Gross Profit? ICAN IFRS Certification Technical Training Programme
- 28. Identify the CODM Operating segments Identify the operating segments Determine the reportable segments Present the required information (and reconcile to primary statements) 1 2 3 4 28 The road to IFRS 8 – 4 simple steps ICAN IFRS Certification Technical Training Programme
- 29. Determining reportable segments Slide 29 The road to IFRS 8 – 4 simple steps Aggregate any operating segments that meet all aggregation criteria Identify each operating segment or aggregated operating segment that exceeds 10% threshold For the remaining operating segments below 10% threshold, aggregate with each other if majority of aggregation criteria met If reportable segments are less than 75% of external revenue add more reportable segments ICAN IFRS Certification Technical Training Programme
- 30. The road to IFRS 8 – 4 simple steps Determining reportable segments: Concepts • Segments have similar economic characteristics • Segments similar on five specified criteria (unless two immaterial segments – then only a majority of the criteria need to be met) Slide 30 Aggregation Criteria • Aggregation is consistent with the core principal Segments that exceed the threshold 10% of • Revenue (including internal) • Profit and Loss • Assets Specified Criteria • Nature of products and services • Natureof production process • Method of distribution • Type or class of customer • Nature of regulatory environment ICAN IFRS Certification Technical Training Programme
- 31. Identify the CODM Operating segments Identify the operating segments Determine the reportable segments Present the required information (and reconcile to primary statements) 1 2 3 4 31 The road to IFRS 8 – 4 simple steps ICAN IFRS Certification Technical Training Programme
- 32. The road to IFRS 8 – 4 simple steps – disclosures Disclosure considerations Slide 32 • Disclosure of certain minimum information Measure of profit Significant other items included in the profit measure or provided to CODM e.g. revenue, interest, depreciation Measure of assets* Associates and Capex included in the asset measure or provided to CODM Measure of liabilities • Disclosure of information where the information is regularly provided to CODM Reconciliation of totals to primary financial statements Non-GAAP Measures ICAN IFRS Certification Technical Training Programme
- 33. The road to IFRS 8 – 4 simple steps – disclosures Disclosure considerations Slide 33 Entity wide disclosures Information about products and services Geographical areas • Domicile and foreign revenues • Domicile and foreign non-current assets Extent of reliance on Major customers • > 10% entity revenues from single external customer • This is required even if entity has only one reportable segment. 3/05/2011 ICAN IFRS Certification Technical Training Programme
- 34. The road to IFRS 8 – 4 simple steps – disclosures Disclosure considerations Retrospective application in all of the following situations: • When adopted • When segment is initially identified as reportable becomes non-reportable • Changes in the organizational structure 3/05/2011 Slide 34 ICAN IFRS Certification Technical Training Programme
- 35. Case Study ICAN IFRS Certification Technical Training Programme
- 36. Questions? The views and opinions expressed in this presentation are those of the author and do not in any way represent the views of the author’s employer or the Institute of Chartered Accountants of Nigeria. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The author does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. ICAN IFRS Certification Technical Training Programme
- 37. Contact Cyril Azobu, FCA Partner, PwC Energy Assurance Tel: +234 1 2711700, 2111 Mobile: +234 802 3227 845 E-mail: cyril.azobu@ng.pwc.com
Notes de l'éditeur
- This session will cover an introduction to interim reporting and the requirements of IAS 34, as this topic is not included in the P2P modules. The session will follow the following structure: Section 1: Introduction - Scope of IAS 34 and requirements to publish interims - Objective of IAS 34 - Time frame for publication of interim reports - Full vs condensed financial statements Section 2: Recognition and measurement Recognition - Principles of IAS 1 - Use of same accounting policies as in annual financial statements Measurement - Special measurement issues in interim reports - Provisions and bonuses - Tax - Impairments (IFRIC 10) - Material changes in the period (including pensions) - Fair values (including investment properties) Section 3: Disclosure - Minimum disclosures – primary statements - Comparatives - Disclosure of accounting policies, especially on first time adoption - Notes to interim accounts, including seasonality - Segment reporting in interims - IFRS 3 Business combinations disclosures in interims Section 4: Other sources of information - eg Manual, NoE, Illustrative interim accounts
- This standard does not specify which entities should be required to publish interim financial reports, how frequently or how soon after the end of an interim period. However, governments, securities regulators, stock exchanges and accountancy bodies often either require or recommend that entities (in particular those whose debt or equity securities are publicly traded) to publish an interim financial report in accordance with IFRS’s. IAS 34, ‘Interim financial reporting’, applies where an entity publishes an interim financial report in accordance with IFRS. IAS 34 sets out the minimum content that an interim financial report should contain and the principles that should be used in recognising and measuring the transactions and balances included in that report. While there is no required timescale for interim financial reports, IAS 34 encourages entities to make their interim financial reports available not later than 60 days after the end of the interim period. Local legislative requirements may mandate a different timescale. Under IAS 34, entities may either prepare full IFRS financial statements (conforming to the requirements of IAS 1, and as published in their annual report), or condensed financial statements. Condensed reporting is the more common approach. Condensed financial statements include condensed primary statements and selected note disclosures, and hence have less disclosures than full financial statements. IAS 34 contains no requirement for a separate management commentary, but this may be required by local legislation/regulators. [IAS 34 does not require interim reports to be reviewed by auditors. However, where local legislation requires it, the auditors’ interim review report should be included in the interim report.]
