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Diploma in IFRS Module 1 Introduction to IFRS, Role of IASB, Key Principles and Preparation of Primary Statements title goes here

Introduction and Overview Learning Objectives Understand the context of International Financial Reporting How to adopt IFRS for the first time (IFRS 1) Understand basic principles of Framework Be able to apply the basic principles in practice via IAS 8 Be able to prepare the primary financial statements in accordance with IAS 1

Introduction and Overview Learning Objectives Be able to define and distinguish accounting policies, accounting estimates and errors (IAS 8) Be able to define discontinued operations and incorporate into the primary statements (IFRS 5) Be able to prepare cash flow statements (IAS 7)

More information www.iasb.org.uk www.iasplus.com.uk www.asb.org.uk www.company reporting.com.uk

The Role of the IASB, IFRS Advisory and IFRS Interpretations Committee Successor to IASC Output - 41 IASs and 13 IFRS Financial Reporting Structure (see next slide)

Financial Reporting Structure

The IASB The Three Objectives High quality global standards Promote use and rigorous application Work for convergence Convergence with FASB Experienced full time professionals EFRAG and EU endorsement

The Standard Setting Process

IASB “ In partnership with national standard setters, we will aim to increase the transparency of financial reporting by achieving a single, global method of accounting for transactions. The potential benefit to the world economy by removing barriers to investment through applying uniform, high quality standards is enormous ” Sir David Tweedie, Chairman

The IFRS Interpretations Committee Objectives Specific issues in applying existing standards Emerging issues

International Financial Reporting Standards IFRS 1First Time Adoption of IFRS

Transition date Opening IFRS Statement of Financial Position Recognise all assets and liabilities required by IFRS Not recognise assets/liabilities if IFRS do NOT permit Reclassify items in accordance with IFRS Apply IFRSs in measuring assets/liabilities List of possible exemptions List of mandatory exceptions Disclosures IFRS 1 First Time Adoption of IFRS

30.6.12 31.12.11 31.12.12 1.1.11 First IFRS Interim accounts First full IFRS accounts Transition Date Transition Date 31 December year end 1st year of adoption Comparative year

Business combinations Fair value or revaluations at deemed cost Employee benefits Cumulative translation differences Compound financial instruments List of Possible Exemptions Entities may elect to apply these exemptions.

Derecognition of financial assets & financial liabilities Hedge accounting List of Mandatory Exceptions to Retrospective Application of Other IFRSs IFRS prohibits retrospective application of other IFRSs relating to the above items.

Disclosures in First IFRS Annual Accounts IFRS Balance Sheet 1.1.11 Effect on equity of adjustments from UK/IRISH/IRISH GAAP to IFRS Additional detailed disclosures (see IASPLUS website) Year end 31.12.12 Normal IFRS disclosures Year end 31.12.11 (comparatives) Normal IFRS disclosures Reconciliation of profit and equity from UK/IRISH GAAP to IFRS Changes to cash flow statement

Self Test Question Torrey Plc Reconciliation of equity at the date of transition

Extracts from Published Accounts Carrefour SA Group (France)

Current Work Plan Financial Crisis Related Projects Memorandum of Understanding Projects Other Projects Conceptual Framework

Current Work Plan

International Financial Reporting Standards

International Financial Reporting Standards IFRSs IFRS 1 First Time Adoption of IFRSs IFRS 2 Share Based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Disposal of Non Current Assets and Presentation of Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosure IFRS 8 Operating segments IFRS 9 Financial instruments (replacement of IAS 39) IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement

Conceptual Framework For Financial Reporting 2010 International Financial Reporting Standards

IASB Framework Purposes To assist the IASB in setting standards To serve as a basis for harmonisation To assist national standard-setters To assist preparers, auditors and users To assist in understanding the standard-setting process

IASB Framework Status - Non authoritative Standards prevail Aim of IASB is to reduce conflicts between the Framework and standards Living document

IASB Framework Scope Objective of general purpose financial statements Qualitative characteristics that determine usefulness of information Definition, recognition and measurement of the elements of financial statements Concepts of capital and capital maintenance.

