FR Session 1 Notes

Seite 1

IFRS 1 – First-time Adoption of International Financial Reporting Standards

1. Introduction

International financial reporting standards (IFRS) have, to date, only been adopted by a

minority of companies. While the adoption of IFRS became mandatory for the group

financial statements of EU listed companies for periods beginning on or after 1st

January 2005, most other companies have yet to make the change away from their

national accounting rules. The role of IFRS 1 is to provide the basis for an orderly

transition to IFRS when the changeover takes place.

IFRS 1 states that its objective is to ensure that an entity’s first financial statements will

contain high quality information that:

 is transparent for users and comparable over all periods presented;

 provides a suitable starting point for accounting under IFRS;

 can be generated at a cost that does not exceed the benefits to users.

2. Scope and application of the Standard

IFRS 1 applies to any entity that is presenting its first set of financial statements under

IFRS. The first IFRS financial statements are defined as the first annual financial

statements in which an entity adopts International Financial Reporting Standards.

3. Opening IFRS Statement of Financial Position

The starting point for an entity in accounting under IFRS is to prepare an opening

IFRS statement of financial position at the date of transition to IFRS. The date of

transition to IFRS is the beginning of the earliest period for which an entity presents

full comparative information under IFRS.

Example 1

Mercer Limited’s financial statements are being prepared under IFRS for the first time

in the year ending 31st December 2014. Mercer Limited is also presenting one

comparative period (i.e. year ended 31st December 2013) as part of its 2014 financial

statements.

What is date of transition to IFRS, and what procedures must Mercer Limited follow?

Solution

The date of transition is the beginning of the earliest period for which full comparative

information is presented under IFRS. For Mercer, this date is 1 January 2013 (i.e.

effectively 31 December 2012).

Mercer Limited will therefore be required to prepare an opening statement of financial

position at 31 December 2012.

In its opening statement of financial position, an entity must:

(i) recognise all assets and liabilities whose recognition is required by IFRS;

(ii) notrecognise assets or liabilities whose recognition is not permitted by IFRS

(iii) reclassify existing assets, liabilities or components of equity, as required by

IFRS

(iv) apply IFRS in measuring all recognised assets and liabilities

The extent to which adjustments are required in the opening statement of financial

position will depend on the degree of overlap between an entity’s national accounting

rules and those of the IASB. For example, UK accounting rules have been converging

with those of the IASB for several years. This process significantly limits the need for

amendments by UK first-time adopters of IFRSs.

Accounting policies

An entity must use the same accounting policies in its opening IFRS statement of

financial position, and throughout all periods presented in its first IFRS financial

statements. Those accounting policies must be based on IFRSs effective at the end of its

first IFRS reporting period.

4. Adjustments required in opening statement of financial position to move from

previous GAAP to IFRS

(a) Recognition of new assets and liabilities

IFRS 1 requires the recognition of all assets or liabilities, whose recognition are

required by IFRSs. This will include assets or liabilities that were not recognised

under previous GAAP.

(b) Derecognition of some old assets and liabilities

Assets and liabilities should be excluded from an entity’s opening statement of

financial position if they do not qualify for recognition under IFRS. For example,

IAS 38 Intangible Assets requires that the following expenditure be recognised as

an expense:

 start-up costs and pre-opening costs

 training activities

 advertising and promotion

 relocation and reorganisation

 future operating losses

IFRS 1 requires that an entity should re-classify items in their opening statement

of financial position, if a different classification applies under IFRS. For example:

 Treasury stock might have been reported as an asset under an entity’s

previous GAAP. Under IFRS it will have to be presented as a component

of equity.

 Dividends declared or proposed after the period end may have been

presented as a liability under previous GAAP. This is not permitted under

IAS 10 Events after the Reporting Period. Therefore, in an entity’s

opening statement of financial position, such dividends would be re-

classified as a component of retained earnings.

(d) Measurement

IFRS 1 requires that an entity should apply IFRS’s in measuring all recognised

assets and liabilities. Optional exemptions from these measurement rules are

outlined in Appendix A below.

5. Exceptions to the retrospective application of other IFRSs

IFRS 1 prohibits the retrospective application of some aspects of other IFRSs. These

five exceptions are outlined in Appendix B below.

6. Estimates

An entity’s estimates at the date of transition should be the same under IFRS as they

were under previous GAAP (after adjustments for differences in accounting policy).

An entity is not permitted to use new information, that became available after the date

of transition, to amend its opening statement of financial position.

7. Presentation and disclosure

(a) Comparative information

IFRS 1 requires that an entity’s first IFRS financial statements must include:

 at least three statements of financial position;

 two statements of comprehensive income;

 two separate income statements (if presented);

 two statements of cash flows;

 two statements of changes in equity

(b) Explanation of transition to IFRSs

Entities are required to explain how the transition from previous GAAP to IFRSs

affected its reported financial position, financial performance and cash flows.