- Although interim financial reports prepared in accordance with IAS 34 are not required to comply with the full requirements of IAS 1, ‘Presentation of financial statements’, they are required to be prepared in accordance with certain of the fundamental principles that underpin IAS 1, as are annual financial statements. These fundamental principles include the preparation of the financial statements on a going concern basis, using the accruals basis, offsetting, applying consistent accounting policies that comply with IFRS, materiality and aggregation. An entity shall prepare financial statements 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. Using the accrual basis of accounting means recognising items as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Framework. An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an IFRS. Offsetting may detract from the ability of users both to understand the transactions and assess the entity's future cash flows. Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. This means faithful representation of transactions, other events and conditions in accordance with the Framework. The application of IFRSs is presumed to result in financial statements that achieve a fair presentation. Other keywords are: relevant, reliable, comparable and understandable. Consistent presentation: same presentation and classification from one period to the next unless: (a) a significant change in the nature of the entity's operations suggest an alternative is more appropriate; or (b) an IFRS requires a change. Items of a dissimilar nature or function should be presented separately unless they are immaterial. An entity need not provide a specific disclosure required by an IFRS if the information is not material. Transactions are aggregated into classes according to their nature or function. If a line item is not individually material, it is aggregated with other items either in those statements or in the notes. An item that is not sufficiently material to warrant separate presentation in those statements may warrant separate presentation in the notes.
- The interim financial report should be prepared using the same accounting policies as were applied in the preparation of the most recent annual financial statements. However, the frequency of an entity’s reporting (annual, half-yearly or quarterly) should not affect the measurement of its annual results. [IAS 34 para 28]. There is an exception where the entity plans or is required to change an accounting policy before the year end. In this case the accounting policy that will be applied in the current year annual financial statements should be used in preparing the interim financial report and disclosure of the nature and impact of the change in accounting policy should be disclosed. The prior interim periods of the current year and the comparable interim periods of the prior year should be restated. [IAS 34 para 43].
- The interim period is treated as a discrete accounting period in its own right. The entity should apply the same criteria at the interim balance sheet date as it does at its year-end when considering the accounting treatment of transactions. Assets and liabilities should be recognised in the interim balance sheet only where they meet the definition of an asset or a liability at the interim balance sheet date. The assets and liabilities recognised should be measured in accordance with IFRS and with the entity’s stated accounting policies. For example, a cost that does not meet the definition of an asset at the end of an interim period is NOT deferred on the balance sheet either to await further information or to smooth earnings over interim periods within a year. However, the preparation of an interim financial report may make greater use of estimates than in an annual report. For example, if an entity does not perform full stock taking procedures at each interim balance sheet date it may estimate the required inventory procedures based on sales margins. The decision about whether measurement of an asset or liability should be estimated at an interim period will be driven by materiality and obtaining a balance between the cost of accurate measurement and the usefulness of that to the users of the interim financial report. The resulting information must still be reliable and all relevant information should be given. The materiality used in the preparation of an interim financial report should be calculated with respect to the results of that period and not by an estimate of the result for the full year.
- The interim reporting is required to give users an illustration of the events in the interim period. This will not necessarily be a snapshot of half of the full year as many business receive revenues and incur costs seasonally or occasionally within a financial year. IAS 34 specifies that it is not appropriate to anticipate or defer these items as of an interim date if such anticipation or deferral would not be appropriate at the end of the entity's financial year. That is to say that it is not considered appropriate to “smooth” results across the first and second interim periods of the year. Examples of items which may occur in different halves of the year include dividend revenue, royalties, and government grants. Such revenues are recognised when they occur. For items of income or expenditure determined on a formal basis once a year, it will be necessary to determine whether an asset or liability exists at the interim period end. An appendix to IAS 34 gives some specific guidance on how to approach various costs types which may occur seasonally, some of which we will consider now.
- A provision is recognised when an entity has no realistic alternative but to make a transfer of economic benefits as a result of an event that has created a legal or constructive obligation. The amount of the obligation is adjusted upward or downward, with a corresponding loss or gain recognised in the income statement, if the entity's best estimate of the amount of the obligation changes. An entity must apply the same criteria for recognising and measuring a provision at an interim date as it would at the end of its financial year. The existence or non-existence of an obligation to transfer benefits is not a function of the length of the reporting period. It is a question of fact. The nature of year-end bonuses varies widely. Some are earned simply by continued employment during a time period. Some bonuses are earned based on a monthly, quarterly, or annual measure of operating result. They may be purely discretionary, contractual, or based on years of historical precedent. A bonus is anticipated for interim reporting purposes if, and only if, (a) the bonus is a legal obligation or past practice would make the bonus a constructive obligation for which the entity has no realistic alternative but to make the payments, and (b) a reliable estimate of the obligation can be made. IAS 19 Employee Benefits provides guidance. Holidays are often accumulating ie can be carried forward and used in future periods. Let’s say that some employees have 20 days holiday entitlement per financial year, and have use that holiday in that financial year, otherwise it is lost. At the year-end, because all holiday is either used or lost, there would be no accrual for holiday pay. However, at an interim reporting date, the entity is liable for any accrued annual leave that is earned but not yet taken, and so an accrual should be made. This is regardless of whether the employee has a right to receive cash compensation or must use the annual leave. [IAS 34 App B para 10].