IASB Framework – Objective “to provide information about the financial position, performance and changes in financial position that is useful to a wide range of users in making economic decisions” Stewardship and Decision Making

IASB Framework - Users and Information Needs Investors Employees Lenders Suppliers and other trade payables Customers Governments and their agencies Public

IASB Framework – Underlying Assumptions Accruals basis Going Concern

IASB Framework – Qualitative Characteristics Fundamental QCs Relevance Materiality Faithful representation Substance over form Neutrality Prudence Completeness Enhancing QCs Understandability Efficient markets Comparability

IASB Framework – Elements of Financial Statements Statement of Financial Position Assets Liabilities Equity Financial Performance Income (Revenue, gains) Expenses

IASB Framework – Recognition of the Elements Sufficient evidence that a change in assets/liabilities has occurred Can the cost/value of an asset/liability be measured with sufficient reliability

IASB Framework – Measurement Bases of measurement Historical cost Current cost Realisable (selling) value Present value

IASB Framework - Concepts of Capital Maintenance Financial capital maintenance (e.g. Current Purchasing Power) Physical capital maintenance (e.g. Current Cost Accounting)

IASB Framework – Implications Most heavily employed in definition and recognition of elements, and in determining the borders of a reporting entity Most challenged in area of measurement and classification (eg financial instruments, impairments, equity based compensation, defined benefit pension schemes)

Comparison with UK/Irish Gaap Statement of Principles Elements – ownership interest Recognition criteria Creation or change in A/L and reliable measure Conceptual Framework Elements – equity Recognition criteria Definition, probability and reliable measure

International Financial Reporting Standards IAS 1 Presentation of Financial Statements

IAS 1 Presentation of Financial Statements Primary Statements Statement of Financial Position Statement of Comprehensive Income or Income Statement and Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows

IAS 1 Presentation of Financial Statements Overall Considerations Fair Presentation and Compliance with IFRS (can depart RARE circumstances) Going concern Offsetting Comparative information Identification of the Financial Statements

IAS 1 Presentation of Financial Statements Statement of Financial Position Minimum Headings Current assets Current liabilities Information to be presented on the face of the Statement of Financial Position (see next slide)

IAS 1 Presentation of Financial Statements Assets (a) property, plant and equipment; (b) investment property; (c) intangible assets; (d) financial assets (e) investments accounted for under the equity method (f) biological assets (g) inventories; Liabilities (a) trade and other payables; (b) provisions (c) financial liabilities (d) current tax (e) deferred tax Equity (a) capital and reserves (b) non controlling interests

IAS 1 Presentation of Financial Statements

Practical Example Slovnaft AS (Slovakia)

IAS 1 Presentation of Financial Statements Statement of Comprehensive Income Two statements or one Amendment – only one statement (Dropped) Information to be presented on the face of the Income Statement Allocation of profit – NCI/equity holders of parent Analysis of expenses – nature or function

Practical Examples Attica SA (Greece) (Single Performance Statement) Norsk Hydro ASA (Norway) (Two Performance Statements)

IAS 1 Presentation of Items in OCI (June 2011)

IAS 1 Statement of Profit or Loss and Other Comprehensive Income (amended 2011)

IAS 1 Presentation of Financial Statements Statement of Changes in Equity A statement showing the change in equity for the period resulting from income, expenses, gains and losses (including prior period adjustments) must be presented Other changes in equity must also be disclosed either as part of the statement or in the notes

Practical Examples Linmark Group (Hong Kong)

IAS 1 Notes to the Financial Statements Structure Accounting Policies Judgements Key sources of estimation uncertainty

Primary statements IAS 1 Summary Statement of Comprehensive Income OR income Statement and Statement of Comprehensive Income Statement of Financial Position Statement of changes in equity Statement of Cash Flows Notes in order of Primary statements Material Accounting policies including key sources of estimation uncertainty

IAS 1 Other Disclosures Proposed dividends Domicile, legal form, country of incorporation, nature of operations, principal activities, name of parent and ultimate parent Review of Performance – PS Management Commentary (Dec 2010)

Comparison with UK/Irish Gaap IAS 1 Different terminology Property etc, Inventories, receivables Primary Statements Statement of Financial Position Income Statement Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows EU Directives (Cos Acts) Different Terminology Fixed assets, stocks, debtors Primary Statements Balance sheet Profit and loss account Statement of total recognised gains and losses Note – reserves movement Cash flow statement

Preparation of Published Financial Statements under IAS 1 Read the question carefully, particularly the notes to T/B, identify issues and stds Identify on T/B which primary statement Ensure items in notes recorded twice and show workings clearly Finally prepare primary statements – page each – even prepare pro forma in advance

Self Test Example Brooklyn Plc

International Financial Reporting Standards IAS 8 Accounting Policies, Changes in Accounting estimates and Errors

IAS 8 Accounting policies, changes in estimates and errors Objectives Accounting Policies Selection and application Consistency Changes in policy Applying the changes in policy Disclosure