An entity’s first IFRS financial statements must include the following

reconciliations:

(i) equity reported under previous GAAP to equity under IFRSs for both of the

following dates;

 the date of transition to IFRSs (i.e. 31 December 2012 in example 1 above);

 the end of the latest annual period in which the entity reported under

previous GAAP (i.e. 31 December 2013 in example 1 above)

(b) total comprehensive income for the latest annual period reported under previous

GAAP (i.e. 31 December 2013 in example 1 above), with total comprehensive

income that would have been calculated for the same period under IFRSs.

Appendix A

Exemptions for first-time adopters

(a) Business combinations

In Appendix C of IFRS 1, the Standard outlines how a first-time adopter should

account for business combinations which occurred prior to the date of transition to

IFRS.

IFRS 1 permits an entity to elect not to apply IFRS 3 retrospectively to past business

combinations.

However, if a first-time adopter restates any business combination to comply with

IFRS 3, it must also restate all later business combinations.

(b) Exemptions from other IFRSs

In Appendix D of IFRS 1, the Standard outlines exemptions which an entity can

claim from other IFRSs:

(i) IFRS 2 – Share based payment transactions

A first-time adopter is encouraged, but not required, to apply IFRS 2 to equity

instruments which vested before the transition to IFRS.

A first-time adopter is also encouraged, but not required, to apply IFRS 2 to

liabilities arising from share based payment transactions that were settled before

the date of transition to IFRS.

(ii) IFRS 4 – Insurance contracts

A first-time adopter may apply the transitional provisions in IFRS 4.

(iii) Fair value or revaluation as deemed cost

An entity may elect to measure an item of property, plant & equipment (PPE) at

its fair value at the date of its opening IFRS statement of financial position. That

fair value can be used as the deemed cost of the asset under IFRS.

A first-time adopter may also elect to use a previous GAAP revaluation of an item

of PPE as its deemed cost. The revaluation must have been made on or before the

date of its opening IFRS statement of financial position.

The above exemptions are also available in respect of:

 investment property if an entity elects to use the cost model of IAS 40;

 intangible assets that meet the criteria of IAS 38 regarding recognition and

revaluation.

(iv) IAS 27 –Separate financial statements

When an entity prepares separate financial statements, IAS 27 requires it to

account for its investments in subsidiaries, joint ventures and associates either:

 at cost; or

 in accordance with IFRS 9.

IFRS 1 requires that, should a first-time adopter measure such an investment at

cost, it must measure that investment at one of the following amounts in its

separate opening IFRS statement of financial position:

(a) cost determined in accordance with IAS 27; or

(b) deemed cost, which shall be;

(i) the investment’s fair value at the entity’s date of transition to IFRS in

its separate financial statements; or

(ii) the previous GAAP carrying amount of the investment at that date.

A first time adopter may choose (i) or (ii) above to measure its investment in each

subsidiary, joint venture or associate that it elects to measure using a deemed cost.

(v) Assets and liabilities of subsidiaries, associates and joint ventures

If a subsidiary becomes a first time adopter later than its parent, IFRS 1 allows a

choice between two measurement bases in the subsidiary’s separate financial

statements. The subsidiary shall measure its assets and liabilities at either:

(i) the carrying amounts that would be included in the parent’s consolidated

financial statements, based on the parent’s date of transition to IFRS, if no

adjustments were made for consolidation procedures and for the effects of

the business combination in which the parent acquired the subsidiary; or

(ii) the carrying amounts required by IFRS 1, based on the subsidiary’s date of

transition to IFRS.

A similar election is available to an associate or joint venture that becomes a first

time adopter later than an entity that has significant influence or control over it.

If a parent becomes a first time adopter later than its subsidiary, the parent shall,

in its consolidated financial statements, measure the assets and liabilities of the

subsidiary at the same carrying amounts as in the financial statements of the

subsidiary, after adjusting for consolidation.

(vi) IAS 32 – Compound financial instruments

IAS 32 requires an entity to split a compound financial instrument (e.g.

convertible debentures) at inception into separate liability and equity components.

IFRS 1, however, does not require a first-time adopter to separate these two

portions, if the liability component is no longer outstanding at the date of

transition to IFRS.

(vii) Decommissioning liabilities included in the cost of property, plant and

equipment

IFRIC 1 requires specified changes in a decommissioning or similar liability to be

added to or deducted from the cost of the asset to which it relates.

IFRS 1 however does not require a first-time adopter to record changes in such

liabilities that occurred before the date of transition to IFRS.

(viii) IAS 23 - Borrowing costs

A first-time adopter may apply the transitional provisions set out in paragraphs 27

and 28 of IAS 23. In those paragraphs, references to the effective date shall be

interpreted as 1 January 2011 or the date of transition to IFRSs, whichever is later.

(ix) IFRS 1 also provides exemptions in respect of the following areas:

 IAS 21 – Cumulative translation differences;

 IAS 39 – Designation of previously recognised financial instruments;

 IFRIC 12 – Financial assets or intangible assets accounted for under IFRIC 12;

 Transfers of assets from customers;

 Severe hyperinflation;

 Extinguishing financial liabilities with equity instruments;

 Leases.