- Taxation is an annually determined item and, accordingly, determining the tax charge will involve making an estimate of the likely effective tax rate for the year. The tax charge or credit cannot be properly determined until the end of the financial year (or, if different, the tax year) when all allowances and taxable items are known. Calculating tax on the basis of the results of the interim period in isolation could result in recognising a tax figure that is inconsistent with the manner in which tax is borne by the entity. Therefore, the calculation of the effective tax rate should be based on an estimate of the tax charge or credit for the year expressed as a percentage of the expected accounting profit or loss. This percentage is then applied to the interim result, and the tax is recognised rateably over the year as a whole. The tax effect of exceptional (or 'one-off') items should not be included in the likely effective annual rate, but should be recognised in the same period as the relevant exceptional (or 'one-off') item. The estimated annual effective tax rate (excluding exceptional items) will in that case be applied to the interim profit or loss excluding exceptional items. Events and expenditure that are expected to fall in the second part of the year and would impact the effective annual tax rate should be considered when estimating the annual effective tax rate. An event such as planned capital expenditure should be anticipated in calculating the effective tax rate for the year. Any tax changes announced by the government or tax authorities (as applicable) may have a significant impact on the deferred tax balances held by companies. However, the question arises as to when the impact on the deferred tax balances should be recognised. These changes will have implications for deferred tax accounting once the changes have been “substantively enacted”. Any changes announced are considered as non-adjusting events, unless and until they are substantively enacted at a particular interim or final balance sheet date. To the extent practicable, a separate estimated average annual effective income tax rate is determined for each taxing jurisdiction and applied individually to the interim period pre-tax income of each jurisdiction. Similarly, if different income tax rates apply to different categories of income (such as capital gains or income earned in particular industries), to the extent practicable a separate rate is applied to each individual category of interim period pre-tax income. While that degree of precision is desirable, it may not be achievable in all cases, and a weighted average of rates across jurisdictions or across categories of income is used if it is a reasonable approximation of the effect of using more specific rates. Consider the following example – how much tax should be reported in each quarter’s interim report?
- An entity reports quarterly. It earns 10,000 pre-tax each quarter. Tax rate is 20% on first 20,000 and 30% on rest. Which of the following tables gives the correct answer for the tax each quarter? The bottom table gives the correct answer. We work out what the annual earnings are expected to be (40,000). We then calculate what the tax would be on the annual earnings, so: 20% * 20,000 = 4,000 PLUS 30% * 20,000 = 6,000 = total tax of 10,000 for the whole year. This gives an effective tax rate of 10,000 tax / 40,000 earnings = 25% So we apply this 25% effective tax rate to each quarter’s earnings, ie 25% * 10,000 = 2500 tax per quarter.
- There are a number of circumstances under which entities reporting in accordance with IFRS may carry assets and liabilities at valuation rather than historical cost, eg financial instruments. Accounting at a valuation for non-financial assets is permitted by IAS 16, 'Property, plant and equipment', and IAS 40, 'Investment property'. Reliably estimating fair values can be time-consuming and require the involvement of experts. It may be appropriate for entities preparing interim financial reports to use directors' estimates of fair values, based on the most recent independent valuation, rather than obtaining an independent valuation at each interim balance sheet date. [IAS 34 App C para 7]. However, the principle that interim financial reports need to be sufficiently reliable for users’ needs should be considered. In volatile economic environments, directors may be less able to reliably estimate fair values and, therefore, companies should consider the need to obtain independent valuations at the interim date. When there has been a material change in the fair value of assets or liabilities that are carried at fair value this should be reflected in the interim report. This stems from the requirement in IAS 34 paragraph 28 to apply the same accounting policies in the interim financial statements as are applied in the annual financial statements, and the general need to provide information about material changes since the year-end. Let’s consider the following question: A company has an accounting policy of carrying its land and buildings at fair value under IAS 16. At the start of the year, a property had a value of 100m. At the interim balance sheet date, the company revalues the property to 110m, recognising a gain in OCI of 10m. In the second half of the year, the company sells the property for 104m. When calculating the gain or loss on disposal of the property, should the “carrying value” be 100m (and the company recognise a profit on disposal of 4m) or 110m (and the company recognise a loss on disposal of 6m)? What does IAS 34 say? Well, two things. Firstly, IAS 34 states that the fact that a company has prepared an interim report should not alter the annual financial statements. This suggests that an IFRS reporter would recognise a profit on disposal of 6m. But, arguably, it’s not the fact that the company has prepared an interim report that has caused the year-end accounting to change, but the fact that it revalued the property: the reason for that revaluation being irrelevant. So where do we stand on this? The view is that, once a formal valuation has been carried out and the values included in financial information relating to the entity, whether that be prospectus figures, interim figures or any other published financial information, it cannot be ignored. So in this situation, there will be an impact on the annual financial statements. In the annual financial statements, therefore, the carrying values should first be adjusted to reflect the revaluation in the interim report (up to £110m) and then the loss on disposal should be calculated by reference to the revalued amount, giving a loss of £6m in this case. Thus if the entity had not revalued its properties at the interim date, it would have reported a gain on disposal of £4m as opposed to a loss on disposal of £6m and a revaluation gain in equity (under IAS 16).