IAS 8 Accounting policies, changes in accounting estimates and errors Changes in accounting estimates Distinguish from policy changes Disclosure

Flowchart: Changes in Accounting Policies versus Changes in Accounting Estimates Change in presentation e.g. move expenses from administration to cost of sales Change in accounting policy Change in measurement base e.g. FIFO to Weighted Average Move transaction from one primary statement to another e.g. capitalise borrowing costs for first time Change in accounting estimate All other changes

IAS 8 Accounting policies, changes in accounting estimates and errors Prior Period Errors Definition Accounting treatment Disclosure

IAS 8 Accounting policies, changes in accounting estimates and errors Self Test questions XYZ Plc Change in accounting policy XYZ Plc Prior period error

Practical Example – Change in Accounting Policy – Reclassification (C & C Group Plc – Ireland)

Practical example – Change in accounting policy – Presentation (IFG PLC - Ireland)

Practical Example – Correction of Material Error – (Greencore Plc – Ireland)

Comparison with UK/Irish Gaap IAS 8 Errors All material errors – prior period adjustment FRS 3 Fundamental errors Only fundamental errors – prior period adjustment

International Financial Reporting Standards IFRS 5 Non Current assets Held For Sale and Presentation of Discontinued Operations

IFRS 5 Non Current Assets Held For Sale and Presentation of Discontinued Operations Non Current Assets Held For Sale management must be committed to and have the authority to approve the action to sell the asset/group of assets; the asset or disposal group must be available for immediate sale in its present condition subject to the usual terms an active programme to locate a buyer must be initiated; the sale must be highly probable and be expected to qualify for recognition as a completed sale within one year from the date of classification as ‘held for sale’. the asset or disposal group has been actively marketed for sale at a reasonable price in relation to its fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or the plan withdrawn.

IFRS 5 Non Current Assets Held For Sale and Presentation of Discontinued Operations Measurement of Non Current Assets Held For Sale Lower of carrying amount and fair value less costs to sell Discount to present value Change to a Plan For Sale

IFRS 5 Non Current Assets Held For Sale and Presentation of Discontinued Operations Example Year 1 Asset meets criteria to be reclassified as a non-current asset held for sale Asset cost 100 Recoverable amount 60 Transfer to non-current assets held for sale Impairment loss 40 Income statement Dr Income (impairment loss) 40 Current assets (non-current assets held for sale) 60 Cr Non-current assets 100 Being the transfer of non-current assets held for sale from non current assets to current assets at their recoverable amount and recording impairment losses to reduce the asset to its recoverable amount through the income statement

IFRS 5 Non Current Assets Held For Sale and Presentation of Discontinued Operations Year 2 Change of plan and asset is no longer to be sold Recoverable amount 120 Original net book value 100 Adjusted for depreciation that would have been recognised (say 10%) 10 90 Lower of 120 and 90 is 90 Dr Non-current assets 90 Cr Current assets (Non-current assets held for sale) 60 Cr Income 30 Being the restatement of asset into non-current assets at the lower of its recoverable amount and its original net book value as adjusted for depreciation that would have been charged had the asset remained in non-current assets

Example Presentation of a Non-Current Asset or Disposal Group Classified as Held for Sale Tullow Oil Plc Year ended 31st December 2008 (Ireland)

Example Presentation of a Non-Current Asset or Disposal Group Classified as Held for Sale

IFRS 5 Discontinued Operations A component of an entity that either has been disposed of or is classified as held for sale and: represents a separate major line of business or geographical area of operations; or is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to resale.

IFRS 5 Discontinued Operations Presentation and Disclosure Information should be presented to enable users to evaluate the financial effects of discontinued operations An entity therefore must disclose for all periods presented: a single amount on the face of the Statement of Comprehensive Income comprising: the post tax profit/loss of discontinued operations the post tax gains/losses on measurement to fair value or on disposal of discontinued operations; analysis of above in the notes or statement into: revenue, expenses and pre tax profits/losses of discontinued operations

IFRS 5 Discontinued Operations Presentation and Disclosure Gains/losses on disposal of discontinued operations Profit/loss on discontinued operations for period Single profit or loss on face of income statement related tax expense gains/losses on measurement to fair value or on disposal of discontinued operations related tax expense. The net cash flows attributable to the operating, investing and financing activities of discontinued operations.