Appendix B

Exceptions to the retrospective application of other IFRSs by first-time adopters

IFRS 1 requires that entities must apply the following exceptions in respect of other

IFRSs:

(a) IFRS 9 - Derecognition of financial instruments

A first-time adopter must apply the derecognition requirements of IFRS 9

prospectively for transactions occurring on the date of transition to IFRSs. However,

the entity may apply the derecognition requirements retrospectively, provided that the

information needed to apply IFRS 9 was obtained at the time of initially accounting

for the financial assets or financial liabilities that were derecognised.

(b) IFRS 9 - Hedge Accounting

An entity is not allowed to include, in its opening statement of financial position, a

hedging relationship that does not qualify for hedge accounting under IFRS 9.

However, if an entity designated a net position as a hedged item under previous

GAAP, it may designate an individual item within that net position as a hedged item

under IFRS 9

, provided that it does so no later than the date of transition to IFRS.

A first time adopter must apply the following requirements of IFRS 10 prospectively

from the date of transition to IFRS:

 the requirement that total comprehensive income must be attributed to the

owners of the parent and to the non-controlling interests;

 the requirements in paragraphs 23 and B93 for accounting for changes in the

parent’s ownership interest in a subsidiary that do not result in a loss of

control; and

 the requirements in paragraphs B97 – B99 for accounting for a loss of control

over a subsidiary, and the related requirements of paragraph 8A of IFRS 5.

However, if a first-time adopter elects to apply IFRS 3 retrospectively to any past

business combination, it must also apply IFRS 10 retrospectively from the same date.

IAS 1 – Presentation of Financial Statements

(1) Objective of IAS 1 (IAS 1.1)

The objective of IAS 1 is to prescribe the basis for presentation of general purpose

financial statements, to ensure comparability both with the entity's financial

statements of previous periods and with the financial statements of other entities. IAS

1 sets out the overall requirements for the presentation of financial statements,

guidelines for their structure and minimum requirements for the content of the

financial statements.

(2) Purpose of Financial Statements (IAS 1.9)

The objective of financial statements is to provide information about the financial

position, financial performance and cash flows of an entity that is useful for making

economic decisions. The financial statements should also show the results of

management’s stewardship of the resources entrusted to it.

(3) Overall Considerations (IAS 1.15 – 1.46)

 Fair presentation (i.e. free from factual error and undue bias) and compliance

with IFRSs

 Going concern basis assumed unless otherwise stated

 Accrual basis of accounting

 Materiality & Aggregation (each material class of similar items to be presented

separately. Dissimilar items to be presented separately unless immaterial)

 Comparatives (for face of financial statements and notes)

 Offsetting (assets and liabilities, and income and expenses not to be offset unless

permitted or required by an IFRS)

 Frequency of Reporting (complete set of financial statements to be presented at

least annually)

 Comparative Information (comparative information to be provided for the

previous period)

 Consistency of Presentation and Classification is required from one period to the

next, unless another presentation/classification would be considered more

appropriate, following a significant change in an entity’s operations, or a review

of its financial statements. Alternatively, an IFRS may require a change in

presentation.

(4) Components of Financial Statements

A complete set of financial statements should include: (IAS 1.10)

 a statement of financial position at end of period

 a statement of profit or loss and other comprehensive income for the period

 a statement of changes in equity for the period

 a statement of cash flows

 notes, comprising a summary of significant accounting policies and other

explanatory information, and

 a statement of financial position as at the beginning of the earliest comparative

period*, when an entity:

- applies an accounting policy retrospectively, or

- makes a retrospective restatement of items in its financial statements,

- when it reclassifies items in its financial statements

* For example, an entity preparing its financial statements, for the year ending 30

April 2014, applies an accounting policy retrospectively. The entity will be

required to prepare 3 statements of financial position, at the following year

ends: 30 April 2014, 2013 and 2012.

(A) Statement of Financial Position

An entity must present a classified statement of financial position, separating current and

non-current assets and liabilities. Only if a presentation based on liquidity provides

information that is reliable and more relevant may the current/noncurrent split be omitted.

(IAS 1.60)

Current Assets (IAS 1.66)

An entity shall classify an asset as current when:

(i) it expects to realise the asset, or intends to sell or consume it, in its normal

operating cycle

(ii) it holds the asset primarily for the purpose of trading

(iii) it expects to realise the asset within 12 months after the reporting period, or

(iv) the asset is cash or a cash equivalent

All other assets should be classified as non-current.

Current liabilities (IAS 1.69)

An entity shall classify a liability as current when;

(i) it expects to settle the liability in its normal operating cycle;

(ii) it holds the liability primarily for the purpose of trading; or

(iii) the liability is due to be settled within 12 months after the reporting period.

Minimum items to be presented in the SOFP (IAS 1.54)

(a) property, plant and equipment;

(b) investment property;

(d) financial assets (excluding amounts shown under (e), (h) and (i));

(e) investments accounted for using the equity method;

(f) biological assets;

(g) inventories;

(h) trade and other receivables;

(i) cash and cash equivalents;

(j) total of assets classified as held for sale, and assets included in disposal groups

classified as held for sale in accordance with IFRS 5.

(k) trade and other payables;

(l) provisions;

(m) financial liabilities (excluding amounts shown under (k) and (l));

(n) liabilities and assets for current tax, as defined in IAS 12;

(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12;

(p) liabilities included in disposal groups, classified as held for sale;

(q) non-controlling interests, presented within equity; and

(r) issued capital and reserves attributable to equity holders of the parent.