- A similar issue can arise with respect of impairments - IAS 34 requires that the recognition and measurement of impairments (including the reversals of impairments) is determined by the same criteria that are applied at the year end ie IAS 36 must be applied. However, applying the rules of IAS 36 does not mean that an entity is required to perform detailed impairment calculations at each interim date: the entity should review its assets for indicators of impairment since the end of the most recent financial year to determine whether such calculations are required. But what if there have been impairment indicators and an impairment has been booked? How could this impact the annual financial statements? Notably, this situation can be further complicated by the specific rules of certain standards. When considering the impairment of both goodwill and available for sale financial assets, we are told (by IAS 38 and IAS 39 respectively) that any impairments booked may not be reversed. This can give seemingly intriguing results. Imagine a situation where a retailer has goodwill on its balance sheet that is attached to a shop. During the first half of the year, a competitor opens a store in the same road and the shop becomes loss-making. This necessitates an impairment review of the shop, which results in the recognition of an impairment in the goodwill to be recognised in the interim report. In the second half of the year, the competitor goes into liquidation and the competing store closes. The results of our shop return to their previous levels. Had the retailer not prepared an interim report, then no impairment would have been recognised. But IAS 38 tells us we are not allowed to reverse that impairment. So what do we do in the annual report? Recognise the impairment reported in the interim or not? So what is the stance on this issue? There are two things to consider: Firstly, IAS 34 states that the fact that a company has prepared an interim report should not alter the annual financial statements. This suggests that an IFRS reporter would not recognise an impairment loss in last annual report date. But, arguably, it’s not the fact that the company has prepared an interim report that has caused the impairment to be recognised, but the fact that there was an impairment trigger during the period and the property was therefore impaired. [click to reveal] This issue was considered by the IFRIC who then published IFRIC 10 ‘Interim financial reporting and impairment’. IFRIC 10 deals specifically with impairments and interim reporting (as opposed to revaluations and interim reporting). It addresses the issue of whether an impairment of goodwill or an investment recognised in an interim period may be reversed (in a subsequent interim period or in a subsequent full year accounts). IFRIC 10 concludes that an entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost. [IFRIC 10 para 8].
- IAS 34 requires that the interim financial report should contain, as a minimum: A condensed statement of financial position A condensed statement of comprehensive income presented as either a condensed single statement or a condensed separate income statement and a condensed statement of comprehensive income. A condensed statement of cash flows A condensed statement of changes in equity Selected explanatory notes. Basic and diluted earnings per share, for the interim period reported (only if the entity is required to present earnings per share in accordance with IAS 33). The condensed primary statements should contain, as a minimum, the main headings and sub-totals that were included in the entity's most recent full financial statements. [IAS 34 para 10]. Best practice would be to include the same categories and line items as in the annual financial statements.
- IAS 34 specifies the periods (as explained below) for which information should be presented for each of the primary statements in the interim financial report. Statement of financial position IAS 34 requires that balance sheet information is given as at the end of the interim period, with comparative information as at the end of the previous financial year. There is no requirement under IAS 34 for a balance sheet to be presented for the previous interim period. A company could choose to give this information too but it would not be required to do so. Statement of comprehensive income Statements of comprehensive income (which can be presented either as a condensed single statement or a condensed separate income statement and a condensed statement of comprehensive income) must be presented for: the current interim period cumulatively for the current financial year to date (for those who only report half-yearly, only one current period, for the 6months, is required. In the example on the slide, the entity reports quarterly, and so the current 3m interim period is different to the 6m cumulative period to date). With comparatives for both for the comparable interim periods of the immediately preceding financial year. Statement of changes in equity and cash flow statement Both are required cumulatively for the current financial year to date with comparatives for the comparable year-to-date period in the immediately preceding financial year.
- The entity's annual financial statements give a comprehensive picture of the entity's state of affairs at the most recent year end, and, therefore, the interim financial report should be read in conjunction with them. It is not necessary to give relatively insignificant updates to information already reported. The selected explanatory notes to the interim report should explain significant events and transactions that have occurred during the interim period. As a minimum, the following information is required by IAS 34 to be included in the notes to a condensed interim financial report: Segmental reporting (we will look at this in more detail on the next slide) Business combinations (we will look at this in more detail shortly) A statement that the accounting policies and methods of computation used in the interim financial report are the same as those used in the most recent annual financial statements or, if this is not the case, a description of the nature and effect of the change. Explanatory comments about seasonality or cyclicality of interim operations. Highly seasonal businesses are encouraged to include financial information for the 12 months ending on the interim reporting date, with comparatives for the prior 12 month period. [IAS 34 para 21]. The nature and amount of any items affecting assets, liabilities, equity, net income or cash flows that are unusual because of their size, nature or incidence. The nature and amount of changes in estimates of amounts reported in prior periods, either interim periods within the current financial year or in prior financial years, where those have a material impact in the current interim period. Issuances, repurchases and repayments of debt and equity securities. Dividends paid (aggregate or per share) separately for ordinary shares and other shares. Material events that have occurred subsequent to the end of the interim period that have not been reflected in the interim financial report. Changes in contingent liabilities and contingent assets since the previous annual balance sheet date. [IAS 34 para 16]. The standard also lists some examples of the kinds of disclosures required (para 17), and these include: the write down of inventories to net realisable value and the reversal of such a write down; recognition of a loss from the impairment of property, plant and equipment, intangible assets, or other assets, and the reversal of such an impairment loss; the reversal of any provisions for the costs of restructuring; acquisitions and disposals of items of property, plant and equipment; commitments for the purchase of property, plant and equipment; litigation settlements; corrections of prior period errors; [deleted] any loan default or breach of a loan agreement that has not been remedied on or before the balance sheet date; and related party transactions.
