17 Reporting Financial Performance

Question 1

Define Accounting policies; A change in accounting estimate; Material; Prior period errors

Answer 1

 Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.  A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.  Material. Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.  Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: – Was available when financial statements for those periods were authorised for issue – Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Question 2

Define Retrospective application; Retrospective restatement; Prospective application;

Answer 2

 Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied.  Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred.  Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting estimate, respectively, are: – Applying the new accounting policy to transactions, other events and conditions occurring after the date as at which the policy is changed – Recognising the effect of the change in the accounting estimate in the current and future periods affected by the change

Question 3

Define Impracticable

Answer 3

Impracticable. Applying a requirement is impracticable when the entity cannot apply it after making every reasonable effort to do so. It is impracticable to apply a change in an accounting policy retrospectively or to make a retrospective restatement to correct an error if one of the following apply. – The effects of the retrospective application or retrospective restatement are not determinable. – The retrospective application or retrospective restatement requires assumptions about what management’s intent would have been in that period. – The retrospective application or retrospective restatement requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that: (i) Provides evidence of circumstances that existed on the date(s) at which those amounts are to be recognised, measured or disclosed (ii) Would have been available when the financial statements for that prior period were authorised for issue, from other information

Question 4

Where there is no applicable IFRS or Interpretation management should use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. Management should refer to:

Answer 4

(a) The requirements and guidance in IFRSs and IFRICs dealing with similar and related issues (b) The definitions, recognition criteria and measurement concepts for assets, liabilities and expenses in the Conceptual Framework

Question 5

Changes in accounting policies: Accounting for changes of policy The same accounting policies are usually adopted from period to period, to allow users to analyse trends over time in profit, cash flows and financial position. Changes in accounting policy will therefore be rare and should be made only if:

Answer 5

The change is required by an IFRS; or
(b) The change will result in a more appropriate presentation of events or transactions in the financial statements of the entity, providing more reliable and relevant information.

Question 6

The standard highlights two types of event which do not constitute changes in accounting policy:

Answer 6

(a) Adopting an accounting policy for a new type of transaction or event not dealt with previously by the entity
(b) Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material

Question 7

A change in accounting policy must be applied retrospectively. Retrospective application means that the new accounting policy is applied to transactions and events as if it had always been in use. In other words, at the earliest date such transactions or events occurred, the policy is applied from that date.t/f

Answer 7

A change in accounting policy must be applied retrospectively. Retrospective application means that the new accounting policy is applied to transactions and events as if it had always been in use. In other words, at the earliest date such transactions or events occurred, the policy is applied from that date.

Question 8

Accounting for changes of policy The same accounting policies are usually adopted from period to period, to allow users to analyse trends over time in profit, cash flows and financial position. Changes in accounting policy will therefore be rare and should be made only if:

Answer 8

(a) The change is required by an IFRS; or
(b) The change will result in a more appropriate presentation of events or transactions in the financial statements of the entity, providing more reliable and relevant information. The standard highlights two types of event which do not constitute changes in accounting policy: (a) Adopting an accounting policy for a new type of transaction or event not dealt with previously by the entity
(b) Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material

Question 9

A change in accounting policy must be applied retrospectively. Retrospective application means that the new accounting policy is applied to transactions and events as if it had always been in use. In other words, at the earliest date such transactions or events occurred, the policy is applied from that date. Prospective application is no longer allowed under IAS 8 unless it is impracticable (see Key Terms) to determine the cumulative effect of the change. T/F

Answer 9

A change in accounting policy must be applied retrospectively. Retrospective application means that the new accounting policy is applied to transactions and events as if it had always been in use. In other words, at the earliest date such transactions or events occurred, the policy is applied from that date. Prospective application is no longer allowed under IAS 8 unless it is impracticable (see Key Terms) to determine the cumulative effect of the change

Question 10

Adoption of an IFRS Where a new IFRS is adopted, resulting in a change of accounting policy, IAS 8 requires any transitional provisions in the new IFRS itself to be followed. If none are given in the IFRS which is being adopted, then you should follow the general principles of IAS 8. T/F

Answer 10

Adoption of an IFRS Where a new IFRS is adopted, resulting in a change of accounting policy, IAS 8 requires any transitional provisions in the new IFRS itself to be followed. If none are given in the IFRS which is being adopted, then you should follow the general principles of IAS 8

Question 11

Disclosure Certain disclosures are required when a change in accounting policy has a material effect on the current period or any prior period presented, or when it may have a material effect in subsequent periods.