Additional line items may be needed to fairly present the entity's financial position. (IAS

1.55)

IAS 1 does not prescribe the format of the SOFP. For example, assets can be presented as

current then non-current, or vice versa, and liabilities and equity can be presented current

then non-current then equity, or vice versa.

(B) Statement of Profit or Loss and Other Comprehensive Income (i.e. Statement of

Comprehensive Income)

This statement should have a section for profit or loss and a section for OCI. It should

show (IAS 1.81A);

- profit or loss;

- total OCI;

- comprehensive income for the period (i.e. total of profit or loss and OCI)

Information to be presented in the Profit or Loss section (IAS 1.82)

- revenue;

- finance costs;

- share of the profit or loss of associates and joint ventures;

- tax expense;

- a single amount for the total of discontinued operations;

Information to be presented in the OCI section (IAS 1.82A)

Items should be classified by nature and grouped into those that:

 will not be reclassified subsequently to profit or loss; and

 will be reclassified subsequently to profit or loss when specific conditions are met

No items may be presented as extraordinary items. (IAS 1.87)

Items requiring separate disclosure

When items of income or expense are material, an entity shall disclose their nature

and amount separately. (IAS 1.97)

Circumstances that would give rise to the separate disclosure of items of income and

expense include:

- write-downs of inventories to net realisable value or of property, plant and

equipment to recoverable amount, as well as reversals of such write-downs;

- restructurings of the activities of an entity and reversals of any provisions for the

costs of restructuring;

- disposals of items of property, plant and equipment;

- disposals of investments;

- discontinued operations;

- litigation settlements; and

- other reversals of provisions.

Expenses should be analysed either by nature (depreciation, purchases of materials,

depreciation, etc.) or by function (cost of sales, selling, administrative, etc.) (IAS 1.99)

An entity shall present a statement of changes in equity showing:

(i) Total comprehensive income for the period, showing separately the

total amounts attributable to owners of the parent and to non-

controlling interests

(ii) For each component of equity, the effects of retrospective application

or retrospective restatement recognised in accordance with IAS 8

(iii) For each component of equity, a reconciliation between the carrying

amount at the beginning and the end of the period, separately

disclosing changes resulting from:

- profit or loss

- other comprehensive income, and

- transactions with owners in their capacity as owners

An entity shall present, either in the SOCIE or in the notes;

- the amount of dividends recognised as distributions to owners during

the period and the related amount per share;

- an analysis of OCI by item

(D) Statement of Cash Flows

IAS 1 also refers to IAS 7 in respect of the required content of the Statement of Cash

Flows (IAS 1.111).

(E) Notes

The notes should disclose:

 statement of compliance with IFRSs

 a summary of significant accounting policies applied;

 supporting information for items presented in the financial statements;

 other disclosures (e.g. contingent liabilities);

 information about the assumptions an entity makes about the future, and

other major sources of estimation uncertainty;

 information that enables users to evaluate the entity’s objectives, policies

and processes for managing capital;

 dividends proposed or declared before the financial statements were

authorised for issue, but not recognised as a distribution during the period;

 details of an entity’s legal form, country of incorporation, its operations

and principal activities;

 name of the parent and ultimate parent of the group;

 a sensitivity analysis relating to the impact of the methods, assumptions

and estimates made by an entity.

(F) FRS 102

Complete set of financial statements

A complete set of financial statements under IAS 1 is similar to that required under

FRS 102. However, unlike FRS 102, IAS 1 does not permit a single statement of

‘income and retained earnings’. Under IAS 1, these would be shown separately as

the SOCI and the SOCIE.

IAS 1 also requires that a SOFP at the beginning of the earliest comparative period is

presented where an entity;

- applies an accounting policy retrospectively; or

- makes a retrospective restatement of items in its financial statements

(e.g. to correct a material prior period error); or

- reclassifies items in its financial statements

Format

FRS 102 requires financial statements to be prepared in accordance with Company

Legislation. There are therefore significant differences in terms of formats between

IAS 1 and FRS 102. In particular, it should be noted that the Companies Act is more

prescriptive than IAS 1.

The Companies Act permits two formats for the Statement of Financial Position, and

four formats for the Statement of Comprehensive Income. Items must be shown in the

order and under the headings and sub-headings given in the particular format used.

Items preceded by a letter or by a Roman numeral must be presented separately in the

statement of financial position. Items preceded by Arabic numerals can be combined if

they are not material, or when their combination facilitates assessment of the

company’s affairs.

Notes to the financial statements

FRS 102 requirements are similar to those of IAS 1. However, FRS 102 makes no

reference to sensitivity analysis in relation to the type of disclosure that an entity

would make.

IAS 7 – Statement of Cash Flows

Profit is a measure of the long term success of a business. Over time, profit provides

funds to repay loans, invest in an entity’s asset infrastructure, and to provide a return

to shareholders in the form of a dividend.

In the short term, however, a firm’s survival is far more dependent on having

adequate cash resources than on its ability to generate profits. The fact that a

business is profitable in fact is no guarantee that it will remain solvent.