- Companies disclosing segmental information in their annual reports under IFRS 8 ‘Operating segments’ should disclose: the following segment information (disclosure of segment information is required in an entity's interim financial report only if IFRS 8 Operating Segments requires that entity to disclose segment information in its annual financial statements): (i) revenues from external customers, if included in the measure of segment profit or loss reviewed by the chief operating decision maker or otherwise regularly provided to the chief operating decision maker; (ii) intersegment revenues, if included in the measure of segment profit or loss reviewed by the chief operating decision maker or otherwise regularly provided to the chief operating decision maker;(iii) a measure of segment profit or loss; (note this could be a non-GAAP measure such as EBITDA, if that is what is reported to the chief operating decision maker) (iv) total assets for which there has been a material change from the amount disclosed in the last annual financial statements; (v) a description of differences from the last annual financial statements in the basis of segmentation or in the basis of measurement of segment profit or loss; (vi) a reconciliation of the total of the reportable segments' measures of profit or loss to the entity's profit or loss before tax expense (tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments' measures of profit or loss to profit or loss after those items. Material reconciling items shall be separately identified and described in that reconciliation;
- IAS 34’s minimum disclosure requirements are quite extensive in respect of business combinations during the period: companies must disclose information relating to all material acquisitions, disposals, restructurings and discontinued operations. The disclosures required are those in IFRS 3. For example, for any business combination in the period, disclosure is required of: ■ The names and descriptions of the combining entities or business. ■ The acquisition date. ■ The percentage of voting equity instruments acquired. ■ The cost of the business combination and a description of the components of that cost. You would then have to disclose information about the acquiree’s assets, liabilities or contingent liabilities: ■ The amount (fair value) recognised in the acquiring group’s financial statements. ■ A description of the factors that contributed to the recognition of goodwill (including the nature of and explanation for unrecognised intangible assets) And then the disclosures about the impact of the business combination on results: ■ The amount of the acquiree’s post acquisition profit or loss. ■ The revenue and profit or loss as if the acquisition date for all business combinations had been the beginning of the reporting period. In practice, we would expect disclosure for both the current interim period and the current year to date (if different) in an interim financial report. Notably, where a business combination has been completed after the end of the interim period but before the date of publication of the interim financial report, the disclosures above should be disclosed in full (unless this is not practicable, in which case this fact must be stated along with an explanation of why this is the case). Another key factor with respect of business combinations is that, where the initial accounting for a business combination for which disclosure is required has been determined provisionally, as permitted by IFRS 3, this fact should be disclosed together with an explanation as to why this is the case. So, not only will application of IAS 34 mean voluminous additional disclosure that needs preparing and reviewing but it will require the company to complete its provisional fair value exercise by the interim reporting date and have the full business combinations note (often one of the longer in the annual accounts) ready to be published. (It should be noted that the disclosure of this information in the interim financial report does not remove the need for disclosure of all information required by IFRS 3 in the annual financial statements). Specific details per the standard, for reference: Pre IFRS 3 Revised: The effect of changes in the reporting entity's composition during the interim period, including business combinations, acquisition or disposal of subsidiaries and long-term investments, restructurings and discontinued operations. For business combinations the detailed information required to be disclosed by IFRS 3 paragraphs 66-73 is required. These are extensive, and include items listed on the slide. As amended by IFRS 3 revised: (effective 1 Jul 2009) the effect of changes in the composition of the entity during the interim period, including business combinations, obtaining or losing control of subsidiaries and long term investments, restructurings, and discontinued operations. In the case of business combinations, the entity shall disclose the information required by IFRS 3 Business Combinations. These are extensive, and include items listed on the slide. For speaker’s reference – full IFRS 3R disclosures per the standard are as follows: 59 The acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either: (a) during the current reporting period; or (b) after the end of the reporting period but before the financial statements are authorised for issue. 60 To meet the objective in paragraph 59, the acquirer shall disclose the information specified in paragraphs B64—B66. 61 The acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods. 62 To meet the objective in paragraph 61, the acquirer shall disclose the information specified in paragraph B67. 63 If the specific disclosures required by this and other IFRSs do not meet the objectives set out in paragraphs 59 and 61, the acquirer shall disclose whatever additional information is necessary to meet those objectives. B64 To meet the objective in paragraph 59, the acquirer shall disclose the following information for each business combination that occurs during the reporting period: the name and a description of the acquiree. (b) the acquisition date. (c) the percentage of voting equity interests acquired. (d) the primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree. (e) a qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition or other factors. (f) the acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration, such as: cash; (ii) other tangible or intangible assets, including a business or subsidiary of the acquirer; (iii) liabilities incurred, for example, a liability for contingent consideration; and (iv) equity interests of the acquirer, including the number of instruments or interests issued or issuable and the method of determining the fair value of those instruments or interests. (g) for contingent consideration arrangements and indemnification assets: the amount recognised as of the acquisition date; (ii) a description of the arrangement and the basis for determining the amount of the payment; and (iii) an estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why a range cannot be estimated. If the maximum amount of the payment is unlimited, the acquirer shall disclose that fact. (h) for acquired receivables: the fair value of the receivables; (ii) the gross contractual amounts receivable; and (iii) the best estimate at the acquisition date of the contractual cash flows not expected to be collected. The disclosures shall be provided by major class of receivable, such as loans, direct finance leases and any other class of receivables. the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed. (j) for