Answer 11

(a) Reasons for the change/nature of change (b) Amount of the adjustment for the current period and for each period presented (c) Amount of the adjustment relating to periods prior to those included in the comparative information (d) The fact that comparative information has been restated or that it is impracticable to do so

Question 12

Disclosure is important to maintain the principle of comparability. Users should be able to compare the financial statements of an entity over time and to compare the financial statements of entities in the same line of business. Changes of accounting policy affect comparability, so it is important that they are disclosed. T/F

Answer 12

Disclosure is important to maintain the principle of comparability. Users should be able to compare the financial statements of an entity over time and to compare the financial statements of entities in the same line of business. Changes of accounting policy affect comparability, so it is important that they are disclosed.

Question 13

Changes in accounting estimates
Changes in accounting estimate are not applied retrospectively.
Estimates arise in relation to business activities because of the uncertainties inherent within them. Judgements are made based on the most up to date information and the use of such estimates is a necessary part of the preparation of financial statements. It does not undermine their reliability. Here are some examples of accounting estimates:

Answer 13

(a) A necessary irrecoverable debt allowance (b) Useful lives of depreciable assets (c) Provision for obsolescence of inventory

Question 14

The rule here is that the effect of a change in an accounting estimate should be included in the determination of net profit or loss in one of:

Answer 14

The rule here is that the effect of a change in an accounting estimate should be included in the determination of net profit or loss in one of:

Question 15

An example of a change in accounting estimate which affects only the current period is the bad debt estimate. However, a revision in the life over which an asset is depreciated would affect both the current and future periods, in the amount of the depreciation expense. Reasonably enough, the effect of a change in an accounting estimate should be included in the same expense classification as was used previously for the estimate. This rule helps to ensure consistency between the financial statements of different periods. T/F

Answer 15

An example of a change in accounting estimate which affects only the current period is the bad debt estimate. However, a revision in the life over which an asset is depreciated would affect both the current and future periods, in the amount of the depreciation expense. Reasonably enough, the effect of a change in an accounting estimate should be included in the same expense classification as was used previously for the estimate. This rule helps to ensure consistency between the financial statements of different periods

Question 16

The materiality of the change is also relevant. The nature and amount of a change in an accounting estimate that has a material effect in the current period (or which is expected to have a material effect in subsequent periods) should be disclosed. If it is not possible to quantify the amount, this impracticability should be disclosed. T/F

Answer 16

The materiality of the change is also relevant. The nature and amount of a change in an accounting estimate that has a material effect in the current period (or which is expected to have a material effect in subsequent periods) should be disclosed. If it is not possible to quantify the amount, this impracticability should be disclosed

Question 17

Errors discovered during a current period which relate to a prior period may arise through:

Answer 17

(a) Mathematical mistakes (b) Mistakes in the application of accounting policies (c) Misinterpretation of facts (d) Oversights (e) Fraud

Question 18

Accounting treatment Prior period errors: correct retrospectively. There is no longer any allowed alternative treatment. This involves:

Answer 18

a) Either restating the comparative amounts for the prior period(s) in which the error occurred, or (b) When the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for that period,

Question 19

Only where it is impracticable to determine the cumulative effect of an error on prior periods can an entity correct an error prospectively. Various disclosures are required:

Answer 19

(a) Nature of the prior period error (b) For each prior period, to the extent practicable, the amount of the correction: (i) For each financial statement line item affected (ii) If IAS 33 applies, for basic and diluted earnings per share (c) The amount of the correction at the beginning of the earliest prior period presented (d) If retrospective restatement is impracticable for a particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Subsequent periods need not repeat these disclosures

Question 20

Notes to the financial statements

Structure The notes to the financial statements should perform the following functions.

Answer 20

(a) Provide information about the basis on which the financial statements were prepared and which specific accounting policies were chosen and applied to significant transactions/events (b) Disclose any information, not shown elsewhere in the financial statements, which is required by IFRSs (c) Show any additional information that is relevant to understanding which is not shown elsewhere in the financial statements

Question 21

The way the notes are presented is important. They should be given in a systematic manner and cross referenced back to the related figure(s) in the statement of financial position, statement of comprehensive income or statement of cash flows. Notes to the financial statements will amplify the information shown therein by giving the following.