IFRS 5 Examples – Discontinued Operations Fosters Group Limited Year ended 30th June 2009 (Australia)

IFRS 5 Example – Discontinued Operation Fosters Group Limited Year ended 30th June 2009 (Australia)

Practical Example – IFRS 5 Veris Plc Year ended 31st December 2008 (Ireland)

Veris Plc IFRS 5 Discontinued Operations

Veris Plc IFRS 5 NCA Held for Sale

Flowchart – Summary of IFRS 5 Non Current Assets Held For Sale Presentation of Discontinued Operations Must meet 6 criteria Satisfy definition Selling off net assets (disposal group) Writedown to Recoverable Amount Present as single item at foot of income statement Move into Current Assets and separately disclose

IFRS 5 Self Test Question Discontinued Operation Lecale

Comparison with UK/Irish Gaap IFRS 5 Non current assets held for sale Moved to current assets – meet 6 criteria Discontinued Operations Presented as one net figure on face of the income statement inclusive of profits/losses on disposal FRS 3 Non current assets held for sale Not covered in UK Gaap Discontinued Operations Split turnover and operating profit between continuing, discontinued and acquisitions Other items in notes or in memorandum column on income statement

International Financial Reporting Standards IAS 7 Statements of Cash Flow

IAS 7 Statements of Cash Flow Content Operating Activities Investing Activities Financing Activities

IAS 7 Statements of Cash Flow Operating Activities Option of two methods Direct Method Indirect Method

IAS 7 Statements of Cash Flow Direct Method Cash flows from operating activities Cash receipts from customers 30,150 Cash paid to suppliers and employees (27,600) Cash generated from operations 2,550 Interest paid ( 270) Income taxes paid ( 900) Cash flow before extraordinary item 1,380 Proceeds from earthquake disaster settlement 180 Net cash from operating activities1,560

IAS 7 Statements of Cash Flow Indirect Method Cash flows from operating activities Net profit before taxation, and extraordinary item 3,350 Adjustments for: Depreciation 450 Foreign exchange loss 40 Investment income ( 500) Interest expense 400 Operating profit before working capital changes 3,740 Increase in trade and other receivables ( 500) Decrease in inventories 1,050 Decrease in trade payables (1,740) Cash generated from operations 2,550 Interest paid ( 270) Income taxes paid ( 900) Cash flows before extraordinary item 1,380 Proceeds from earthquake disaster settlement 180 Net cash from operating activities 1,560

IAS 7 Statements of Cash Flow Investing Activities Purchases and sales of long term assets Purchases and sales of investments Only 1 figure presented for acquisitions and disposals

IAS 7 Statements of Cash Flow Example W Ltd acquired 100% of Z Ltd. The purchase consideration was 100 ordinary shares of 1 each, 40 6% loans and 20 cash. The fair value of the net assets acquired was 90 (including 10 cash) Total purchase consideration 160 (including 20 cash discharged) Fair value of net assets acquired 90 (including 10 cash balances acquired) Goodwill 70 Summary of other assets acquired Plant 40 Inventories 30 Trade receivables 20 Trade payables (10) 80 Under investing cash flows the acquisition of Z Ltd would be recorded as a net outflow of 10 (i.e. 20 cash discharged minus 10 cash acquired)

IAS 7 Statements of Cash Flows Financing Activities Cash proceeds from sale of shares Cash payments to redeem/acquire the enterprises shares Cash proceeds from issue of debentures, loans etc Cash repayments of loans etc Cash repayments of principal of finance lease liabilities

IAS 7 Statements of Cash Flow Operating Direct Method Cash Flows Indirect Method Investing Financing

IAS 7 Statements of Cash Flow Cash and cash equivalents Illustrative Disclosure Example Analysis of components of cash and cash equivalents 2012 2011 Balance of cash in hand 20 10 Balance of cash at bank 40 30 Investment in short-term liquid investments 30 30 Bank overdraft (30) (40) 60 30 Included within the bank balance are 20 (5 2011) cash balances which are not currently available for use by the group as they are under foreign exchange controls in Ruritania.

IAS 7 Statements of Cash Flow Other issues Foreign Currency Cash Flows Specimen Format See next slide

IAS 7 Statements of Cash Flow (Specimen) Cash flows from operating activities Net profit before taxation, and extraordinary item 3,350 Adjustments for: Depreciation 450 Foreign exchange loss 40 Investment income ( 500) Interest expense 400 Operating profit before working capital changes 3,740 Increase in trade and other receivables ( 500) Decrease in inventories 1,050 Decrease in trade payables (1,740) Cash generated from operations 2,550 Interest paid ( 270) Income taxes paid ( 900) Cash flows before extraordinary item 1,380 Proceeds from earthquake disaster settlement 180 Net cash from operating activities 1,560 Cash flows from investing activities Acquisition of subsidiary X net of cash acquired (Note A) ( 550) Purchase of property, plant and equipment (Note B) ( 350) Proceeds from sale of equipment 20 Interest received 200 Dividends received 200 Net cash used in investing activities ( 480) Cash flows from financing activities Proceeds from issuance of share capital 250 Proceeds from long-term borrowings 250 Payment of finance lease liabilities ( 90) Dividends paid * (1,200) Net cash used in financing activities (790) Net increase in cash and cash equivalents 290 Cash and cash equivalents at beginning of period (Note C) 120 Cash and cash equivalents at end of period (Note C) 410 * This could also be shown as an operating cash flow