each contingent liability recognised in accordance with paragraph 23, the information required in paragraph 85 of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. If a contingent liability is not recognised because its fair value cannot be measured reliably, the acquirer shall disclose: the information required by paragraph 86 of IAS 37; and (ii) the reasons why the liability cannot be measured reliably. (k) the total amount of goodwill that is expected to be deductible for tax purposes. (l) for transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination in accordance with paragraph 51: a description of each transaction; (ii) how the acquirer accounted for each transaction; (iii) the amounts recognised for each transaction and the line item in the financial statements in which each amount is recognised; and (iv) if the transaction is the effective settlement of a pre-existing relationship, the method used to determine the settlement amount. (m) the disclosure of separately recognised transactions required by (l) shall include the amount of acquisition-related costs and, separately, the amount of those costs recognised as an expense and the line item or items in the statement of comprehensive income in which those expenses are recognised. The amount of any issue costs not recognised as an expense and how they were recognised shall also be disclosed. (n) in a bargain purchase (see paragraphs 34–36): the amount of any gain recognised in accordance with paragraph 34 and the line item in the statement of comprehensive income in which the gain is recognised; and (ii) a description of the reasons why the transaction resulted in a gain. (o) for each business combination in which the acquirer holds less than 100 per cent of the equity interests in the acquiree at the acquisition date: the amount of the non-controlling interest in the acquiree recognised at the acquisition date and the measurement basis for that amount; and (ii) for each non-controlling interest in an acquiree measured at fair value, the valuation techniques and key model inputs used for determining that value. (p) in a business combination achieved in stages: the acquisition-date fair value of the equity interest in the acquiree held by the acquirer immediately before the acquisition date; and (ii) the amount of any gain or loss recognised as a result of remeasuring to fair value the equity interest in the acquiree held by the acquirer before the business combination (see paragraph 42) and the line item in the statement of comprehensive income in which that gain or loss is recognised. (q) the following information: the amounts of revenue and profit or loss of the acquiree since the acquisition date included in the consolidated statement of comprehensive income for the reporting period; and (ii) the revenue and profit or loss of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If disclosure of any of the information required by this subparagraph is impracticable, the acquirer shall disclose that fact and explain why the disclosure is impracticable. This IFRS uses the term 'impracticable' with the same meaning as in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. B65 For individually immaterial business combinations occurring during the reporting period that are material collectively, the acquirer shall disclose in aggregate the information required by paragraph B64(e)–(q). B66 If the acquisition date of a business combination is after the end of the reporting period but before the financial statements are authorised for issue, the acquirer shall disclose the information required by paragraph B64 unless the initial accounting for the business combination is incomplete at the time the financial statements are authorised for issue. In that situation, the acquirer shall describe which disclosures could not be made and the reasons why they cannot be made. B67 To meet the objective in paragraph 61, the acquirer shall disclose the following information for each material business combination or in the aggregate for individually immaterial business combinations that are material collectively: if the initial accounting for a business combination is incomplete (see paragraph 45) for particular assets, liabilities, non-controlling interests or items of consideration and the amounts recognised in the financial statements for the business combination thus have been determined only provisionally: (i) the reasons why the initial accounting for the business combination is incomplete; (ii) the assets, liabilities, equity interests or items of consideration for which the initial accounting is incomplete; and (iii) the nature and amount of any measurement period adjustments recognised during the reporting period in accordance with paragraph 49. (b) for each reporting period after the acquisition date until the entity collects, sells or otherwise loses the right to a contingent consideration asset, or until the entity settles a contingent consideration liability or the liability is cancelled or expires: any changes in the recognised amounts, including any differences arising upon settlement; (ii) any changes in the range of outcomes (undiscounted) and the reasons for those changes; and (iii) the valuation techniques and key model inputs used to measure contingent consideration. (c) for contingent liabilities recognised in a business combination, the acquirer shall disclose the information required by paragraphs 84 and 85 of IAS 37 for each class of provision. (d) a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period showing separately: the gross amount and accumulated impairment losses at the beginning of the reporting period. (ii) additional goodwill recognised during the reporting period, except goodwill included in a disposal group that, on acquisition, meets the criteria to be classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (iii) adjustments resulting from the subsequent recognition of deferred tax assets during the reporting period in accordance with paragraph 67. (iv) goodwill included in a disposal group classified as held for sale in accordance with IFRS 5 and goodwill derecognised during the reporting period without having previously been included in a disposal group classified as held for sale. (v) impairment losses recognised during the reporting period in accordance with IAS 36. (IAS 36 requires disclosure of information about the recoverable amount and impairment of goodwill in addition to this requirement.) (vi) net exchange rate differences arising during the reporting period in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates. (vii) any other changes in the carrying amount during the reporting period. (viii) the gross amount and accumulated impairment losses at the end of the reporting period. (e) the amount and an explanation of any gain or loss recognised in the current reporting period that both: relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period; and (ii) is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity's financial statements.
- IFRS 1, 'First-time adoption of International Financial Reporting Standards', applies to interim financial reports that are presented in accordance with IAS 34 for part of the period covered by the entity's first IFRS financial statements. [IFRS 1 para 2(b)]. The first IFRS interim report should contain sufficient detail to enable users to understand the effect of the transition (including the new IFRS accounting policies), as well as the IFRS 1 reconciliations between previous GAAP and IFRS. This is likely to lead to a significantly longer report.