Answer 21

(a) More detailed analysis or breakdowns of figures in the statements (b) Narrative information explaining figures in the statements (c) Additional information, eg contingent liabilities and commitments

Question 22

IAS 1 suggests a certain order for notes to the financial statements. This will assist users when comparing the statements of different entities.

Answer 22

(a) Statement of compliance with IFRSs (b) Statement of the measurement basis (bases) and accounting policies applied
(c) Supporting information for items presented in each financial statement in the same order as each line item and each financial statement is presented (d) Other disclosures, eg: (i) Contingent liabilities, commitments and other financial disclosures (ii) Non-financial disclosures

Question 23

Presentation of accounting policies The accounting policies section should describe the following

Answer 23

(a) The measurement basis (or bases) used in preparing the financial statements (b) The other accounting policies used, as required for a proper understanding of the financial statements

Question 24

Other disclosures An entity must disclose in the notes:

Answer 24

(a) The amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period, and the amount per share
(b) The amount of any cumulative preference dividends not recognised

Question 25

IAS 1 ends by listing some specific disclosures which will always be required if they are not shown elsewhere in the financial statements.

Answer 25

(a) The domicile and legal form of the entity, its country of incorporation and the address of the registered office (or, if different, principal place of business) (b) A description of the nature of the entity’s operations and its principal activities (c) The name of the parent entity and the ultimate parent entity of the group

Question 26

Define Disposal group; cash generating unit

Answer 26

Disposal group. A group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. (In practice a disposal group could be a subsidiary, a cash-generating unit or a single operation within an entity.) Cash-generating unit. The smallest identifiable group of assets for which independent cash flows can be identified and measured

Question 27

IFRS 5 does not apply to certain assets covered by other accounting standards:

Answer 27

(a) Deferred tax assets (IAS 12) (b) Assets arising from employee benefits (IAS 19) (c) Financial assets (IFRS 9) (d) Investment properties accounted for in accordance with the fair value model (IAS 40) (e) Agricultural and biological assets (IAS 41) (f) Insurance contracts (IFRS 4)

Question 28

Classification of assets held for sale A non-current asset (or disposal group) should be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. A number of detailed criteria must be met:

Answer 28

a) The asset must be available for immediate sale in its present condition. (b) Its sale must be highly probable (ie significantly more likely than not).

Question 29

For the sale to be highly probable, the following must apply:

Answer 29

(a) Management must be committed to a plan to sell the asset. (b) There must be an active programme to locate a buyer. (c) The asset must be marketed for sale at a price that is reasonable in relation to its current fair value. (d) The sale should be expected to take place within one year from the date of classification. (e) It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Question 30

An asset that is to be abandoned should not be classified as held for sale. This is because its carrying amount will be recovered principally through continuing use. However, a disposal group to be abandoned may meet the definition of a discontinued operation and therefore separate disclosure may be required (see below). T/F

Answer 30

An asset that is to be abandoned should not be classified as held for sale. This is because its carrying amount will be recovered principally through continuing use. However, a disposal group to be abandoned may meet the definition of a discontinued operation and therefore separate disclosure may be required (see below).

Question 31

Define fair value; costs of disposal; recoverable amount; value in use

Answer 31

Fair value. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Costs of disposal. The incremental costs directly attributable to the disposal of an asset (or disposal group), excluding finance costs and income tax expense. Recoverable amount. The higher of an asset’s fair value less costs of disposal and its value in use. Value in use. The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

Question 32

A non-current asset (or disposal group) that is held for sale should be measured at the lower of its carrying amount and fair value less costs of disposal. Fair value less costs of disposal is equivalent to net realisable value. T/F

Answer 32

A non-current asset (or disposal group) that is held for sale should be measured at the lower of its carrying amount and fair value less costs of disposal. Fair value less costs of disposal is equivalent to net realisable value.

Question 33

A non-current asset (or disposal group) that is no longer classified as held for sale (for example, because the sale has not taken place within one year) is measured at the lower of:

Answer 33

(a) Its carrying amount before it was classified as held for sale, adjusted for any depreciation that would have been charged had the asset not been held for sale (b) Its recoverable amount at the date of the decision not to sell

Question 34

Presentation of a non-current asset or disposal group classified as held for sale:
Non-current assets and disposal groups classified as held for sale should be presented separately from other assets in the statement of financial position. The liabilities of a disposal group should be presented separately from other liabilities in the statement of financial position.

