SBR Study notes – 2018 – Updated.pdf Downloaded from www PDF

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Download SBR Study notes – 2018 – Updated.pdf Downloaded from www PDF

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SBR – STRATEGIC BUSINESS REPORTING (INT) STUDY NOTES

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TABLE OF CONTENTS The conceptual and regulatory framework for financial reporting IAS 1 - Presentation of Financial Statements IAS 16 – Property, Plant and Equipment IAS 38 – Intangible assets IAS 36 – Impairment of assets IAS 40 – Investment property IAS 2 – Inventories IAS 41 – Agriculture IAS 23 – Borrowing cost IAS 20 - Government grants IAS 8 – Accounting policies, Changes in accounting estimates and Errors IAS 10 – Events after reporting date IAS 37 – Provisions, Contingent liabilities and Contingent assets IFRS 16 – Leases IFRS 15 – Revenue from contract with customers IFRS 13 – Fair value measurements IAS 19 – Employee benefits IFRS 2 - Share based payments IAS 12 – Income taxes IFRS 8 – Operating segments IAS 33 – Earnings per share IFRS 5 – Non-current assets held for sale and discontinued operations Financial Instruments IFRS 9 Financial Instruments (Replacement of IAS 39) IFRS 7 Financial Instrument Disclosures IFRS 10 Consolidated Financial Statements Consolidated Statement of Financial Position Consolidated Statement Profit or Loss and Other Comprehensive Income IAS 28 Investment in Associates IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities Changes in Group Structures IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 7 Statement of Cash Flows IAS 24 Related Party Transactions IAS 34 Interim Financial Reporting Interpretation Of Financial Statements And Ratio Analysis Small And Medium Sized Entities (SMEs) Specialiseed Not of Profit and Public Sector Entities Current Developments IFRS 1: First-Time Adoption Of International Reporting Standards Convergence With IFRS And Improvements To IFRSS

4 13 16 23 30 35 40 43 46 48 51 55 57 62 70 77 82 97 107 125 131 136 140 143 154 155 158 163 165 168 173 175 183 192 202 206 210 223 231 237 239 242

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IAS 21 – Does It Need Amending The IASB‘s Principles Of Disclosure Initiative Disclosure Initiative (Amendments To I AS 1) Future Trends In Sustainability Reporting Exposure Drafts Technical Articles

245 248 251 254 255 262

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THE CONCEPTUAL AND REGULATORY FRAMEWORK FOR FINANCIAL REPORTING CONCEPTUAL FRAMEWORK The IFRS Framework describes the basic concepts that underlie the preparation and presentation of financial statements for external users. A conceptual framework can be seen as a statement of generally accepted accounting principles (GAAP) that form a frame of reference for the evaluation of existing practices and the development of new ones. Purpose of framework It is true to say that the Framework:      

Seeks to ensure that accounting standards have a consistent approach to problem solving and do not represent a series of ad hoc responses that address accounting problems on a piece meal basis Assists the IASB in the development of coherent and consistent accounting standards Is not a standard, but rather acts as a guide to the preparers of financial statements to enable them to resolve accounting issues that are not addressed directly in a standard Is an incredibly important and influential document that helps users understand the purpose of, and limitations of, financial reporting Used to be called the Framework for the Preparation and Presentation of Financial Statements Is a current issue as it is being revised as a joint project with the IASB's American counterparts the Financial Accounting Standards Board.

Advantages of a conceptual framework  Financial statements are more consistent with each other  Avoids firefighting approach and a has a proactive approach in determining best policy  Less open to criticism of political/external pressure  Has a principles based approach  Some standards may concentrate on effect on statement of financial position; others on statement of profit or loss Disadvantages of a conceptual framework  A single conceptual framework cannot be devised which will suit all users  Need for a variety of standards for different purposes  Preparing and implementing standards may still be difficult with a framework The purpose of financial reporting is to provide useful information as a basis for economic decision making. OVERVIEW OF THE CONTENTS OF THE FRAMEWORK The starting point of the Framework is to address the fundamental question of why financial statements are actually prepared. The basic answer to that is they are prepared 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. In turn this means the Framework has to consider what is meant by useful information. In essence for information to be useful it must be considered both relevant, i.e. capable of making a difference in the