- Where an interim financial report has been prepared in accordance with IAS 34, that fact should be disclosed. A financial report should not be described as complying with ‘IFRS’ or 'Standards', unless it complies fully with every accounting standard issued by the IASB (or the IASC) and every interpretation issued by the IFRIC (or the SIC). [IAS 34 para 19]. We discussed the periods to present for each primary statement earlier (slide 17), but companies still get this wrong in first drafts of interim reports, for example by presenting a balance sheet as at the prior interim date, when what the standard requires is a balance sheet at the most recent year-end. Application of IFRS 1 in the year of transition in interim financial statements (as discussed on the previous slide). Clients may not appreciate that IFRS 1 disclosures and full accounting policies are required to be included in the interim financial statements, which are often the first communication to the market of the new IFRS policies – these need to be right, and need to be prepared 6 months earlier than the first IFRS year-end financial statements! Items that are unusual by their nature, size or incidence should be disclosed. An example might be a large impairment or a significant acquisition or disposal. Events and transactions that are material to an understanding of the current interim period should be disclosed (IAS 34 para 16). This includes items that may not necessarily be material in the context of the full year financial statements. Companies sometimes omit some or all of the required business combinations disclosures, which are extensive. Disclosures are also required for combinations after the end of the interim period. See earlier slide 20. Companies that are not first time adopters should disclose the effect of standards and interpretations that are mandatory for the first time in the current reporting period. Voluntary disclosure of standards and interpretations that are not yet effective, and their effect on the financial statements, is also useful. It is important to remember to tailor any checklist of such standards (for example from illustrative accounts) to the company’s own year-end! Material changes in estimates should be disclosed, for example on fair values, pensions, provisions and impairments. Such matters should be discussed with clients before the end of the interim period, as they may be reluctant to make such disclosures. This may be important in turbulent economic environments. Explanations of the effect of any seasonality on operations should be given. This is especially important for some retailers and food manufacturers, for example. Related party transactions are an example of the type of disclosures required by the standard per para 17.
- The Core principle An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates
- This session will cover an introduction to interim reporting and the requirements of IAS 34, as this topic is not included in the P2P modules. The session will follow the following structure: Section 1: Introduction - Scope of IAS 34 and requirements to publish interims - Objective of IAS 34 - Time frame for publication of interim reports - Full vs condensed financial statements Section 2: Recognition and measurement Recognition - Principles of IAS 1 - Use of same accounting policies as in annual financial statements Measurement - Special measurement issues in interim reports - Provisions and bonuses - Tax - Impairments (IFRIC 10) - Material changes in the period (including pensions) - Fair values (including investment properties) Section 3: Disclosure - Minimum disclosures – primary statements - Comparatives - Disclosure of accounting policies, especially on first time adoption - Notes to interim accounts, including seasonality - Segment reporting in interims - IFRS 3 Business combinations disclosures in interims Section 4: Other sources of information - eg Manual, NoE, Illustrative interim accounts
- Other standards making reference to IFRS 8 IAS 36 – Impairment of Assets, refers to IFRS 8 when addressing goodwill impairment testing: Goodwill has to be allocated to cash-generating units, no bigger than an operating segment. Thus, if an entity has goodwill, it has to know what its operating segments are. Therefore some IFRS 8 procedures will be necessary to comply with IAS 36, including: Identifying the ‘CODM’ Identify operating segments IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations: Definition of a discontinued operation
- The entire session is focused on these four steps. Getting each of these steps right is critical to success in appropriately applying the requirements of this standard. We will walk through each step in detail.
- Emphasise the point that the CODM encompasses a function and not a title; therefore, it may be a group of people. It is critical that clients get this right; otherwise everything else, by default, breaks down.
- The entire session is focused on these four steps. Getting each of these steps right is critical to success in appropriately applying the requirements of this standard. We will walk through each step in detail.
- We are going to look at what each of these items means in the following slides. “Engages in business activities” is very general and can encompass many things, including start-up activities, an R&D operation, a vertically integrated business, or a functional department. [Instructor Note: Draw participants attention to the drawing that illustrates the definition of a business (inputs, processes, outputs)] [Instructor Note: Ask for each item that appears (click mouse for each item) whether or not it could be an operating segment. Each subsequent click will reveal the checkmark. Be ready to explain why each of these could be an operating segment, focusing on the idea that it needs to engage in business activities that may earn revenues, its operating results are regularly reviewed by the CODM, and discrete financial information is available. For example, start up activities may qualify because IFRS 8.5 says “engages in business activities that may earn revenue and incur expenses.” In fact, IFRS 8.5 specifically identifies start-up operations as potentially qualifying as an operating segment. The other items (R&D operations, vertically integrated business, and functional departments may also be operating segments.] Understand the regular process that the CODM uses to assess performance. What information is actually used and with whom does he/she/it interact? (a starting point is the presumption that any information provided to the CODM on a regular basis, is used); Consider whether the receipt of certain specific information (such as ratios) can logically be used to assess performance and allocate resources or whether the CODM could practically perform the function at the low disaggregated level suggested by a very detailed CODM package. Identifying the segment managers and what are they responsible for is important. Segment managers are usually compensated on the basis of the results of the segment as a whole. Note however that the standard acknowledges that such a manager can be in charge of more that one operating segment. [Instructor Note: Ask the class what to do when there is a matrix operation – should they default to products and services or geography?] US GAAP will default to products and services; however, one of the few differences between the standards is in this area. Under IFRS 8, operating segments using products and services or geographies should be determined by reference to the core principle. A balance sheet is not required. Generally, discrete information would include some measure of profit. Revenue alone would generally not constitute discrete financial information for the purposes of determining the operating segments. Depending on the nature of the business, gross profit might prove sufficient.
