Ti Corporate Reporting 2014 2015 Inspection Copy

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The Institute of Chartered Accountants in England and Wales

CORPORATE REPORTING Advanced Stage Technical Integration Level

For exams in 2014 – July 2015

www.icaew.com

Study Manual

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Corporate Reporting The Institute of Chartered Accountants in England and Wales

ISBN: 978-0-85760-750-8

Previous ISBN: 978-0-85760-477-4

First edition 2007 Seventh edition 2013

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means or stored in any retrieval system, electronic, mechanical, photocopying, recording or otherwise without prior permission of the publisher.

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library

Printed in the United Kingdom by Polestar Wheatons

Polestar Wheatons Hennock Road Marsh Barton Exeter EX2 8RP

Your learning materials are printed on paper obtained from traceable, sustainable sources.

© The Institute of Chartered Accountants in England and Wales

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iii

Welcome to ICAEW I am delighted to welcome you as a student studying our chartered accountancy qualification, the ACA.

The ACA will open doors to a highly rewarding career as a financial expert or business leader. Once you are an ICAEW member, you will join over 138,000 others around the world who work at the highest levels across all industry sectors, providing valuable financial and business advice. Some of our earlier members formed today's global Big Four firms, and you can find an ICAEW Chartered Accountant on the boards of 80% of the UK FTSE 100 companies.

We are here to help you every step of the way. As part of a worldwide network of over 19,000 students, you will have access to a range of resources including the online student community, where you can interact with fellow students, and our student support team. Take a look at the key resources on page ix.

I wish you the very best of luck with your studies and look forward to supporting you throughout your career.

Michael Izza Chief Executive ICAEW

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Contents

Introduction vii

Corporate Reporting viii

Key resources ix

Skills assessment guide x

Faculties and Special Interest Groups xvi

ICAEW publications for further reading xvi

Financial statements

1 Presentation of financial statements 1

Assets, liabilities and provisions

2 Reporting of assets 27

3 Events after the reporting period, provisions and contingencies 81

Financing

4 Leases, government grants and borrowing costs 103

5 Financial instruments – presentation and disclosure 135

6 Financial instruments – recognition and measurement 155

7 Financial instruments – hedge accounting 219

Remuneration

8 Employee benefits 259

9 Share-based payment 299

Business combinations

10 Groups – revision 351

Reporting overseas activities

11 Foreign currency translation and hyperinflationary economies 419

Taxation and industry specific standards

12 Income taxes 469

13 Industry specific Standards 511

Reporting performance

14 Earnings per share 545

15 Reporting performance 583

Financial analysis 16 Financial statement analysis 625

Index 685

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Introduction vii

1 Introduction

1.1 What is Corporate Reporting and how does it fit within the ACA Advanced Stage? Structure

The ACA syllabus has been designed to develop core technical, commercial, and ethical skills and knowledge in a structured and rigorous manner.

The diagram below shows the twelve modules at the ACA Professional Stage, where the focus is on the acquisition and application of technical skills and knowledge, and the ACA Advanced Stage which comprises two technical integration modules and the Case Study.

The knowledge level

In the Accounting paper you will have been introduced to the double entry system of recording transactions and the preparation of non-complex financial statements.

Progression to ACA application level

The knowledge base that is put into place here will be taken further in two application stage modules.

The Financial Accounting module develops these basic principles covered in Accounting, looking at the preparation of single entity financial statements in more complex situations and also introduces the issue of group financial statements.

The Financial Reporting paper then takes these issues a step further enabling students to prepare extracts from financial statements for entities undertaking a wide range of accounting transactions. The emphasis is also on understanding financial information as well as preparation with analysis and interpretation a key feature.

Progression to ACA Advanced Stage

The Advanced Stage papers – Business Reporting (BR) and Business Change (BC) – then take things further again. The aims of BR are to ensure that students can apply analysis techniques, technical knowledge and professional skills to resolve real-life compliance issues faced by businesses. In the BC paper the aim is to ensure that students can provide technical advice in respect of issues arising in business transformations eg mergers and acquisitions.

The above illustrates how the knowledge base of accounting gives a platform from which a progression of skills and technical expertise is developed.

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Corporate Reporting viii

2 Corporate Reporting

2.1 Module aim The aim of the Business Reporting paper is:

To ensure that candidates can apply analysis techniques, technical knowledge and professional skills to resolve real-life compliance issues faced by businesses.

Candidates may be put, for example, in the role of a preparer of financial statements, or other corporate reports such as on sustainability and corporate responsibility, an advisor or in an assurance role facing business issues where there are reporting implications. Compliance issues relating to taxation will also feature in this module.

Candidates will be required to use professional judgement to identify and evaluate alternatives and determine the appropriate solution(s) to compliance issues, giving due consideration to the commercial impact of their recommendations.

The aim of the Business Change paper is:

To ensure that candidates can provide technical advice in respect of issues arising in business transformations, mergers, acquisitions, alliances and disposals.

Candidates will be required to analyse and interpret both external and internal financial and non-financial data in order to plan for change and provide advice. In undertaking this analysis students will be expected to evaluate the impact of stakeholder influences on the data, including the impact of choice of reporting policies.

Taxation and practical business techniques are particularly important in this module, where business techniques include aspects of business strategy, business finance, performance management and costing. There will also be assurance, ethical and legal implications to be considered when developing and assessing strategic and business plans.

2.2 Specification grid This grid shows the relative weightings of subjects within each module and should guide the relative study time spent on each. Over time the marks available in the assessment will equate to the weightings below, while slight variations may occur in individual assessments to enable suitably rigorous questions to be set.

BR BC Weighting (%) Weighting (%) Ethics and law 5 – 10 5 – 10 Taxation 20 – 30 25 – 35 Audit and assurance 30 – 40 10 – 20 Corporate reporting 30 – 40 15 – 25 Business analysis 0 30 – 35

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Introduction ix

3 Key resources

STUDENT SUPPORT TEAM T +44 (0)1908 248 250 E [email protected]

STUDENT WEBSITE icaew.com/students student homepage icaew.com/exams exam applications, deadlines, regulations and more icaew.com/cpl credit for prior learning/exemptions icaew.com/examresources examiners comments, syllabus, past papers, study guides and more icaew.com/examresults exam results

TUITION If you are receiving structured tuition, make sure you know how and when you can contact your tutors for extra help.

If you aren't receiving structured tuition and are interested in classroom, online or distance learning tuition, take a look at our tuition providers in your area on icaew.com/exams

ONLINE STUDENT COMMUNITY The online student community allows you to ask questions, gain study and exam advice from fellow ACA and CFAB students and access our free webinars. There are also regular Ask an Expert and Ask a Tutor sessions to help you with key technical topics and exam papers. Access the community at icaew.com/studentcommunity

THE LIBRARY & INFORMATION SERVICES (LIS) The Library and Information Service (LIS) is ICAEW's world-leading accountancy and business library. You have access to a range of resources free of charge via the library website, including the catalogue, LibCat. icaew.com/library

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Corporate Reporting x

4 Skills assessment guide

4.1 Introduction As a Chartered Accountant in the business world, you will require the knowledge and skills to interpret financial and other numerical and business data, and communicate the underlying issues to your clients. In a similar way to the required knowledge, the ACA syllabus has been designed to develop your professional skills in a progressive manner. These skills are broadly categorised as:

Assimilating and using information Structuring problems and solutions Applying judgement Drawing conclusions and making recommendations

4.2 Assessing your professional skills

BR

BC

Professional Stageknowledge level

Professional Stageapplication level

Advance Stagetechnical integrationTAX FR

FA A&A

FM

BS

ETHICSCase Study

Initial Professional Development

Skills

Tech

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The work experience requirements for students provide a framework to develop appropriate work experience, completion of which is essential in order to qualify for membership. Work experience is also an essential component for examination preparation.

The work experience framework is built around five key skills:

Business awareness – being aware of the internal and external issues and pressure for change facing an organisation and assessing an organisation's performance.

Technical and functional expertise – applying syllabus learning outcomes and where appropriate, further technical knowledge to real situations.

Ethics and professionalism – recognising issues, using knowledge and experience to assess implications, making confident decisions and recommendations.

Professional judgement – making recommendations and adding value with appropriate, targeted and relevant solutions.

Personal effectiveness – developing, maintaining and exercising skills and personal attributes necessary for the role and responsibilities.