The objective of IAS 7 is to require entities to provide information about the

historical changes in cash and cash equivalents in a statement of cash flows.

2. Definitions

The following terms are defined by IAS 7 as follows:

 Cash comprises cash on hand and demand deposits;

 Cash equivalents are short-term, highly liquid investments, that are readily

convertible to known amounts of cash, and which are subject to an insignificant

risk of changes in value.

An investment normally qualifies as a cash equivalent only when it has a short

maturity of, say, three months or less from the date of acquisition.

3. Presentation of a statement of cash flows

IAS 7 requires that the statement of cash flows should report cash flows during the

period, classified into the following activities:

 operating

 investing

 financing

(a) Operating activities

Operating activities are the principal revenue-producing activities of an entity, and

other activities that are not investing or financing activities. Examples of cash flows

relating to operating activities are receipts from customers and payments to

suppliers.

(b) Investing activities

Investing activities are the acquisition and disposal of long-term assets and other

investments not included in cash equivalents. Examples of cash flows from

investing activities are:

 cash payments to acquire property, plant and equipment and intangibles;

 cash receipts from the sale of property, plant and equipment and intangibles;

 cash payments to acquire equity or debt instruments of other entities, and

joint ventures;

 cash advances and loans made to other parties.

Financing activities are activities that result in changes in the size and composition

of the equity and borrowings of an entity. Examples of cash flows arising from

financing activities are:

 cash proceeds from the issue of shares or other equity instruments;

 cash payments to owners to acquire or redeem the entity’s shares;

 cash proceeds from issuing debentures, loans and other short or long-term

borrowings;

 cash repayment of amounts borrowed.

4. Reporting cash flows

In a statement of cash flows, cash flows are reported separately for each of the

activities outlined in 3 above:

(a) Reporting cash flows from operating activities

IAS 7 requires an entity to report cash flows from operating activities using either:

(i) the direct method, whereby major classes of gross cash receipts and

gross cash payments are disclosed; or

(ii) the indirect method, whereby profit or loss is adjusted for the effects of

transactions of a non-cash nature, any deferrals or accruals of past or

future operating cash receipts or payments, and items of income or

expense associated with investing or financing cash flows.

Entities are encouraged by IAS 7 to report cash flows from operating activities

using the direct method.

(b) Reporting cash flows from investing and financing activities

IAS 7 requires that an entity should report separately most major classes of gross

cash receipts and gross cash payments arising from investing and financing

activities.

5. Statement of Cash Flows – Example

The statement of comprehensive income of Bramble Limited for the year ended 31

December 2014 is presented below. The statement of financial position of Bramble at

31 December 2014 is also shown.

Prepare a statement of cash flows for the year ended 31 December 2014, in accordance

with IAS 7, using the direct method.

Statement of Profit or Loss and Other Comprehensive Income of

Bramble Ltd. for the year ended 31 December 2014

Gross Profit 850

Revenue

Cost of sales (950)

Income tax expense

Profit for the year from continuing

operations

(100)

(148)

382

2014

€’000

1,800

Distribution costs

Administrative expenses (80)

Other expenses

Finance costs (20)

Profit before tax 530

(120)

Statement of Financial Position of Bramble Ltd. at 31 December 2014

Assets

Non-current assets

Property, plant & equipment

Intangible assets

Current Assets

Inventories

Trade receivables

Cash and cash equivalents

Liabilities

Current liabilities

Trade payables

Accrued interest

Current tax payable

Non-current liabilities

Term loan

Net assets

Equity

Share capital

Share premium

Revaluation reserve

Retained earnings

Total equity

The following information is available:

2014 2013

€’000 €’000

1,693 555

250 250

1,943 805

269 240

395 322

155 130

819 692

212 182

5 3

148 130

365 315

120 135

2,277 1,047

270 100

1,150 402

80 80

777 465

2,277 1,047

(i)

(ii)

(iii)

Cost of sales includes depreciation of €60,000.

There were no disposals of non-current assets during 2014.

Expenses in the statement of comprehensive income include the following

payments to employees:

 Cost of sales €250,000

 Distribution €25,000

 Administration €20,000

(iv) A dividend of €70,000 was paid in March 2014.

Solution

(a) Statement of cash flows for the year ended 31 December 2014 (Direct

method)

Cash flows from operating activities

Cash receipts from customers

Cash paid to suppliers

Cash paid to employees

Cash generated from operations

Interest paid

Income tax paid

Net cash flow from operating activities

Cash flows from investing activities

Purchase of property, plant & equipment

Cash flows from financing activities

Proceeds from issue of share capital

Repayment of long term loan

Dividends paid

Net cash flow from financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at 1 January 2014

Cash and cash equivalents at 31 December 2014

1,727

(894)

(295)

(18)

(130)

918

(15)

(70)

538

(148)

390

(1,198)

833

130

155

====

€’000 €’000

Workings:

(i) Cash receipts from customers are computed as revenue + Opening trade

receivables – Closing trade receivables (i.e. 1,800K + 322K – 395K).

(ii) Purchases are equal to cost of sales (excluding depreciation) + closing

inventory – opening inventory – amounts paid to employees included in

cost of sales (i.e. 890K + 269K – 240K – 250K).