IAS 7 Statements of Cash Flow Practical Implementation Ensure that the assessment question is read carefully noting down the adjustments required in the notes Prepare workings to calculate actual cash flows for property movements, taxation, interest etc Prepare the indirect method or direct method, as appropriate Prepare statement of cash flows Prepare any notes if required

IAS 7 Statements of Cash Flow Self Test Questions Coney Plc (Indirect Method) Lagos Plc (Direct Method)

IAS 7 Published Accounts (Indirect Method) Anheuser Busch Inbev Year ended 31st December 2009 (Belgium)

IAS 7 Published Accounts (Direct Method) Fletcher Building Ltd Year ended 30th June 2009 (New Zealand)

Comparison with UK/Irish Gaap IAS 7 Only three headings Operating, Investing, Financing Choice of direct or indirect method Cash and cash equivalents Reconciliation to movement in net debt not required FRS 1 Nine headings Operating, Returns on investment and servicing of finance, Dividends from associated companies, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid, management of liquid resources, financing Indirect method required Cash only Reconciliation to movement in net debt required

Module 1 Case Studies Case Study 1 Jersey Plc (Income Statement/Statement of Financial Position) Case Study 2 Ailsa Plc (IFRS 5) Case Study 3 Bakerloo Plc (IAS 8) Case Study 4 Turnpike Ltd (Income Statement/Statement of Financial Position) Case Study 5 Troodos Plc (Statement of Cash Flows – indirect method)

Module 1 Learning Objectives Now that you have completed this module, you should: Be able to explain the role of the International Accounting Standards Board(IASB) and convergence projects with other GAAP, particularly US standards Understand how the IASB Structure works, what its objectives are and understand the process developed to both publish new standards and deal with non-urgent, minor amendments to existing IFRSs Have an awareness of the role of IFRS Interpretations Committee (IFRIC) and how it functions Be able to understand the transitional arrangements on the First Time Application of IFRS (IFRS 1) and being able to apply them Have an awareness of the current projects in which the IASB is involved for developing new or amended standards in the coming years Understand the content of the Framework for the Preparation and Presentation of Financial Statements and how it has been applied in developing new IFRSs Have an awareness of the current exposure drafts(EDs) updating the framework and what impact these will have on developing IFRSs in the future

Module 1 Learning Objectives Have a detailed understanding of IAS 1: Presentation of Financial Statements as per Revisions to IAS 1 for 2012 and update on phase B of the presentation project including the ED Presentation of Items of Comprehensive Income (May 2010) Be able to define accounting policies, accounting estimates and errors Understand the distinction between a change in accounting policy and a change in accounting estimate and their appropriate accounting treatment, particularly the application of prior period adjustments Be able to calculate and disclose the transactions required for prior period errors Be able to define discontinued operations Be able to prepare a Statement of Comprehensive Income and Statement of Financial Position to incorporate the inclusion of discontinued operations under IFRS 5 Be able to discuss the criteria to be passed before assets can be classified as non-current under IFRS 5 and show how these must be presented in the Statement of Financial Position Be able to prepare the Statement of Cash Flows under IAS 7 Understand the option of the direct and indirect methods of presenting operating cash flows Be aware of how to account for taxation, interest receipts and payments and cash equivalents in preparing statements of cash flows

Useful Websites www.charteredaccountants.ie www.ifrs.org.uk www.iasplus.com.uk www.frc.org.uk www.aicpa.org www.company reporting.com.uk

Further reading International Financial Accounting and Reporting (3rd Edition) Ciaran Connolly CA Ireland International Financial Reporting Standards in Depth RJ Kirk CIMA Publishing/Elsevier Volume 1 and 2 International Financial Reporting Standards: A Quick Reference Guide RJ Kirk CIMA Publishing/Elsevier International Financial Reporting A Practical Guide Alan Melville FT Prentice Hall Financial Accounting and Reporting Bill Collins and John McKeith McGraw Hill

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