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Introduction xi

The examinations, and in particular the Advanced Stage, embrace all of these skills.

The link between work experience and the examinations is demonstrated by the skills development grids produced by the examiners.

This will help students see that their practical knowledge and skills gained in the workplace feed back into the exam room and vice-versa.

4.3 Assessment grids The following pages set out the learning outcomes for Corporate Reporting that are addressed under each of the four skills areas. In addition, for each skills area, there is a description of:

The specific skills that are assessed How these skills are assessed

Using these grids will enable you to determine how the examination paper will be structured and to consider whether your knowledge of Corporate Reporting is sufficiently strong to enable you to apply it in the required manner.

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Corporate Reporting xii

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Introduction xiii

4.4 Technical knowledge The table contained in this section shows the technical knowledge covered in the ACA Syllabus by module.

For each individual standard the level of knowledge required in the relevant Professional Stage module and at the Advanced Stage is shown.

The knowledge levels are defined as follows:

Level D

An awareness of the scope of the standard.

Level C

A general knowledge with a basic understanding of the subject matter and training in its application sufficient to identify significant issues and evaluate their potential implications or impact.

Level B

A working knowledge with a broad understanding of the subject matter and a level of experience in the application thereof sufficient to apply the subject matter in straightforward circumstances.

Level A

A thorough knowledge with a solid understanding of the subject matter and experience in the application thereof sufficient to exercise reasonable professional judgement in the application of the subject matter in those circumstances generally encountered by Chartered Accountants.

Key to other symbols:

→ The knowledge level reached is assumed to be continued

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Corporate Reporting xiv

Corporate Reporting

Professional Stage

Title

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Preface to International Financial Reporting Standards A Conceptual Framework for Financial Reporting C A IAS 1 Presentation of Financial Statements B A IAS 2 Inventories C A IAS 7 Statement of Cash Flows B B IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors A IAS 10 Events after the Reporting Period A IAS 11 Construction Contracts A IAS 12 Income Taxes C A IAS 16 Property, Plant and Equipment C A IAS 17 Leases A IAS 18 Revenue A IAS 19 Employee Benefits A IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

A

IAS 21 The Effects of Changes in Foreign Exchange Rates A IAS 23 Borrowing Costs A IAS 24 Related Party Disclosures A IAS 26 Accounting and Reporting by Retirement Benefit Plans D IAS 27 Consolidated and Separate Financial Statements B A IAS 28 Investments in Associates B A IAS 29 Financial Reporting in Hyperinflationary Economies D IAS 31 Interests in Joint Ventures A IAS 32 Financial Instruments: Presentation C A IAS 33 Earnings per Share B A IAS 34 Interim Financial Reporting A IAS 36 Impairment of Assets B A IAS 37 Provisions, Contingent Liabilities and Contingent Assets A IAS 38 Intangible Assets C B A IAS 39 Financial Instruments: Recognition and Measurement C B A IAS 40 Investment Property A IAS 41 Agriculture D IFRS 1 First-Time Adoption of IFRS A IFRS 2 Share-based Payment A IFRS 3 Business Combinations B B A IFRS 4 Insurance Contracts D IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

B A

IFRS 6 Exploration for and Evaluation of Mineral Resources D IFRS 7 Financial Instruments: Disclosures B A IFRS 8 Operating Segments A IFRS 9 Financial Instruments C IFRS for SMEs C

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Introduction xv

Current issues

A number of the Chapters in this Study Manual cover current developments in the relevant financial reporting area. For example, IAS 39 is being replaced by IFRS 9, and there are proposals for changes to the rules on revenue recognition.

These areas are not examinable because they were not in force at the April 2013 cut-off date for examinations in 2014. However, as a professional you need to be aware of what these issues are, and of the problems with current accounting treatments.

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Corporate Reporting xvi

5 Faculties and Special Interest Groups

The faculties and special interest groups are specialist bodies within the ICAEW which offer members networking opportunities, influence and recognition within clearly defined areas of technical expertise. As well as providing accurate and timely technical analysis, they lead the way in many professional and wider business issues through stimulating debate, shaping policy and encouraging good practice. Their value is endorsed by over 40,000 members of ICAEW who currently belong to one or more of the seven faculties:

Audit and Assurance Corporate Finance Finance and Management Financial Reporting Financial Services Information Technology Tax

The special interest groups provide practical support, information and representation for chartered accountants working within a range of industry sectors, including:

Charity and Voluntary sector Entertainment and Media Farming and Rural Business Forensic Healthcare Interim Management Non-Executive Directors Public Sector Solicitors Tourism and Hospitality Valuation

Students can register free of charge for provisional membership of one special interest group and receive a monthly complimentary e-newsletter from one faculty of your choice. To find out more and to access a range of free resources, visit icaew.com/facultiesandsigs

6 ICAEW publications for further reading

ICAEW produces publications and guidance for its students and members on a variety of technical and business topics. This list of publications has been prepared for students who wish to undertake further reading in a particular subject area and is by no means exhaustive. You are not required to study these publications for your exams. For a full list of publications, or to access any of the publications listed below, visit the Technical Resources section of the ICAEW website at icaew.com

ICAEW no longer prints a Members Handbook. ICAEW regulations, standards and guidance are available at icaew.com/regulations This area includes regulations and guidance relevant to the regulated areas of audit, investment business and insolvency as well as materials that were previously in the handbook.

The TECH and AUDIT series of technical releases are another source of guidance available to members and students. Visit icaew.com/technicalreleases for the most up-to-date releases.

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Introduction xvii

Audit and Assurance Faculty – icaew.com/aaf

Right First Time with the Clarified ISAs, ICAEW 2010, ISBN 978-0-85760-063-9

Clarified ISAs provide many opportunities for practitioners in terms of potential efficiencies, better documentation, better reporting to clients, and enhanced audit quality overall.

This modular guide has been developed by ICAEW's ISA implementation sub-group to help medium-sized and smaller firms implement the clarified ISAs and take advantage of these opportunities. This modular guide is designed to give users the choice of either downloading the publication in its entirety, or downloading specific modules on which they want to focus.

An international edition is also available.

• Quality Control in the Audit Environment, ICAEW 2010, ISBN 0-497-80857-605-5

The publication identifies seven key areas for firms to consider. Illustrative policies and procedures are provided for selected aspects of each key area, including some examples for sole practitioners. The guide also includes an appendix with answers to a number of frequently asked questions on the standard.


The Audit of Related Parties in Practice, ICAEW 2010, ISBN 978-1-84125-565-6

This practical guide to the audit of related party relationships and transactions is set in the context of the significant change in approach that is required under the revised ISA and highlights the importance of planning, the need to involve the entire audit team in this, to assign staff with the appropriate level of experience to audit this area and upfront discussions with the client to identify related parties.


Alternatives to Audit ICAEW, 2009, ISBN 978-1-84152-819-9

In August 2006, the ICAEW Audit and Assurance Faculty began a two-year consultation on a new assurance services (the ICAEW Assurance Service), an alternative to audit based on the idea of limited assurance introduced by the International Auditing and Assurance Standards Board (IAASB). This report presents findings from the practical experience of providing the ICAEW Assurance Service over the subsequent two years and views of users of financial information that help in assessing the relevance of the service to their needs.

Companies Act 2006 – Auditor related requirements and regulations third edition – March 2012 ICAEW, 2012, ISBN 978-0-85760-442-2

This third edition of the guide provides a brief summary of the key sections in the Companies Act 2006 (the Act) which relate directly to the rights and duties of auditors. It covers the various types of reports issued by auditors in accordance with the Act. It is designed to be a signposting tool for practitioners and identifies the other pieces of guidance issued by ICAEW, APB, FRC, POB and others to support implementation of the Act.

Auditing in a group context: practical considerations for auditors ICAEW, 2008, ISBN 978-1-84152-628-7

The guide describes special considerations for auditors at each stage of the group audit's cycle. While no decisions have been taken on UK adoption of the IAASB's clarity ISAs, the publication also covers matters in the IAASB's revised and redrafted 'ISA 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)'. The revised publication contains suggestions for both group auditors and component auditors.