(iii) Cash paid to suppliers of goods and services equals purchases +

distribution, administrative and other expenses (excluding wages &

salaries) + opening trade payables – closing trade payables (i.e. 669K +

255K + 182K – 212K).

(iv) Interest paid is the amount of interest payable for the year, less accrued

interest at the year end + opening accrued interest (i.e. 20K – 5K + 3K).

(v) Income tax paid is the tax charged for the year + opening tax liability –

closing tax liability (i.e. 148K + 130K – 148K).

(vi) Property, plant & equipment purchased equals closing PPE – opening

PPE + depreciation charge for year (i.e. 1,693K – 555K + 60K).

(vii) Proceeds from issue of share capital equals closing share capital –

opening share capital + increase in share premium (i.e. 270K – 100K +

748K)

6. Disclosures

IAS 7 requires an entity to disclose:

 the components of cash and cash equivalents;

 a reconciliation of the amounts in its statement of cash flows with the equivalent

items reported in the statement of financial position;

 the amount of significant cash and cash equivalent balances held by an entity

thatare not available for use by the group.

7. FRS 102

Under FRS 102, an entity is exempt from presenting a cash flow statement if it is

included in publicly available consolidated financial statements. No exemptions are

available under IAS 7.

IAS 7 encourages the use of the direct method. No preference is expressed by FRS

102.

IAS 10 – Events after the Reporting Period

1. Events after the Reporting Period

These are events that occur between the end of the reporting period and the date when

the financial statements are authorisedfor issue.

2. Adjusting Events

These are events after the reporting period that provide further evidence of conditions

that existed at the end of the reporting period. This includes an event which indicates

that the going concern assumption in relation to the whole or part of the enterprise is

not appropriate.

Financial statements should be adjusted for adjusting events.

Examples of adjusting events (IAS 10.9):

It should be assumed, in the following examples, that the financial statements of Bailey

Limited are authorised for issue on 12th March 2014.



The settlement after the reporting period of a court case which confirms that

the entity had a present obligation at the end of the reporting period.

- the entity should adjust any previously recognised provision, in accordance

with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, or

recognise a new provision.

Example 1

A director of Bailey Limited was dismissed in November 2013, and instituted

court proceedings against the company in December 2013. At 31 December

2013 (Bailey Limited’s year end), an amount of €200,000 was provided in

respect of the former director’s claim. In February 2014, the case was settled out

of court, the director being awarded €350,000, which included costs. This

amount was paid in April 2014.

The out of court settlement provides further evidence of conditions existing at

the end of the reporting period. Consequently, the settlement is an adjusting

event after the reporting period. An additional amount of €150,000 should be

provided at 31 December 2013.

Redundancy settlement – P/L

Liability for redundancy settlement - SOFP

(Being increase in redundancy

DR CR

€’000 €’000

150

settlementat 31 December 2013)

 Receipt of information after reporting period indicating that an asset was

impaired at the end of the reporting period, or that the amount of a previously

recognised impairment loss for that asset needs to be adjusted. For example:

- the bankruptcy of a customer that occurs after reporting period usually

confirms that a loss existed at the end of the reporting period in respect

of a trade receivable;

- the sale of inventories after the reporting period may give evidence

about their net realisable value at the end of the reporting period.

Example 2

A customer who owed €100,000 to Bailey Limited at 31 December 2013, was

declared bankrupt in January 2014.

The bankruptcy of the customer in January 2014 was indicative that a loss

existed at 31 December 2013. Thus the carrying amount of trade receivables at

31 December 2013 will need to be adjusted as follows;

DR CR

€’000 €’000

Bad debts 100

Trade receivables

(Being the write-off of a debt at 31 December 2013, as an adjusting event after

the reporting period)

Example 3

Inventories of Bailey Limited, which had a carrying value of €300,000 at 31

December 2013, were disposed of in February 2014 for €180,000.

The sale of the inventories in February 2014 provides evidence of their net

realisable value at 31 December 2013. The sale constitutes an adjusting event

after the reporting period.

DR CR

€’000 €’000

Cost of sales 120

Inventory - SOFP

(Being reduction in value of inventory to its net realisable value at 31 December

2013).

100

120



The determination after the reporting period of the cost of assets purchased, or

the proceeds of assets sold before the end of the reporting period.

Example 4

In December 2013 Bailey Limited sold a subsidiary undertaking which it had

owned for several years. The consideration was agreed as being at least €3

million, and to be no greater than €4 million, the price being ultimately

determined by the profits of the subsidiary for the year ended 31 December

2013. Profits of the subsidiary, determined in late January 2014, were in line

with expectations and the final consideration was settled as €3.5.

In preparing its financial statements for the year ended 31 December 2013, the

finalisation of the disposal price of the subsidiary will be an adjusting event

after the reporting period, and the disposal proceeds of the subsidiary, as

recorded in the 2013 financial statements, will be €3.5 million.

The discovery of fraud or errors that show that the financial statements are

incorrect

Example 5

In January 2014 Bailey Limited discovered that an invoice from a supplier for

€300,000 had been recorded in error as €30,000.