Answer 34

(a) Assets and liabilities held for sale should not be offset. (b) The major classes of assets and liabilities held for sale should be separately disclosed either on the face of the statement of financial position or in the notes. (c) IFRS 5 requires non-current assets or disposal groups held for sale to be shown as a separate component of current assets/current liabilities

Question 35

Additional disclosures In the period in which a non-current asset (or disposal group) has been either classified as held for sale or sold the following should be disclosed.

Answer 35

(a) A description of the non-current asset (or disposal group) (b) A description of the facts and circumstances of the disposal (c) Any gain or loss recognised when the item was classified as held for sale Where an asset previously classified as held for sale is no longer held for sale, the entity should disclose a description of the facts and circumstances leading to the decision and its effect on results.

Question 36

Define Foreign ccy; Functional ccy; Presentation ccy; Exchange difference; Closing rate; Spot exchange rate; Monetary items

Answer 36

Foreign currency. A currency other than the functional currency of the entity. Functional currency. The currency of the primary economic environment in which the entity operates. Presentation currency. The currency in which the financial statements are presented. Exchange rate. The ratio of exchange for two currencies. Exchange difference. The difference resulting from translating a given number of units of one currency into another currency at different exchange rates. Closing rate. The spot exchange rate at the year-end date. Spot exchange rate. The exchange rate for immediate delivery. Monetary items. Units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

Question 37

IAS 21 states that an entity should consider the following factors in determining its functional currency:

Answer 37

(a) The currency that mainly influences sales prices for goods and services (often the currency in which prices are denominated and settled) (b) The currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services (c) The currency that mainly influences labour, material and other costs of providing goods or services (often the currency in which prices are denominated and settled

Question 38

Sometimes the functional currency of an entity is not immediately obvious. Management must then exercise judgement and may also need to consider:

Answer 38

(a) The currency in which funds from financing activities (raising loans and issuing equity) are generated (b) The currency in which receipts from operating activities are usually retained

Question 39

Translation Foreign currency translation, as distinct from conversion, does not involve the act of exchanging one currency for another. Translation is required at the end of an accounting period when a company still holds assets or liabilities in its statement of financial position which were obtained or incurred in a foreign currency. These assets or liabilities might consist of:

Answer 39

(a) An individual home company holding individual assets or liabilities originating in a foreign currency ‘deal’. (b) An individual home company with a separate branch of the business operating abroad which keeps its own books of account in the local currency.

Question 40

Foreign currency transactions: initial recognition IAS 21 states that a foreign currency transaction should be recorded, on initial recognition in the functional currency, by applying the exchange rate between the reporting currency and the foreign currency at the date of the transaction to the foreign currency amount. An average rate for a period may be used if exchange rates do not fluctuate significantly. T/F

Answer 40

Foreign currency transactions: initial recognition IAS 21 states that a foreign currency transaction should be recorded, on initial recognition in the functional currency, by applying the exchange rate between the reporting currency and the foreign currency at the date of the transaction to the foreign currency amount. An average rate for a period may be used if exchange rates do not fluctuate significantly.

Question 41

Reporting at subsequent year ends It is important to distinguish between monetary and non-monetary items. Monetary items involve the right to receive or the obligation to deliver a fixed or determinable amount of currency. This would include receivables, payables, loans etc. Non-monetary items would be items such as non-current assets and inventories. The following rules apply at each subsequent year end;

Answer 41

(a) Report foreign currency monetary items using the closing rate (b) Report non-monetary items (eg non-current assets, inventories) which are carried at historical cost in a foreign currency using the exchange rate at the date of the transaction (historical rate)(c) Report non-monetary items which are carried at fair value in a foreign currency using the exchange rates that existed when the values were measured.

Question 42

Exchange differences occur when there is a change in the exchange rate between the transaction date and the date of settlement of monetary items arising from a foreign currency transaction. Exchange differences arising on the settlement of monetary items (receivables, payables, loans, cash in a foreign currency) or on translating an entity’s monetary items at rates different from those at which they were translated initially, or reported in previous financial statements, should be recognised in profit or loss in the period in which they arise. There are two situations to consider:

Answer 42

(a) The transaction is settled in the same period as that in which it occurred: all the exchange difference is recognised in that period. (b) The transaction is settled in a subsequent accounting period: the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period.

Question 43

How should an asset held for sale be measured?

Answer 43

At the lower of carrying amount and fair value less costs of disposal

Question 44

When can a non-current asset be classified as held for sale?

Answer 44

(a) The asset must be available for immediate sale in its present condition. (b) Its sale must be highly probable (ie significantly more likely than not).