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Corporate Reporting xviii

Corporate Finance Faculty – icaew.com/corpfinfac

Private equity demystified – an explanatory guide Second Edition, Financing Change Initiative, ICAEW, March 2010, John Gilligan and Mike Wright

This guide summarises the findings of academic work on private equity transactions from around the world. Hard copies of the abstract and full report are free and are also available by download from icaew.com/thoughtleadership

Best Practice Guidelines

The Corporate Finance Faculty publishes a series of guidelines on best-practice, regulatory trends and technical issues. Authored by leading practitioners in corporate finance, they are succinct and clear overviews of emerging issues in UK corporate finance. icaew.com/corpfinfac

• Corporate Financier magazine, ISSN 1367-4544 The award-winning Corporate Financier magazine is published ten times a year for members, stakeholders and key associates of ICAEW's Corporate Finance Faculty.

Aimed at professionals, investors and company directors involved in corporate finance, it covers a wide range of emerging regulatory, commercial and professional development issues.

The magazine includes features, news, analysis and research, written by experts, experienced editors and professional journalists.

In 2011, three major themes were introduced: Innovation & Corporate Finance; Financing Entrepreneurship; and Deal Leadership.

Corporate governance – icaew.com/corporategovernance

The UK Corporate Governance Code 2010

The UK Corporate Governance Code (formerly the Combined Code) sets out standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders. All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report on how they have applied the UK Corporate Governance Code in their annual report and accounts.

The first version of the UK Corporate Governance Code was produced in 1992 by the Cadbury Committee. In May 2010 the Financial Reporting Council issued a new edition of the Code which applies to financial years beginning on or after 29 June 2010.

The UK Corporate Governance Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the main principles of the Code, and either to confirm that they have complied with the Code's provisions or – where they have not – to provide an explanation.

Internal Control: Revised Guidance on Internal Control for Directors on the Combined Code (now the UK Corporate Governance Code)

Originally published in 1999, the Turnbull guidance was revised and updated in October 2005, following a review by the Financial Reporting Council. The updated guidance applies to listed companies for financial years beginning on or after 1 January 2006.

The FRC Guidance on Audit Committees (formerly known as The Smith Guidance)

First published by the Financial Reporting Council in January 2003, and most recently updated in 2010. It is intended to assist company boards when implementing the sections of the UK Corporate Governance Code dealing with audit committees and to assist directors serving on audit committees in carrying out their role. Companies are encouraged to use the 2010 edition of the guidance with effect from 30 April 2011.

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Introduction xix

The UK Stewardship Code

The UK Stewardship Code was published in July 2010. It aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities by setting out good practice on engagement with investee companies to which the Financial Reporting Council believes institutional investors should aspire.

A report summarising the actions being taken by the Financial Reporting Council and explaining how the UK Stewardship Code is intended to operate was also published in July 2010.

Corporate responsibility – icaew.com/corporateresponsibility

Sustainable Business January 2009

The new thought leadership prospectus acts as a framework for the work that ICAEW do in sustainability/corporate responsibility. It argues that any system that is sustainable needs accurate and reliable information to help it learn and adapt, which is where the accounting profession plays an important role. A downloadable pdf is available at icaew.com/sustainablebusiness

Environmental issues in annual financial statements ICAEW, May 2009, ISBN 978-1-84152-610-2

This report is a joint initiative with the Environment Agency. It is aimed at business accountants who prepare, use or audit the financial statements in statutory annual reports and accounts, or who advise or sit on the boards of the UK companies and public sector organisations. It offers practical advice on measuring and disclosing environmental performance. A downloadable pdf is available at icaew.com/sustainablebusiness

ESRC seminar series – When worlds collide: contested paradigms of corporate responsibility

ICAEW, in conjunction with the British Academy of Management, won an Economic and Social Research Council grant to run a seminar series which aims to bring academics and the business community together to tackle some of the big challenges in corporate responsibility. icaew.com/corporateresponsibility

The Business Sustainability Programme (BSP)

The Business Sustainability Programme is an e-learning package for accountants and business professionals who want to learn about the business case for sustainability. The course is spread across five modules taking users from definitions of sustainability and corporate responsibility, through case studies and finally towards developing an individually tailored sustainability strategy for their business. The first two modules are free to everyone. For more information and to download a brochure visit icaew.com/bsp

Ethics – icaew.com/ethics

Code of Ethics

The Code of Ethics helps ICAEW members meet these obligations by providing them with ethical guidance. The Code applies to all members, students, affiliates, employees of member firms and, where applicable, member firms, in all of their professional and business activities, whether remunerated or voluntary.

Instilling integrity in organisations ICAEW June 2009

Practical guidance aimed at directors and management to assist them in instilling integrity in their organisations. This document may also be helpful to audit firms discussing this topic with clients and individuals seeking to address issues in this area with their employers.

Reporting with Integrity ICAEW May 2007, ISBN 978-1-84152-455-9

This publication brings ideas from a variety of disciplines, in order to obtain a more comprehensive understanding of what is meant by integrity, both as a concept and in practice. Moreover, because this report sees reporting with integrity as a joint endeavour of individuals, organisations and professions, including the accounting profession, the concept of integrity is considered in all these contexts.

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Finance and Management Faculty – icaew.com/fmfac

Finance's role in the organisation November 2009, ISBN 978-1-84152-855-7

This considers the challenges of designing successful organisations, written by Rick Payne, who leads the faculty's finance direction programme.

Investment appraisal SR27: December 2009, ISBN 978-1-84152-854-4

This special report looks at the key issues and advises managers on how they can contribute effectively to decision making and control during the process of investment appraisal.

Starting a business SR28: March 2010, ISBN 978-1-84152-984-2

This report provides accountants with a realistic and motivational overview of what to consider when starting a business.

Developing a vision for your business SR30: September 2010, ISBN 978-0-85760-054-7

This special report looks at what makes a good vision, the benefits of having one, the role of the FD in the process, leadership, storytelling and the use of visions in medium-sized businesses.

Finance transformation – the outsourcing perspective SR31: December 2010, ISBN 978-0-85760-079-0

The authors of this outsourcing special report share their expertise on topics including service level agreements, people management, and innovation and technology.

The Finance Function: A Framework for Analysis September 2011, ISBN 978-0-85760-285-5

This report is a source of reference for those analyzing or researching the role of the finance function and provides a foundation for considering the key challenges involved, written by Rick Payne, who leads the faculty's finance direction programme.

Financial Reporting Faculty – icaew.com/frfac

EU Implementation of IFRS and the Fair Value Directive ICAEW, October 2007, ISBN 978-1-84152-519-8

The most comprehensive assessment to date of compliance with the requirements of IFRS and the overall quality of IFRS financial reporting.

The Financial Reporting Faculty makes available to students copies of its highly-regarded factsheets on UK GAAP and IFRS issues, as well as its journal, By All Accounts, at icaew.com/frfac

Financial Services Faculty – icaew.com/fsf

Audit of banks: lessons from the crisis, (Inspiring Confidence in Financial Services initiative) ICAEW, June 2010 ISBN 978-0-85760-051-6

This research has looked into the role played by bank auditors and examined improvements that can be made in light of lessons learned from the financial crisis. The project has included the publication of stakeholder feedback and development of a final report.

Measurement in financial services, (Inspiring Confidence in Financial Services initiative) ICAEW, March 2008, ISBN 978-1-84152-546-4

This report suggests that more work is required on matching measurement practices in the financial services industry to the needs of different users of financial information, despite the fact that the financial services industry has the greatest concentration of measurement and modelling skills of any industry. A downloadable pdf is available at icaew.com/thoughtleadership

Skilled Persons' Guidance – Reporting Under s166 Financial Services and Markets Act 2000 (Interim Technical Release FSF 01/08)

This interim guidance was issued by ICAEW in April 2008 as a revision to TECH 20/30 to assist chartered accountants and other professionals who are requested to report under s166 Financial Services and Markets Act 2000. A downloadable pdf is available at icaew.com/technicalreleases

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Introduction xxi

Information Technology Faculty – icaew.com/itfac

The IT Faculty provides ongoing advice and guidance that will help students in their studies and their work. The online community (ion.icaew.com/itcountshome) provides regular free updates as well as a link to the faculty's Twitter feed which provides helpful updates and links to relevant articles. The following publications should also be of interest to students:

Make the move to cloud computing ICAEW, 2012, ISBN 978-0-85760-617-4

Cloud computing in its purest form is pay-as-you-go IT, online and on demand. The IT capabilities provided as a service to businesses include: single software applications or software suites; online software development platforms; and virtual computing infrastructure, ranging from data storage to computer grids.