- The entire session is focused on these four steps. Getting each of these steps right is critical to success in appropriately applying the requirements of this standard. We will walk through each step in detail.
- The first step in determining reportable segments is to identify the material segments (those that exceed one of the 10% thresholds). [Instructor Note: Ask the participants if they know the quantitative thresholds. Describe the three 10% significance tests (revenue, profit and loss, and assets) and refer participants to their flowcharts. Emphasize that the revenue threshold includes both sales to external customers and intercompany sales.] Material segments can be aggregated with other material segments or with an immaterial segment if aggregation is consistent with the core principle, the segments are economically similar, and ALL of the aggregation criteria are met. Two immaterial segments can be aggregated with each other if aggregation is consistent with the core principle, the segments are economically similar, and a MAJORITY of the aggregation criteria are met. Reportable segments must be at least 75% of external revenue. If 75% not met, the next most relevant operating segment should be reported. Once 75% threshold is met, the remaining segments can be grouped together as “All Other”. The first and last steps are the minimum requirements for reporting segments, while the second and third are optional. If a company has an operating segment that accounts for 80% of revenue, it does not have to aggregate or report the remaining segments if they are not significant. The company would, however, be required to disclose this one segment and a category of “All Other”.
- The first step in determining reportable segments is to identify the material segments (those that exceed one of the 10% thresholds). [Instructor Note: Ask the participants if they know the quantitative thresholds. Describe the three 10% significance tests (revenue, profit and loss, and assets) and refer participants to their flowcharts. Emphasize that the revenue threshold includes both sales to external customers and intercompany sales.] Material segments can be aggregated with other material segments or with an immaterial segment if aggregation is consistent with the core principle, the segments are economically similar, and ALL of the aggregation criteria are met. Two immaterial segments can be aggregated with each other if aggregation is consistent with the core principle, the segments are economically similar, and a MAJORITY of the aggregation criteria are met. Reportable segments must be at least 75% of external revenue. If 75% not met, the next most relevant operating segment should be reported. Once 75% threshold is met, the remaining segments can be grouped together as “All Other”. The first and last steps are the minimum requirements for reporting segments, while the second and third are optional. If a company has an operating segment that accounts for 80% of revenue, it does not have to aggregate or report the remaining segments if they are not significant. The company would, however, be required to disclose this one segment and a category of “All Other”. In addition to aggregation being consistent with the core principle and the segments being economically similar (both of which are ALWAYS required for aggregation), these are the five additional criteria used to determine if aggregation is appropriate. Nature of products and services (e.g., food versus heavy equipment) Nature of production process (e.g., plastic manufacturing – using moulds versus an extrusion process) Type of class of customer (e.g., government versus private) Method of distribution (e.g., wholesale versus retail versus internet) Nature of regulatory environment (e.g., banking, insurance, utilities, etc.)
- The entire session is focused on these four steps. Getting each of these steps right is critical to success in appropriately applying the requirements of this standard. We will walk through each step in detail.
- What are we actually going to disclose? Certain minimum information must be disclosed. You must disclose a measure of assets (discuss annual improvements project here – now only required to disclose measure of assets/liabilities where these are regularly provided to the CODM. Improvement effective for yrs starting 1/1/2010, early adoption is allowed) and you must disclose a measure of profits. Note that these measures may be Non-GAAP measures – remember it is through the eyes of management. What matters to management and what types of reports does the CODM review? You must consider what has been given to the CODM. So if the CODM analyses the Non-GAAP information, that information should be disclosed. Of course, the final requirement is to reconcile this information to the primary financial statement. You must disclose a measure of liabilities where such a measure is regularly reviewed by the CODM. In addition you must disclose the following additional items where they are included in the measures reviewed by management: revenue (internal and external), interest received and paid, depreciation/amortisation, separately disclosed material items of income and expenditure disclosed in accordance with IAS 1, interest in P&L of associates/JV’s, tax expense, material non-cash items. Where these amounts are included in the measure of segment assets reviewed by the CODM< the following must be disclosed: The amount of investment in Associates/JV’s accounted for under the equity method, and additions to non-current assets. *Discuss the amendment arising from the Improvements project, effective for years beginning on/after 1/1/2010. Amendment is available for early adoption ( disclosure is required). The amendment results in a measure of segment assets only being disclosed where such a measure is regularly provided to the CODM.
- In summary this disclosure requires the company to tell investors what it is that they do, what their products and services are, where they operate, and last but not least, who are their customers. This is back to basics and providing very basis information to the users of the financial statements.
- IFRS 8 does require retrospective application in a number of situations, including upon adoption. [Instructor Note: An impracticability clause has been built into the standard for instances where the information is not available and the cost to develop it would be excessive.] Restatement may also be required if a previously reportable segment becomes non-reportable. If management deems the segment to not be of continuing significance and no longer reports it separately, prior year information should be restated.