The discovery of this error is an adjusting event after the reporting period, and

the following adjustment will be made in the 2013 financial statements:

DR CR

€’000 €’000



Purchases 270

Trade payables

(Being correction of understatement of trade payables)

270

3. Non-adjusting events

These are events that are indicative of conditions that arose after the reporting period

date (IAS 10.3)

An entity should not adjust its financial statements for non-adjusting events after the

reporting period. (IAS 10.10)

An entity shall disclose the following for each material category of non-adjusting

events;

 The nature of the event; and

 An estimate of its financial effect, or a statement that such an estimate cannot

be made

Non-adjusting events that would generally result in disclosure (IAS 10.22):

- a major business combination after the reporting period;

- announcing a plan to discontinue an operation;

- major purchases of assets;

- classification of assets as held for sale;

- major disposals of assets;

- destruction of a major production plant by fire after the reporting period;

- announcing, or commencing the implementation of a major restructuring;

- abnormally large changes after the reporting period in asset prices or foreign

exchange rates;

- entering into significant commitments or contingent liabilities, for example, by

issuing significant guarantees;

Example 6

 Bailey Limited had non-current asset investments at 31 December 2013, included

in the SOFP at their valuation of €560,000. The investments dropped in value

after the year end, and amounted to €350,000 on 12 March 2014, when the

company’s financial statements were authorisedfor issue.

The change in value of the investments is an non-adjusting event after the

reporting period. Bailey Ltd. should continue to value the investments at €560,000

in its SOFP at 31 December 2013.

4. Dividends

Dividends declared after the reporting period shall not be recognised as a liability at

the end of the reporting period (IAS 10.12).

Example 7

 In January 2014 the Board of Directors of Bailey Limited declared a dividend of 5

cent per ordinary share in respect of the year ending 31 December 2013.

The declaration of a dividend after the year end is a non-adjusting event after the

reporting period. Thus, no record of this dividend will appear in the financial

statements of Bailey Limited for the year ending 31 December 2013.

The following entry will be made in the financial statements for the year ending

31 December 2014:

DR CR

€’000 €’000

Retained earnings - SOFP xxx

Bank

(Being payment of dividend in 2014 – also show in the SOCIE)

5. Going Concern

An entity shall not prepare its financial statements on a going concern basis if

management determines after the reporting period either that;

- it intends to liquidate the entity or cease trading; or

- that it has no realistic alternative but to do so. (IAS 10.14)

6. Disclosures

- Date when the financial statements were authorisedfor issue and who gave that

authorisation (IAS 10.17);

- If the entity’s owners or others have the power to amend the financial statements

after issue, the entity shall disclose that fact (IAS 10.17);

- See 3 above for disclosure relating to non-adjusting events;

- Information received after the reporting period about conditions that existed at the

end of the reporting period.

7. FRS 102

FRS 102 requirements are similar to those of IAS 10.

xxx

IAS 21 – The Effect of Changes in Foreign Exchange Rates*

1. Introduction

International business has grown in importance in recent years and most business

entities now have transactions that are denominated in one or more foreign currencies.

This can result in foreign exchange risk. For a company in the Eurozone, this can arise,

for example, by exporting goods to the UK and invoicing in £ sterling. The same

company might import materials from the US, and agree to pay in US dollars.

This raises the issue as to how such transactions should be accounted for, in terms of

recording and measuring foreign currency revenues, expenses, receivables and

payables.

2. Recording foreign currency transactions

(a) Identifying an entity’s Functional Currency

IAS 21 requires that a foreign currency transaction be recorded in an entity’s

functional currency.

Functional currency is defined as the currency of the primary environment in which

an entity operates. This is normally the currency in which an entity receives and

pays out cash. The following factors should be considered as the primary factors in

determining an entity’s functional currency:

(i) the currency:

 that mainly influences sales prices (often the currency in which sales

prices are denominated and settled); and

 of the country whose competitive forces and regulations mainly

determine its sales prices

(ii) the currency that mainly influences labour, material and other costs (often

the currency in which such costs are denominated and settled.)

The following factors may also provide evidence of an entity’s functional currency:

 the currency in which funds from financing activities (i.e. issuing debt and

equity) are generated;

 the currency in which receipts from operating activities are usually

retained.

* Excluding group accounts issues

Example 1

Cramwell Limited sells most of its goods in the euro zone, with sales invoices being

denominated in euros. Sixty percent of the company’s costs are incurred in euros,

through manufacturing plants based in France and Spain. The remaining production

costs are denominated in £ sterling, through production plants located in the UK.

As the vast majority of Cramwell Limited’s revenues, and 60% of its costs, are

denominated in euros, the euro is the company’s functional currency. Therefore, all

of its transactions should be recorded in euro, with transactions in other currencies

being translated into euro in accordance with IAS 21.

(b) Recording transactions in an entity’s functional currency

Foreign currency transactions should be recorded, on initial recognition, in an

entity’s functional currency. This is done by applying the spot rate of exchange

between the functional currency and the foreign currency at the date of the

transaction.

Example 2

Cramwell Limited purchased goods on credit for £80,000 on the 1 October 2013.