Bringing employee personal devices into the business - a guide to IT consumerisation ICAEW, 2012, ISBN 978-0-85760-443-9

The gap between business and consumer technology has been growing over the last few years, with the consumer market now leading in terms of ease of use and portability.

Making the most of social media - a practical guide for your business ICAEW, 2011, ISBN 978-0-85760-286-2

This guide will enable the business manager to develop a philosophy that allies social media's potential with the business's objectives and capabilities, to set objectives and protect against pitfalls, and then to take the first practical steps in a mass communications medium very different from any that British business has encountered before.

Tax Faculty – icaew.com/taxfac

The Tax Faculty runs a Younger Members Tax Club which provides informal presentations, discussions and socialising. All young professionals interested in tax are welcome to attend. See the website for more details icaew.com/taxfac

Tax news service

You can keep up with the tax news as it develops on the Tax Faculty's news site icaew.com/taxnews. And you can subscribe to the free newswire which gives you a weekly round up. For more details visit icaew.com/taxfac

Demystifying XBRL

This booklet, produced jointly by KPMG, the Tax Faculty and the Information Technology Faculty, explains exactly what iXBRL is all about and what must be done in order to e-file corporation tax returns using the new standard.

Implementing XBRL

This booklet, produced jointly by Thompson Reuters, the Tax Faculty and the Information Technology Faculty, is a practical guide for accountants in business and practice, and follows on from Demystifying XBRL.

TAXline Tax Practice series of detailed briefings on current topics:

TAXline Tax Practice 27 Let property – a brief guide by Rebecca Cave (published November 2011)

TAXline Tax Practice 26 The new pension rules by Anne Redston (published July 2011)

TAXline Tax Practice 25 Tax Credits by Robin Williamson (published April 2011)

TAXline Tax Practice No 23 HMRC Powers – an overview of the new powers and penalties regime by Paula Clemett (published October 2010)

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1

CHAPTER 1

Presentation of financial statements

Introduction

Topic List

1 IAS 1 Presentation of Financial Statements

2 IAS 34 Interim Financial Reporting

3 Future of UK GAAP

Summary and Self-test

Technical reference

Answers to Self-test

Answer to Interactive question

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Corporate Reporting 2

Introduction

Learning objectives Tick off

Understand and apply the requirements of IAS 1Presentation of Financial Statements

Demonstrate an understanding of the requirements of IAS 34 Interim Financial Reporting

Apply recognition and measurement principles to the preparation of interim financial statements as required by IAS 34 Interim Financial Reporting

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Presentation of financial statements 3

CHAPTER

1

1 IAS 1 Presentation of Financial Statements

Section overview

IAS 1 Presentation of Financial Statements sets down the format of financial statements, containing requirements as to their presentation, structure and content.

IAS 1 was amended in 2011, changing the presentation of items contained in other comprehensive income (OCI) and their classification within OCI.

1.1 Main features Titles of financial statements

The three main financial statements under IAS 1 are:

Statement of financial position Statement of profit or loss and other comprehensive income Statement of cash flows

You may still see the old names (balance sheet, etc), as these new titles are not mandatory.

Reporting owner changes in equity and comprehensive income

IAS 1 classifies changes in equity in a period as either:

Owner changes in equity, or Non-owner changes in equity.

Owner changes in equity arise from transactions with owners in their capacity as owners, eg dividends paid and issues of share capital. These are presented in the statement of changes in equity.

Non-owner changes in equity (known as 'comprehensive income') include:

1 The profit or loss for the period 2 Income or expenditure recognised directly in equity (known as 'other comprehensive income').

These are presented in the statement of profit or loss and other comprehensive income.

Summary

IAS 1

Profit or loss for period

Non-owner transactions recognised directly in equity Statement of profit or loss and other comprehensive income

Owner transactions Statement of changes in equity

Presentation of comparatives

IAS 1 requires disclosure of comparative information in respect of the previous period. It also requires inclusion of a statement of financial position as at the beginning of the earliest comparative period when an entity:

Retrospectively applies an accounting policy Retrospectively restates items in the financial statements, or Reclassifies items in the financial statements.

In effect this will result in the presentation of three statements of financial position when there is a prior period adjustment.

1.2 Statement of financial position Note that reserves other than share capital and retained earnings may be grouped as 'other components of equity'.

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STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X7

31 Dec 20X7 31 Dec 20X6 $m $m ASSETS Non-current assets Property, plant and equipment X X Goodwill X X Other intangible assets X X Investments in associates X X Available-for-sale financial assets X X X X Current assets Inventories X X Trade receivables X X Other current assets X X Cash and cash equivalents X X X X Total assets X X

EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital X X Retained earnings X X Other components of equity X X X X Non-controlling interests X X Total equity X X Non-current liabilities Long-term borrowings X X Deferred tax X X Long-term provisions X X Total non-current liabilities X X Current liabilities Trade and other payables X X Short-term borrowings X X Current portion of long-term borrowings X X Current tax payable X X Short-term provisions X X Total current liabilities X X Total liabilities X X Total equity and liabilities X X

1.3 Statement of profit or loss and other comprehensive income The statement of profit or loss and other comprehensive income presents the total comprehensive income of an entity for a period.

Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. It includes all components of profit or loss and of 'other comprehensive income'.

Other comprehensive income includes income and expenses that are not recognised in profit or loss, but instead recognised directly in equity. It includes:

Changes in the revaluation surplus

Remeasurements (actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19 Employee Benefits (revised 2011) (Chapter 8)

Gains and losses arising from translating the financial statements of a foreign operation (Chapter 11)

Gains and losses on remeasuring available-for-sale financial assets (Chapter 6)

The effective portion of gains and losses on hedging instruments in a cash flow hedge (Chapter 7)

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1.3.1 2011 Revision of IAS 1

In June 2011, the IASB published an amendment to IAS 1 called Presentation of items of other comprehensive income, changing the presentation of items contained in Other Comprehensive Income (OCI) and their classification within OCI.

Background

The blurring of distinctions between different items in OCI is the result of an underlying general lack of agreement among users and preparers about which items should be presented in OCI and which should be part of the profit or loss section. For instance, a common misunderstanding is that the split between profit or loss and OCI is on the basis of realised versus unrealised gains. This is not, and has never been, the case.

This lack of a consistent basis for determining how items should be presented has led to the somewhat inconsistent use of OCI in financial statements.

Change

Entities are required to group items presented in other comprehensive income (OCI) on the basis of whether they would be reclassified to (recycled through) profit or loss at a later date, when specified conditions are met.

The amendment does not address which items are presented in other comprehensive income or which items need to be reclassified.

Income tax

IAS 1 requires an entity to disclose income tax relating to each component of other comprehensive income. This is because these items often have tax rates different from those applied to profit or loss.

This may be achieved by either

Presenting individual components of other comprehensive income net of the related tax, or

Presenting individual components of other comprehensive income before tax, with one amount shown for the aggregate amount of income tax relating to those components.

Presentation

IAS 1 allows comprehensive income to be presented in two ways:

1 A single statement of profit or loss and other comprehensive income, or

2 A statement displaying components of profit or loss plus a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of profit or loss and other comprehensive income).

The recommended format of a single statement of profit or loss and other comprehensive income is as follows:

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X7

20X7 20X6 $m $m Revenue X X Cost of sales (X) (X) Gross profit X X Other income X X Distribution costs (X) (X) Administrative expenses (X) (X) Other expenses (X) (X) Finance costs (X) (X) Share of profit of associates X X Profit before tax X X Income tax expense (X) (X) Profit for the year from continuing operations X X Loss for the year from discontinued operations (X)

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20X7 20X6 $m $m PROFIT FOR THE YEAR X X Other comprehensive income: Items that will not be reclassified to profit or loss: Gains on property revaluation X X Investment in equity instruments (available-for-sale financial assets)

(X)

X

Actuarial gains (losses) on defined benefit pension plans (X) X Share of gain (loss) on property revaluation of associates X (X) Income tax relating to items that will not be reclassified X (X) (X) X Items that may be reclassified subsequently to profit or loss: Exchange differences on translating foreign operations X X Cash flow hedges (X) (X) Income tax relating to items that may be reclassified (X) (X) X X Other comprehensive income for the year, net of tax (X) X TOTAL COMPREHENSIVE INCOME FOR THE YEAR X X

Profit attributable to: Owners of the parent X X Non-controlling interests X X X X

Total comprehensive income attributable to: Owners of the parent X X Non-controlling interests X X X X Earnings per share ($) Basic and diluted X X Alternatively, components of OCI could be presented in the statement of profit or loss and other comprehensive income net of tax.