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decisions made by users and be faithful in its presentation, i.e. be complete, neutral and free from error. The usefulness of information is enhanced if it is also comparable, verifiable, timely, and understandable. The Framework also considers the nature of the reporting entity and the basic elements from which financial statements are constructed. The Framework identifies three elements relating to the statement of financial position, being assets, liabilities and equity, and two relating to the statement of profit or loss, being income and expenses. The definitions and recognition criteria of these elements are very important and these are considered in detail below. THE FIVE ELEMENTS An asset is defined as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Assets are presented on the statement of financial position as being non-current or current. They can be intangible, that is, without physical presence – for example, goodwill. Examples of tangible assets include property plant and equipment and inventory. While most assets will be both controlled and legally owned by the entity it should be noted that legal ownership is not a prerequisite for recognition, rather it is control that is the key issue. For example IFRS 16, Leases, with regard to a lessee, is consistent with the Framework's definition of an asset. IFRS 16 requires that the lessee should recognise a leased asset on the statement of financial position in respect of the benefits that it controls, even though the asset subject to the lease is not the legally owned by the lessee. So this reflects that from lessee‘s perspective the economic reality of a lease is a loan to buy an asset, and so the accounting is a faithful presentation. A liability is defined as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Liabilities are also presented on the statement of financial position as being non-current or current. Examples of liabilities include trade payables, tax payable and loans. It should be noted that in order to recognise a liability there does not have to be an obligation that is due on demand but rather there has to be a present obligation. Thus for example IAS 37, Provisions, Contingent Liabilities and Contingent Assets is consistent with the Framework's approach when considering whether there is a liability for the future costs to decommission oil rigs. As soon as a company has erected an oil rig that it is required to dismantle at the end of the oil rig's life, it will have a present obligation in respect of the decommissioning costs. This liability will be recognised in full, as a n oncurrent liability and measured at present value to reflect the time value of money. The past event that creates the present obligation is the original erection of the oil rig as once it is erected the company is responsible to incur the costs of decommissioning. Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities. The effect of this definition is to acknowledge the supreme conceptual importance of identifying, recognising and measuring assets and liabilities, as equity is conceptually regarded as a function of assets and liabilities, i.e. a balancing figure. Equity includes the original capital introduced by the owners, i.e. share capital and share premium, the accumulated retained profits of the entity, i.e. retained earnings, unrealised asset gains in the form of revaluation reserves and, in group accounts, the equity interest in the subsidiaries not enjoyed by the parent company, i.e. the non-controlling interest (NCI). Slightly more exotically, equity can also include the equity element of convertible loan stock, equity settled share based payments, differences arising when there are increases or decreases in the NCI, group foreign exchange differences and contingently

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issuable shares. These would probably all be included in equity under the umbrella term of Other Components of Equity. Income is defined as the increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Most income is revenue generated from the normal activities of the business in selling goods and services, and as such is recognised in the Income section of the statement of profit or loss and other comprehensive income, however certain types of income are required by specific standards to be recognised directly to equity, i.e. reserves, for example certain revaluation gains on assets. In these circumstances the income (gain) is then also reported in the Other Comprehensive Income section of the statement of profit or loss and other comprehensive income. The reference to ‗other than those relating to contributions from equity participants‘ means that when the entity issues shares to equity shareholders, while this clearly increases the asset of cash, it is a transaction with equity participants and so does not represent income for the entity. Again note how the definition of income is linked into assets and liabilities. This is often referred to as ‗the balance sheet approach‘ (the former name for the statement of financial position). Expenses are defined as decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. The reference to ‗other than those relating to distributions to equity participants‘ refers to the payment of dividends to equity shareholders. Such dividends are not an expense and so are not recognised anywhere in the statement of profit or loss and other comprehensive income. Rather they represent an appropriation of profit that is as reported as a deduction from Retained Earnings in the Statement of Changes in Equity. Examples of expenses include depreciation, impairment of assets and purchases. As with income most expenses are recognised in the profit or loss section of the statement of profit or loss and other comprehensive income, but in certain circumstances expenses (losses) are required by specific standards to be recognised directly in equity and reported in the Other Comprehensive Income section of the statement of profit or loss and other comprehensive income. An example of this is an impairment loss, on a previously revalued asset, that does not exceed the balance of its revaluation reserve. The recognition criteria of elements of financial statements The Framework also lays out the formal recognition criteria that have to be met to enable elements to be recognised in the financial statements. Recognition is the process of incorporating in the statement of financial position or statement of profit or loss an item that satisfies the following criteria for recognition:   

An item that meets the definition of an element It is probable that any future economic benefit associated with the item will flow to or from the entity and The item‘s cost or value can be measured with reliability.

Recap: Application of recognition criteria 

An asset is recognised in the statement of financial position when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.

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  

A liability is recognised in the statement of financial position when it is probable that an outflow of resources embodying 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. Income is recognised in the statement of profit or loss when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. Expenses are recognised when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.