The spot rate of exchange on that date was:

€1 = £.8670

The functional currency of Cramwell Limited is the euro, and the transaction should

be recorded in that currency as follows.

Purchases

Trade payables

(Being goods purchased in £, translated into €s:

£80,000/.8670)

92,272

An entity may have several transactions in a foreign currency during a period. For

example, let’s assume that Cramwell Limited has weekly sales of £100,000 during

the 1st quarter of 2013. The exchange rate between the euro and sterling was stable

during the first quarter, and the average rate was €1 = £.8568.

IAS 21 permits the use of an average rate for all transactions occurring during a

period, as long as exchange rates do not fluctuate significantly. Thus, it would be

appropriate for Cramwell Limited to use the average exchange rate for the 1st

quarter of 2013 to record sales made during that period.

€’000

IAS 21 makes an important distinction in relation to the recording of monetary

items and non-monetary items.

(i) Monetary items

Monetary items are defined as units of currency held, and assets and liabilities

to be received or paid, in a fixed or determinable number of units of currency.

An example is trade payables which arise when goods are purchased on credit.

Example 3

Cramwell Limited purchased machinery on the 1 October 2013 for $100,000

from a US supplier. These goods were paid for on the 15th January 2014.

Cramwell Limited has an accounting year end of 31 December.

Spot rates of exchange were as follows:

1st October 2013: €1 = $1.457

31st December 2013: €1 = $1.501

The above transaction is initially accounted for by Cramwell Limited on 1

October 2013 as follows:

Machinery

Trade payables

(Being machinery purchased on 1 October 2013,

translated into €’s at the spot rate on that date:

100,000/1.457)

DR CR

€€

68,634

IAS 21 requires that at the end of each reporting period, foreign currency

monetary items be translated using the closing rate. Monies owed by Cramwell

Limited to its US supplier at 31 December 2013, are a monetary item, and

should be translated into €’s at 31 December 2013.

Any exchange difference that arises should be recognised in profit or loss.

Trade payables

Profit on translation of trade payables – P/L

(Being profit on monetary item, computed as follows:

(100K / 1.457) – (100K / 1.501))

DR CR

€€

2,012

(ii) Non-monetary items

Non-monetary items are those that neither exhibit the right to receive, nor an

obligation to deliver, fixed or determinable amounts of units of a currency.

Examples of non-monetary items are inventory, plant and equipment and

financial assets accounted for at fair value through profit or loss.

IAS 21 requires that non-monetary items that are measured at historical cost

in a foreign currency should be translated using the exchange rate at the date of

the transaction. See example 3 (revisited) below.

Example 3 (revisited)

The machinery purchased by Cramwell Limited on 1 October 2013 is a non-

monetary asset, which is carried at historical cost. Using the exchange rate at the

date of purchase, it will be included in the financial statements at 31 December

2013 as a non-current asset of €68,634 (i.e. 100,000 / 1.457).

IAS 21 requires that non-monetary items measured at fair value in a foreign

currency should be translated using the exchange rates at the date when the fair

value was determined.

Example 4

Cramwell Limited purchased an investment property in London on 1 January

2013 for £1.2M.

The fair value of the property on 31 December 2013 was £1.4M. Cramwell

Limited uses the fair value model in accounting for investment property.

The following information is available in respect of exchange rates:

1 January 2013: €1 = £.873

31 December 2013: €1 = £.861

Cramwell Limited will record the UK property in its financial statements as

follows:

Investment property

Trade payables

(Being purchase of investment property on

1 January 2013: £1.2M /.873)

Investment property

Gain on translation of investment property – P/L

1,375

251

€’000

((1.4M/.861) - 1.375M)

Example 4 (revisited)

Assume the same facts as in Example 4 above, except that Cramwell has

purchased land which is accounted for under IAS 16 Property, Plant &

Equipment.

Cramwell Limited will record the UK land asset in its financial statements as

follows:

€’000

Land 1,375

Trade payables

(Being purchase of land on 1 January 2013: £1.2M /.873)

Land 251

Gain on translation of land – OCI

((1.4M/.861) - 1.375M)

€’000

1,375

251

In Example 4 above, and Example 4 (revisited), the gain on translation

comprises both a gain in the value of the asset and a foreign exchange gain (the

latter resulting from a strengthening of the £ against the €). These gains are

combined for accounting purposes, and treated as a single adjustment of

€251,000.

(d) Impairment of assets

IAS 36 states that if the recoverable amount of an asset is less than its carrying

amount, the carrying amount of the asset shall be reduced to its recoverable

amount.

For a non-monetary asset measured in a foreign currency, IAS 21 requires that

the respective values be computed as follows:

 the cost or carrying amount should be translated at the exchange rate

when that amount was determined (e.g. the revaluation date for an asset

measured at fair value);

 The recoverable amount should be translated at the exchange rate at the

date when that value was determined (usually the end of the reporting

period).

Example 5

On 31 December 2014, the land previously purchased by Cramwell Limited (see

example 4 revisited above) had a recoverable amount of £1.1M.

The exchange rate on 31 December 2014 is €1 = £.859.

Therefore, on 31 December 2014, the recoverable amount of the land is

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