Tutorial note:

Throughout this text, income and expense items which are included in the 'top half' of the statement of profit or loss and other comprehensive income are referred to as recognised in profit or loss, or recognised in the income statement.

Income and expense items included in the 'bottom half' of the statement of profit or loss and other comprehensive income are referred to as recognised in other comprehensive income.

For exam purposes, you must ensure that you clarify where in the statement of profit or loss and other comprehensive income an item is recorded, by referring to recognition:

In profit or loss, or In other comprehensive income

1.4 Statement of changes in equity All changes in equity arising from transactions with owners in their capacity as owners are shown in the statement of changes in equity.

Non-owner transactions are not permitted to be shown in the statement of changes in equity other than in aggregate.

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STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 20X7

Available Translation -for-sale Non- Share Retained of foreign financial Cash flow Revaluation controlling Total capital earnings operations assets hedges surplus Total interest equity

Balance at £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 1 Jan 20X7 X X (X) X X – X X X Changes in accounting policy – X – – – – X – X Restated balance X X (X) X X – X X X Changes in equity during 20X7 Issue of share capital X – – – – – X – X Dividends – (X) – – – – (X) (X) (X) Total comprehensive income for the year – X X X X X X X X Transfer to retained earnings – X – – – (X) – – – Balance at 31 Dec 20X7 X X X X X X X X X

A comparative statement for the prior period is also required.

Here is an example of a statement of changes in equity with some real figures in, to give you a better idea of what it looks like:

OLIVE GROUP: STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20X9

AFS Revalua- Non- Share Retained financial tion controlling Total capital earnings assets surplus Total interest equity £m £m £m £m £m £m £m

Balance at 1 July 20X8 14,280 10,896 384 96 25,656 1,272 26,928 Share capital issued 1,320 1,320 1,320 Dividends (216) (216) (120) (336) Total comprehensive income for the year (1,296) 72 48 (1,176) 528 (648) Balance at 30 June 20X9 15,600 9,384 456 144 25,584 1,680 27,264

2 IAS 34 Interim Financial Reporting

Section overview

IAS 34 recommends that entities should produce interim financial reports, and for entities that do publish such reports, it lays down principles and guidelines for their production.

The following definitions are used in IAS 34.

Definitions

Interim period: A financial reporting period shorter than a full financial year.

Interim financial report: A financial report containing either a complete set of financial statements (as described in IAS 1) or a set of condensed financial statements (as described in this Standard) for an interim period.

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2.1 Scope of IAS 34 IAS 34 does not make the preparation of interim financial reports mandatory, taking the view that this is a matter for governments, securities regulators, stock exchanges or professional accountancy bodies to decide within each country. The IASB does, however, strongly recommend to governments, and regulators, that interim financial reporting should be a requirement for companies whose equity or debt securities are publicly traded.

IAS 34 encourages publicity traded entities:

To provide an interim financial report for at least the first six months of their financial year (ie a half year financial report).

To make the report available no later than 60 days after the end of the interim period.

Thus, a company with a year ending 31 December would be required as a minimum to prepare an interim report for the half year to 30 June and this report should be available before the end of August.

2.2 Minimum components IAS 34 specifies the minimum component elements of an interim financial report as follows:

Condensed statement of financial position

Condensed statement of profit or loss and other comprehensive income, presented either as a single condensed statement or a condensed income statement and a condensed statement of profit or loss and other comprehensive income

Condensed statement of changes in equity

Condensed statement of cash flows

Selected note disclosures

IAS 34 applies where an entity is required to or chooses to publish an interim financial report in accordance with International Financial Reporting Standards (IFRSs).

An interim report complying with IFRSs may be:

A complete set of financial statements at the interim reporting date complying in full with IFRSs, or A condensed interim financial report prepared in compliance with IAS 34.

The rationale for requiring only condensed statements and selected note disclosures is that entities need not duplicate information in their interim report that is contained in their report for the previous financial year. Interim statements should focus more on new events, activities and circumstances.

2.3 Form and content Where full financial statements are given as interim financial statements, IAS 1 should be used as a guide, otherwise IAS 34 specifies minimum contents.

The condensed statement of financial position should include, as a minimum, each of the major components of assets, liabilities and equity as were in the statement of financial position at the end of the previous financial year, thus providing a summary of the economic resources of the entity and its financial structure.

The condensed statement of profit or loss and other comprehensive income should include, as a minimum, each of the component items of total comprehensive income as were shown in the statement of profit or loss and other comprehensive income for the previous financial year, together with the earnings per share and diluted earnings per share.

The condensed statement of cash flows should show, as a minimum, the three major sub-totals of cash flow as required in statements of cash flows by IAS 7, namely: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.

The condensed statement of changes in equity should include, as a minimum, each of the major components of equity as were contained in the statement of changes in equity for the previous financial year of the entity.

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2.3.1 Selected explanatory notes

IAS 34 states that relatively minor changes from the most recent annual financial statements need not be included in an interim report. However, the notes to an interim report should include the following (unless the information is contained elsewhere in the report).

A statement that the same accounting policies and methods of computation have been used for the interim statements as were used for the most recent annual financial statements. If not, the nature of the differences and their effect should be described. (The accounting policies for preparing the interim report should only differ from those used for the previous annual accounts in a situation where there has been a change in accounting policy since the end of the previous financial year, and the new policy will be applied for the annual accounts of the current financial period.)

Explanatory comments on the seasonality or 'cyclicality' of operations in the interim period. For example, if a company earns most of its annual profits in the first half of the year, because sales are much higher in the first six months, the interim report for the first half of the year should explain this fact.

The nature and amount of items during the interim period affecting assets, liabilities, capital, net income or cash flows, that are unusual, due to their nature, incidence or size.

The issue or repurchase of equity or debt securities.

Nature and amount of any changes in estimates of amounts reported in an earlier interim report during the financial year, or in prior financial years if these affect the current interim period.

Dividends paid on ordinary shares and the dividends paid on other shares.

Segmental results for entities that are required by IFRS 8 Operating Segments to disclose segment information in their annual financial statements.

Any significant events since the end of the interim period.

Effect of changes in the composition of the entity during the interim period including the acquisition or disposal of subsidiaries and long-term investments, restructurings and discontinued operations.

Any significant change in a contingent liability or a contingent asset since the date of the last annual statement of financial position.

The standard requires the entity to provide explanatory comments about seasonality or cyclicality relating to the interim financial statements.

Changes in the business environment such as changes in price, costs, demand, market share and prospects for the full year should be discussed in the management discussion and analysis of the financial review.

The entity should also disclose the fact that the interim report has been produced in compliance with IAS 34 on interim financial reporting.

Worked example: Disclosure

Requirement

Give some examples of the type of disclosures required according to the above list of explanatory notes.

Solution

The following are examples:

Write-down of inventories to net realisable value and the reversal of such a write-down

Recognition of a loss from the impairment of property, plant and equipment, intangible assets, or other assets, and the reversal of such an impairment loss

Reversal of any provisions for the costs of restructuring

Acquisitions and disposals of items of property, plant and equipment

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Commitments for the purchase of property, plant and equipment

Litigation settlements

Corrections of fundamental errors in previously reported financial data

Any debt default or any breach of a debt covenant that has not been corrected subsequently

Related party transactions

2.4 Periods covered The Standard requires that interim financial reports should provide financial information for the following periods or as at the following dates.

Statement of financial position data as at the end of the current interim period, and comparative data as at the end of the most recent financial year.

Statement of profit or loss and other comprehensive income data for the current interim period and cumulative data for the current year to date, together with comparative data for the corresponding interim period and cumulative figures for the previous financial year.

Statement of cash flows data should be cumulative for the current year to date, with comparative cumulative data for the corresponding interim period in the previous financial year.

Data for the statement of changes in equity should be for both the current interim period and for the year to date, together with comparative data for the corresponding interim period, and cumulative figures, for the previous financial year.

2.5 Materiality Materiality should be assessed in relation to the interim period financial data. It should be recognised that interim measurements rely to a greater extent on estimates than annual financial data.

2.6 Recognition and measurement principles A large part of IAS 34 deals with recognition and measurement principles, and guidelines as to their practical application. The guiding principle is that an entity should use the same recognition and measurement principles in its interim statements as it does in its annual financial statements.