Measurement issues for elements Finally the issue of whether assets and liabilities should be measured at cost or value is considered by the Framework. To use cost should be reliable as the cost is generally known, though cost is not necessary very relevant for the users as it is past orientated. To use a valuation method is generally regarded as relevant to the users as it up to date, but value does have the drawback of not always being reliable. This conflict creates a dilemma that is not satisfactorily resolved as the Framework is indecisive and acknowledges that there are various measurement methods that can be used. The failure to be prescriptive at this basic level results in many accounting standards sitting on the fence how they wish to measure assets. For example, IAS 40, Investment Properties and IAS 16, Property, Plant and Equipment both allow the preparer the choice to formulate their own accounting policy on measurement. Measurements of elements in financial statements The IFRS Framework acknowledges that a variety of measurement bases can be used. Examples are as follows:     

Historical cost Current cost (Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently) Net realisable value (The amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal) Present value (A current estimate of the present discounted value of the future net cash flows in the normal course of business) Fair value (As per IFRS 13)

HISTORICAL COST ACCOUNTING The application of historical cost accounting means that assets are recorded at the amount they originally cost, and liabilities are recorded at the proceeds received in exchange for the obligation. Advantages  Simple to understand  Figures are objective, reliable and verifiable  Results in comparable financial statements  There is less possibility for manipulation by using 'creative accounting' in asset valuation.

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Disadvantages  The carrying value of assets is often substantially different to market value  No account is taken of inflation meaning that profits are overstated and assets understated  Financial capital is maintained but not physical capital  Ratios like Return on capital employed are distorted  It does not measure any gain/loss of inflation on monetary items arising from the impact  Comparability of figures is not accurate as past figures are not restated for the effects of inflation FINACIAL AND PHYSICAL CAPITAL MAINTENANCE The IASB Conceptual Framework identifies two concepts of capital: 1. A financial concept of capital 2. A physical concept of capital Financial capital maintenance A financial concept of capital is whereby the capital of the entity is linked to the net assets, which is the equity of the entity. When a financial concept of capital is used, a profit is earned only if the financial amount of the net assets at the end of the period is greater than the net assets at the beginning of the period, adjusted of course for any distributions paid to the owners during the period, or any equity capital raised. The main concern of the users of the financial statements is with the maintenance of the financial capital of the entity. Assets – Liabilities = Equity Opening equity (net assets) + Profit – Distributions = Closing equity (net assets) Physical capital maintenance A physical concept of capital is one where the capital of an entity is regarded as its production capacity, which could be based on its units of output. When a physical concept of capital is used, a profit is earned only if the physical production capacity (or operating capability) of the entity at the end of the period is greater than the production capacity at the beginning of the period, adjusted for any distributions paid to the owners during the period, or any equity capital raised. QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION They identify the types of information likely to be most useful to users in making decisions about the reporting entity on the basis of information in its financial report. Fundamental qualitative characteristics  Relevance Relevant financial information is capable of making a difference in the decisions made by users if it has predictive value, confirmatory value, or both. Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity's financial report.

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Faithful representation Information must be complete, neutral and free from material error

Enhancing qualitative characteristics  Comparability Comparison with similar information about other entities and with similar information about the same entity for another period or another date.  Verifiability It helps to assure users that information represents faithfully the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement  Timeliness It means that information is available to decision-makers in time to be capable of influencing their decisions.  Understandability Classifying, characterising and presenting information clearly and concisely. Information should not be excluded on the grounds that it may be too complex/difficult for some users to understand The IFRS framework states that going concern assumption is the basic underlying assumption. RESTRUCTURING OF CONCEPTUAL FRAMEWORK BY IASB The International Accounting Standards Board (IASB) is coming towards the end of its own renovation process on the Conceptual Framework for Financial Reporting 2010 . Chapter 1, The objective of general purpose financial reporting The only major change to ‗Chapter 1, The objective of general purpose financial reporting‘ is that the IASB proposes the reintroduction of the term ‗stewardship‘ into the objective of general purpose financial reporting. This is a relatively minor change and a nice gentle ease-in to the process. As many respondents to the consultation highlighted, stewardship is not a new concept. The importance of stewardship by management is inherent within the existing framework and within financial reporting, so this statement may largely be reinforcing what already exists. Chapter 2, The reporting entity The 2010 framework has had ‗Chapter 2, The reporting entity‘ classified as ‗to be added‘ since inception. The major additions here relate to the description and boundary of a reporting entity. The IASB has proposed the description of a reporting entity as an entity that chooses or is required to prepare general purpose financial statements. The proposed boundaries outline that the financial statements of a reporting entity whose boundary is based on direct control only are called u...