This means, for example, that a cost that would not be regarded as an asset in the year-end statement of financial position should not be regarded as an asset in the statement of financial position for an interim period. Similarly, an accrual for an item of income or expense for a transaction that has not yet occurred (or a deferral of an item of income or expense for a transaction that has already occurred) is inappropriate for interim reporting, just as it is for year-end reporting.

Applying this principle of recognition and measurement may result, in a subsequent interim period or at the year-end, in a remeasurement of amounts that were reported in a financial statement for a previous interim period. The nature and amount of any significant remeasurements should be disclosed.

Revenues received occasionally, seasonally or cyclically Revenue that is received as an occasional item, or within a seasonal or cyclical pattern, should not be anticipated or deferred in interim financial statements, if it would be inappropriate to anticipate or defer the revenue for the annual financial statements. In other words, the principles of revenue recognition should be applied consistently to the interim reports and year-end reports.

Costs incurred unevenly during the financial year These should only be anticipated or deferred (ie treated as accruals or prepayments) if it would be appropriate to anticipate or defer the expense in the annual financial statements. For example, it would be appropriate to anticipate a cost for property rental where the rental is paid in arrears, but it would be

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inappropriate to anticipate part of the cost of a major advertising campaign later in the year, for which no expenses have yet been incurred.

The standard goes on, in an appendix, to deal with specific applications of the recognition and measurement principle. Some of these examples are explained below, by way of explanation and illustration.

Payroll taxes or insurance contributions paid by employers In some countries these are assessed on an annual basis, but paid at an uneven rate during the course of the year, with a large proportion of the taxes being paid in the early part of the year, and a much smaller proportion paid later on in the year. In this situation, it would be appropriate to use an estimated average annual tax rate for the year in an interim statement, not the actual tax paid. This treatment is appropriate because it reflects the fact that the taxes are assessed on an annual basis, even though the payment pattern is uneven.

Cost of a planned major periodic maintenance or overhaul The cost of such an event later in the year must not be anticipated in an interim financial statement unless there is a legal or constructive obligation to carry out this work. The fact that a maintenance or overhaul is planned and is carried out annually is not of itself sufficient to justify anticipating the cost in an interim financial report.

Other planned but irregularly-occurring costs Similarly, these costs such as charitable donations or employee training costs, should not be accrued in an interim report. These costs, even if they occur regularly and are planned, are nevertheless discretionary.

Year-end bonus A year-end bonus should not be provided for in an interim financial statement unless there is a constructive obligation to pay a year-end bonus (eg a contractual obligation, or a regular past practice) and the size of the bonus can be reliably measured.

Worked example: Bonus

An entity's accounting year ends on 31 December each year and it is currently preparing interim financial statements for the half year to 30 June 20X4. It has a contractual agreement with its staff that it will pay them an annual bonus equal to 10% of their annual salary if the full year's output exceeds one million units. Budgeted output is 1.4 million units and the entity has achieved budgeted output during the first six months of the year. Annual salaries are estimated to be £100 million, with the cost in the first half year to 30 June being £45 million.

Requirement

How should the bonus be reflected in the interim financial statements?

Solution

It is probable that the bonus will be paid, given that the actual output already achieved in the year is in line with budgeted figures, which exceed the required level of output. So a bonus of £4.5 million should be recognised in the interim financial statements at 30 June 20X4.

Holiday pay The same principle applies here. If holiday pay is an enforceable obligation on the employer, then any unpaid accumulated holiday pay may be accrued in the interim financial report.

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Non-monetary intangible assets The entity might incur expenses during an interim period on items that might or will generate non-monetary intangible assets. IAS 38 Intangible Assets requires that costs to generate non-monetary intangible assets (eg development expenses) should be recognised as an expense when incurred unless the costs form part of an identifiable intangible asset. Costs that were initially recognised as an expense cannot subsequently be treated instead as part of the cost of an intangible asset. IAS 34 states that interim financial statements should adopt the same approach. This means that it would be inappropriate in an interim financial statement to 'defer' a cost in the expectation that it will eventually be part of a non-monetary intangible asset that has not yet been recognised: such costs should be treated as an expense in the interim statement.

Depreciation Depreciation should only be charged in an interim statement on non-current assets that have been acquired, not on non-current assets that will be acquired later in the financial year.

Foreign currency translation gains and losses These should be calculated by the same principles as at the financial year end, in accordance with IAS 21.

Tax on income An entity will include an expense for income tax (tax on profits) in its interim statements. The tax rate to use should be the estimated average annual tax rate for the year. For example, suppose that in a particular jurisdiction, the rate of tax on company profits is 30% on the first £200,000 of profit and 40% on profits above £200,000. Now suppose that a company makes a profit of £200,000 in its first half year, and expects to make £200,000 in the second half year. The rate of tax to be applied in the interim financial report should be 35%, not 30%, ie the expected average rate of tax for the year as a whole. This approach is appropriate because income tax on company profits is charged on an annual basis, and an effective annual rate should therefore be applied to each interim period.

As another illustration, suppose a company earns pre-tax income in the first quarter of the year of £30,000, but expects to make a loss of £10,000 in each of the next three quarters, so that net income before tax for the year is zero. Suppose also that the rate of tax is 30%. In this case, it would be inappropriate to anticipate the losses, and the tax charge should be £9,000 for the first quarter of the year (30% of £30,000) and a negative tax charge of £3,000 for each of the next three quarters, if actual losses are the same as anticipated.

Where the tax year for a company does not coincide with its financial year, a separate estimated weighted average tax rate should be applied for each tax year, to the interim periods that fall within that tax year.

Some countries give entities tax credits against the tax payable, based on amounts of capital expenditure or research and development, etc. Under most tax regimes, these credits are calculated and granted on an annual basis; therefore it is appropriate to include anticipated tax credits within the calculation of the estimated average tax rate for the year, and apply this rate to calculate the tax on income for the interim period.

Worked example: Taxation charge

An entity's accounting year ends on 31 December 20X4, and it is currently preparing interim financial statements for the half year to 30 June 20X4. Its profit before tax for the six month period to 30 June 20X4 is £6 million. The business is seasonal and the profit before tax for the six months to 31 December 20X4 is almost certain to be £10 million. Income tax is calculated as 25% of reported annual profit before tax if it does not exceed £10 million. If annual profit before tax exceeds £10 million the tax rate on the whole amount is 30%.

Requirement

Under IAS 34 what should the taxation charge be in the interim financial statements?

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Solution

The taxation charge in the interim financial statements is based upon the weighted average rate for the year. In this case the entity's tax rate for the year is expected to be 30%. The taxation charge in the interim financial statements will be £1.8 million.

Interactive question 1: Interim financial statement [Difficulty level: Intermediate]

The Alshain Company's profit before tax for the six months to 30 September 20X6 was £4 million. However, the business is seasonal and profit before tax for the six months to 31 March 20X7 is almost certain to be £8 million. Profit before tax equals taxable profit for this company.

Alshain operates in a country where income tax on companies is at a rate of 25% if annual profits are below £11 million and a rate of 30% where annual profits exceed £11 million. These tax rates apply to the entire profit for the year.

Under IAS 34 Interim Financial Reporting, what should be the income tax expense in Alshain's interim financial statements for the half year to 30 September 20X6?

See Answer at the end of this chapter.

Inventory valuations Within interim reports, inventories should be valued in the same way as for year-end accounts. It is recognised, however, that it will be necessary to rely more heavily on estimates for interim reporting than for year-end reporting.

In addition, it will normally be the case that the net realisable value of inventories should be estimated from selling prices and related costs to complete and dispose at interim dates.

Worked example: Inventory valuations

An entity's accounting year ends on 31 December 20X4, and it is currently preparing interim financial statements for the half year to 30 June 20X4. The price of its products tends to vary. At 30 June 20X4, it has inventories of 100,000 units, at a cost per unit of £1.40. The net realisable value of the inventories is £1.20 per unit at 30 June 20X4. The expected net realisable value of the inventories at 31 December 20X4 is £1.55 per unit.

Requirement

How should the value of the inventories be reflected in the interim financial statements?

Solution

The value of the inventories in the interim financial statements at 30 June 20X4 is the lower of cost and NRV at 30 June 20X4. This is:

100,000 £1.20 = £120,000

2.7 Use of estimates Although accounting information must be reliable and free from material error, it may be necessary to sacrifice some accuracy and reliability for the sake of timeliness and cost-benefits. This is particularly the case with interim financial reporting, where there will be much less time to produce reports than at the financial year end. The standard therefore recognises that estimates will have to be used to a greater extent in interim reporting, to assess values or even some costs, than in year-end reporting.

An appendix to IAS 34 gives some examples of the use of estimates.

Inventories. An entity might not need to carry out a full inventory count at the end of each interim period. Instead, it may be sufficient to estimate inventory values using sales margins.

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Provisions. An entity might employ outside experts or consultants to advise on the appropriate amount of a provision, as at the year end. It will probably be inappropriate to employ an expert to make a similar assessment at each interim date. Similarly, an entity might employ a professional valuer to revalue non-current assets at the year end, whereas at the interim date(s) the entity will not rely on such experts.

Income taxes. The rate of income tax (tax on profits) will be calculated at the year end by applying the tax rate in each country/jurisdiction to the profits earned there. At the interim stage, it may be sufficient to estimate the rate of income tax by applying the same 'blended' estimated weighted average tax rate to the income earned in all countries/jurisdictions.

Classification of current and non-current assets and liabilities. The investigation for classifying assets and liabilities as current and non-current may be more thorough at annual reporting dates than at interim ones.

Pensions. IAS 19 Employee Benefits encourages the use of a professionally qualified actuary in the measurement of the plan's defined benefit obligations. For interim reporting purposes reliable estimates may be obtained by extrapolation of the latest actuarial valuation.

Contingencies. Normally the measurement of contingencies may involve formal reports giving the opinions of experts. Expert opinions about contingencies and uncertainties relating to litigation or assessments may or may not be needed at interim dates.

Revaluations and fair value accounting. Where an entity carries assets at fair value such as non-current assets in accordance with IAS 16 Property, Plant and Equipment or investment properties in accordance with IAS 40 Investment Property, it may rely on independent professional valuations at annual reporting dates, though not at interim reporting dates.

Intercompany reconciliations. Intercompany balances that are reconciled at a detailed level at the year end may be reconciled at a less detailed level at the interim reporting date.

Specialised industries. Interim period measurement in specialised industries may be less precise than at year end due to their complexity, and the cost and time investment that is required.

The principle of materiality applies to interim financial reporting, as it does to year-end reporting. In assessing materiality, it needs to be recognised that interim financial reports will rely more heavily on estimates than year-end reports. Materiality should be assessed in relation to the interim financial statements themselves, and should be independent of 'annual materiality' considerations.

2.8 IFRIC 10 Interim Financial Reporting and Impairment This IFRIC, issued in 2006, addresses the apparent conflict between IAS 34 and the requirement in other standards on the recognition and reversal in financial statements of impairment losses on goodwill and certain financial assets.

IFRIC 10 states that any such impairment losses recognised in an interim financial statement must not be reversed in subsequent interim or annual financial statements.

2.9 IAS 34 Interim Financial Reporting and UK GAAP

IFRS UK GAAP

There is no requirement under IFRS to publish an interim financial report. However, entities that do so voluntarily or are required to do so by local regulators must apply IAS 34.

The Financial Services Authority (FSA) has published the rules which implement the EU Transparency Directive in the UK. These rules apply to listed companies with financial reporting periods starting on or after 20 January 2007.

Listed companies are required to publish a half yearly report (ie interim financial statements) within two months of the end of the first six months of the financial year. The half yearly report must include a condensed set of financial statements prepared in accordance with IFRS, an interim management report and a responsibility statement made by persons responsible to the company for the report.

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IFRS UK GAAP

Unless a company publishes quarterly financial reports, it will be required to publish an Interim Management Statement (IMS) during each six month period of any financial year. The IMS must be published in the period between ten weeks after the beginning, and six weeks before the end of, the relevant six month period.

The IMS must explain material events and transactions that have taken place during the relevant period and their impact on the company's financial position and describe the financial position and performance of the company during that time. According to the FSA, companies may be able to meet IMS requirements based on the content of their usual performance reports, trading statements or other similar reporting formats.

The FSA rules are supplemented by the ASB's Statement of Best Practice.

The requirements of IAS 34 are broadly in line with the UK requirements with some minor differences such as:

IAS 34 requires detailed disclosures in accordance with the requirements of IFRS 3 Business Combinations relating to business combinations in the period.

The ASB's interim statement requires only narrative commentary.

Comparatives for the statement of financial position are required for the previous financial year.

The FSA Rules require statement of financial position comparatives for the corresponding interim date of the previous year.

3 Future of UK GAAP

Section overview

The regulatory shift away from current UK GAAP will require all entities (except those small enough to use the FRSSE) to report in accordance with FRSUKI with an option to use IFRS.

If adopted, the ASB's proposals will mean the end of current UK GAAP.

3.1 Background The UK and Ireland Accounting Standards Board (ASB) has been a close partner of the International Accounting Standards Board for many years and has had enormous input into the development of IFRSs.

Examples of standards which were developed jointly with the International Accounting Standards Board in the past are FRS 11 Impairment of assets and FRS 12 Provisions, contingent liabilities and contingent assets, the former being very similar to the IFRS equivalent (IAS 36) admittedly with a difference of opinion over the allocation of impairment losses, and the latter being almost identical to IFRSs (IAS 37) other than terminology differences.

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Recently the ASB has been harmonising standards with their international counterparts in the interest of international convergence. Recent standards issued which are a copy of the international equivalent include:

FRS 22 Earnings per share (IAS 33) FRS 23 The effects of changes in foreign exchange rates (IAS 21) FRS 25 Financial instruments: presentation (IAS 32) FRS 26 Financial instruments: recognition and measurement (IAS 39) FRS 29 Financial instruments: disclosures (IFRS 7)

Harmonisation with IFRS by adopting the international version as a Financial Reporting Standard is not without its issues: the IASB is continually revising its IFRSs to improve them, which means that the corresponding changes to the UK/Irish equivalent need to be approved before changes can be made to the UK/Irish standard. This is time-consuming and can lead to 'cut-off' differences between the version of the IFRS applied in the UK and Ireland versus other IFRS jurisdictions (and indeed versus the IFRSs applied by quoted companies in the UK and Ireland). This has particularly been the case with the financial instruments standards which have seen many changes since they were originally issued.

3.2 Recent developments In 2009 a decision was made to no longer converge standards with IFRSs, but rather consult on the use of IFRSs generally by companies in the UK and Ireland. In January 2012 the ASB issued FREDs 46 to 48, setting out revised proposals for the future of financial reporting in the UK and Republic of Ireland. FREDs 46 and 47 became FRS 100 and 101 respectively in November 2012, which is before the cut-off date for your exam.

FRS 100 sets out the application of financial reporting requirements in the UK and Republic of Ireland.

FRS 101 or IFRS with reduced disclosures outlines the reduced disclosure framework available for use by 'qualifying entities' choosing to report under IFRS.

FRED 48 (FRS 102 or FRSUKI) is the Financial Reporting Standard applicable in the UK and Republic of Ireland, including the reduced disclosures available for 'qualifying entities' reporting under this FRS. This proposed FRS is based upon the IASB's IFRS for SMEs but has been further amended from earlier versions.

3.3 More detail on the FRSUKI For all entities choosing not to apply IFRS or IFRS with reduced disclosures, the ASB is proposing the use of a new standard based on the IASB's IFRS for SMEs. The ASB's proposed standard, FRS 102 or FRSUKI, runs to less than 300 pages and has been adapted to comply with UK and EU law, extended and amended to address the needs of a broader group of preparers in response to feedback on FRED 44.

3.4 Implications The implications of the above are:

(a) All entities currently reporting under UK GAAP will be required to report under FRSUKI but may voluntarily adopt IFRS. The three tier system previously proposed is eliminated, so that the application of EU-adopted IFRS will not be extended beyond that required by regulation.

(b) Accounting treatments permitted under current accounting standards are introduced. Previously the ASB had proposed keeping changes to the IFRS for SMEs to a minimum. It now proposes that where an accounting treatment is permitted currently in UK and Irish accounting standards and in international accounting standards it should be retained. This means that the options to revalue land and buildings, capitalise borrowing costs or carry forward certain development expenses have been incorporated into the FRSUKI.

(c) The requirements are aligned more closely to company law, with the majority of the presentation requirements for the balance sheet and income statement being replaced by the formats in company law rather than in the IFRS for SMEs.

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(d) There are amendments to accounting for deferred taxation, updates to consolidation requirements and accounting for pension plans, and the introduction of an option to recognise grant income over the life of a grant.

(e) Qualifying entities will be able to take advantage of reduced disclosure requirements that include exemption from disclosure of a cash flow statement, certain financial instruments, related party and share based payments disclosures. The reliefs available are different between IFRS and FRSUKI.

(f) Small entities currently eligible to apply FRSSE will continue to be able to do so. Should a new framework for micro entities be introduced as a result of EU consultation processes, the ASB would then review the status of the FRSSE and consult again on how to amend the FRSSE to accommodate any change.

(g) Guidance for public benefit entities is to be incorporated into the FRSUKI (FRED 48).

3.5 Timescale These proposals would apply to accounting periods beginning on or after 1 January 2015, with earlier adoption encouraged.

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Summary and Self-test

Summary

Presentation ofFinancial Statements

IAS 1

Statement offinancial position

Statement ofcomprehensive income

Statement ofcash flows

Statement ofchanges in equity

Present SFP at start of previous periodwhere prior period adjustment

Profit for period

Other comprehensive income

Transactions with owners

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Interim Financial ReportingIAS 34

Minimumrequirements

Minimumdisclosure

Condensedstatement of

financial position

Where relevanthow performance is

affected by seasonality

Impact of anychanges in

accounting policies

Condensedstatement of

comprehensiveincome

Changes in debt orequity from new

issues, repurchases orrepayments

Statement thataccounting policies

followed areconsistent with

latest full financialstatements

Condensed statementshowing changes inequity arising from

capital transactions withowners and distributions

to owners

Nature and effectof any material

changes in estimatesChanges in contingentliabilities or contingent

assets since lastreporting date

An update of segmentalinformation

Condensedstatement

of cash flows

Any changes in thecomposition of the

entity

Material events afterthe reporting period

Dividends paidfor each class of share

Any unusual items

Small entities

FRSSE

All other entities

FRS 102 FRSUKI�

Qualifying entities

FRS 102 FRSUKIwith reduced

disclosed

�

Qualifying entities

FRS 101 FRSUKIwith reduceddisclosures

�

Entities undderEU1606/2002

Apply EU-adoptedIFRS

UK company law will require either AIS accounts or Companies Act accounts

Future of UK GAAP

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Self-test IAS 34 Interim Financial Reporting

1 Anteater

The Anteater Company operates a saleroom in a city centre from premises which it leases from the Moreno Company under an operating lease according to IAS 17 Leases. Anteater's accounting year end is 31 December each year and it is currently preparing half-yearly interim financial statements for the six months to 30 June 20X7.

The lease agreement on the store premises contains a clause for contingent lease payments as follows:

"If the revenue of Anteater in any year to 31 December exceeds £123 million then an additional lease rental of £4.2 million becomes payable in respect of that year to Moreno on 31 March of the following year."

Anteater's business is seasonal due to high sales around the Christmas period. Only about one third of annual sales are normally earned in the first six months of the year. In January 20X7 a refurbishment of the premises was carried out and this is attracting more customers than had been budgeted for.

Relevant information is as follows: £m Budgeted sales for the six months to 30 June 20X7 39 Budgeted sales for the year to 31 December 20X7 117 Actual sales for the six months to 30 June 20X7 49

The budgets were set in December 20X6 and have not been changed.

Requirement

According to IAS 34 Interim Financial Reporting, what amount should be recognised in profit or loss for Anteater for the six months to 30 June 20X7 in respect of the contingent lease payment clause?

2 Marmoset

The Marmoset Company offers the service of transport consultations. Its accounting year ends on 31 December each year and it is currently preparing half-yearly interim financial statements for the six months to 30 June 20X7.

During 20X7 the directors drew up a plan to introduce a new bonus scheme for all junior consultants in order to provide incentives and improve retention. The details of the scheme were announced to employees the day before the interim financial statements were released on 15 August 20X7. Under the planned scheme any bonus would be paid on 31 March 20X8.

The bonus will be equal to 1% of profit before tax (calculated prior to recognising the bonus) of the year ended 31 December 20X7.

The business is seasonal such that 60% of the annual profit before tax is earned in the first 6 months of the year. The profit before tax in the interim financial statement for the six months to 30 June 20X7 is £6 million.

Requirement

What amount should be recognised in profit or loss for Marmoset for the six months to 30 June 20X7 in respect of the bonus, according to IAS 34 Interim Financial Reporting?

3 Aconcagua

The Aconcagua Company sells fashion shoes, the price of which varies during the year. Its accounting year ends on 31 December and it prepares half-yearly interim financial statements.

At 30 June 20X7 it has inventories of 2,000 units which cost £30 each. The net realisable value of the inventories at 30 June, when the shoes are out of season, is £20 each. No sales are expected in the period to 31 December 20X7, but the expected net realisable value of the shoes at that date (when they are about to come back into season) is £28 each.

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Requirement

Should any changes in inventory values be reflected in the interim financial statements of Aconcagua for the six months ending 30 June 20X7 and for the six months ending 31 December 20X7, according to IAS 34 Interim Financial Reporting?

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Technical reference

IAS 1 Presentation of Financial Statements

Applies to all general purpose financial statements

Links back to much in the IASB Framework

Presentation and disclosure rules apply only to material items IAS 1.31 and IAS

1.7

Statement of financial position IAS 1.54, 56, 60,

66, 69, 79

Statement of profit or loss and other comprehensive income IAS 1.81-90

Statement of changes in equity IAS 1.106-107

IAS 34 Interim Financial Reporting

Minimum components of an interim financial report IAS 34.8

Form and content of interim financial statements IAS 34.9-11

Selected explanatory notes IAS 34.16

Disclosure of compliance with IFRSs IAS 34.19

Periods for which interim financial statements are required to be presented IAS 34.20

Materiality IAS 34.23

Disclosure in annual financial statements

If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the financial year but a separate financial report is not published for that final interim period, the nature and amount of that change in estimate shall be disclosed in a note to the annual financial statements for that financial year.

IAS 34.26

Recognition and measurement

An entity should apply the same accounting policies in its interim financial statements as are applied in its annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements that are to be reflected in the next annual financial statements. However, the frequency of an entity's reporting (annual, half-yearly, or quarterly) should not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes should be made on a year-to-date basis.

IAS 34.28

Revenues received seasonally, cyclically, or occasionally

Revenues that are received seasonally, cyclically, or occasionally within a financial year shall not be anticipated or deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the entity's financial year.

IAS 34.37

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Costs incurred unevenly during the financial year

Costs that are incurred unevenly during an entity's financial year shall be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type of cost at the end of the financial year.

IAS 34.39

Applying the recognition and measurement principles IAS 34.40

Use of estimates IAS 34.41

Restatement of previously reported interim periods IAS 34.43

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Answers to Self-test

IAS 34 Interim Financial Reporting

1 Anteater

£2.1 million

Interim reports should apply the normal recognition and measurement criteria, using appropriate estimates under IAS 34.41.

There is a constructive obligation in relation to the contingent lease payments, which should be measured by reference to all the evidence available. As the trigger level of sales is expected to be achieved, then under IAS 34 App.B B7 the amount to be recognised is £4.2m 6/12.

2 Marmoset

Nil

Interim reports should apply the normal recognition and measurement criteria, using appropriate estimates under IAS 34.41.

There is no legal or constructive obligation at the interim reporting date to pay the bonus as no announcement had been made at this date. Under IAS 34 App B B6 no expense is required.

3 Aconcagua

Six months ending 30 June 20X7 £20,000 profit decrease Six months ending 31 December 20X7 £16,000 profit increase

Interim reports should apply the normal recognition and measurement criteria, using appropriate estimates under IAS 34.41. IAS 34 App B B25-B26 link these general principles to inventories by requiring them to be written down to net realisable value at the interim date; the write-down is then reversed at the year end, if appropriate.

So the profit decrease in the six months to 30 June 20X7 is 2,000 (£30 - £20) = £20,000, while the profit increase in the six months to 31 December 20X7 is 2,000 (£28 - £20) = £16,000.

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Answer to Interactive question

Answer to Interactive question 1

30% × £4 million = £1.2 million

The tax rate for the entire year is applied to the profits for the interim period.

Ti Corporate Reporting 2014 2015 Inspection Copy

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