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5 ED Classification of liabilities – proposed amendments to IAS 1.

5 ED Classification of liabilities – proposed amendments to IAS 1.

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(b)





Recognising the effect of the change in the accounting estimate in the current and future

periods affected by the change.



Impracticable. Applying a requirement is impracticable when the entity cannot apply it after

making every reasonable effort to do so. It is impracticable to apply a change in an accounting

policy retrospectively or to make a retrospective restatement to correct an error if one of the

following apply.

(a)

(b)

(c)



The effects or the retrospective application or retrospective restatement are not

determinable.

The retrospective application or retrospective restatement requires assumptions about what

management's intent would have been in that period.

The retrospective application or retrospective restatement requires significant estimates of

amounts and it is impossible to distinguish objectively information about those estimates

that: provides evidence of circumstances that existed on the date(s) at which those amounts

are to be recognised, measured or disclosed; and would have been available when the

financial statements for that prior period were authorised for issue from other information.



Knowledge brought forward from earlier studies (continued)



Accounting policies

This material has been transferred into IAS 8 from IAS 1.





Accounting policies are determined by applying the relevant IFRS or IFRIC and considering any

relevant Implementation Guidance issued by the IASB for that IFRS/IFRIC.







Where there is no applicable IFRS or IFRIC management should use its judgement in developing

and applying an accounting policy that results in information that is relevant and reliable.

Management should refer to:

(a)

(b)



The requirements and guidance in IFRSs and IFRICs dealing with similar and related issues

The definitions, recognition criteria and measurement concepts for assets, liabilities and

expenses in the Conceptual Framework



Management may also consider the most recent pronouncements of other standard setting bodies

that use a similar conceptual framework to develop standards, other accounting literature and

accepted industry practices if these do not conflict with the sources above.





An entity shall select and apply its accounting policies for a period consistently for similar

transactions, other events and conditions, unless an IFRS or an IFRIC specifically requires or

permits categorisation of items for which different policies may be appropriate. If an IFRS or an

IFRIC requires or permits categorisation of items, an appropriate accounting policy shall be

selected and applied consistently to each category.



Changes in accounting policies













These are rare: only required by statute/standard-setting body/results in reliable and more relevant

information.

Adoption of new IAS: follow transitional provisions of IAS. If no transitional provisions:

retrospective application.

Other changes in policy: retrospective application. Adjust opening balance of each affected

component of equity, ie as if new policy has always been applied.

Prospective application is no longer allowed unless it is impracticable to determine the

cumulative effect of the change. (See definition of impracticable above.)

An entity should disclose information relevant to assessing the impact of new IFRSs/IFRICs on the

financial statements where these have been issued but have not yet come into force.



Part B Accounting standards  10: Performance reporting



287



Changes in accounting estimates







Estimates arise because of uncertainties inherent within them, judgement is required but this

does not undermine reliability.

Effect of a change in accounting estimate should be included in net profit/loss in:







Period of change, if change affects only current period, or

Period of change and future periods, if change affects both



Errors

(See definition of prior period error above; this replaces definition of fundamental error in previous

version of IAS 8.)





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



Knowledge brought forward from earlier studies (continued)







This involves:

(a)

(b)







Either restating the comparative amounts for the prior period(s) in which the error occurred,

Or when the error occurred before the earliest prior period presented, restating the opening

balances of assets, liabilities and equity for that period so that the financial statements are

presented as if the error had never occurred.



Only where it is impracticable to determine the cumulative effect of an error on prior periods can

an entity correct an error prospectively.



The following question will allow you to revise IAS 8.



Question



Prior period error



During 20X7 Lubi Co discovered that certain items had been included in inventory at 31 December 20X6,

valued at $4.2m, which had in fact been sold before the year end. The following figures for 20X6 (as

reported) and 20X7 (draft) are available.

20X6

20X7 (draft)

$'000

$'000

Sales

47,400

67,200

Cost of goods sold

(34,570)

(55,800)

Profit before taxation

12,830

11,400

Income taxes

(3,880)

(3,400)

Net profit

8,950

8,000

Reserves at 1 January 20X6 were $13m. The cost of goods sold for 20X7 includes the $4.2m error in

opening inventory. The income tax rate was 30% for 20X6 and 20X7.

Required

Show the statement of profit or loss and other comprehensive income for 20X7, with the 20X6

comparative, and retained earnings.



288



10: Performance reporting  Part B Accounting standards



Answer

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME



Sales

Cost of goods sold (W1)

Profit before tax

Income tax (W2)

Net profit

RETAINED EARNINGS

Opening retained earnings

As previously reported

Correction of prior period

error (4,200 – 1,260)

As restated

Net profit for year

Closing retained earnings



20X6

$'000

47,400

(38,770)

8,630

(2,620)

6,010



20X7

$'000

67,200

(51,600)

15,600

(4,660)

10,940



13,000



21,950





13,000

6,010

19,010



(2,940)

19,010

10,940

29,950



Workings

1



Cost of goods sold

As stated in question

inventory adjustment



2



Income tax

As stated in question

Inventory adjustment (4,200 × 30%)



2 Segment reporting

FAST FORWARD



20X6

$'000

34,570

4,200

38,770



20X7

$'000

55,800

(4,200)

51,600



20X6

$'000

3,880

((((1,260)

2,620



20X7

$'000

3,400

1,260

4,660



6/08, 12/11, 6/13, 6/15



An important aspect of reporting financial performance is segment reporting. This is covered by IFRS 8

Operating segments, which replaced IAS 14 Segment reporting in 2006.



2.1 Introduction

Large entities produce a wide range of products and services, often in several different countries. Further

information on how the overall results of entities are made up from each of these product or geographical

areas will help the users of the financial statements. This is the reason for segment reporting.









The entity's past performance will be better understood

The entity's risks and returns may be better assessed

More informed judgements may be made about the entity as a whole



Risks and returns of a diversified, multi-national company can only be assessed by looking at the

individual risks and rewards attached to groups of products or services or in different groups of products

or services or in different geographical areas. These are subject to differing rates of profitability,

opportunities for growth, future prospects and risks.

Segment reporting is covered by IFRS 8 Operating segments, which replaced IAS 14 Segment reporting in

November 2006.



Part B Accounting standards  10: Performance reporting



289



2.2 Objective

An entity must disclose information to enable users of its financial statements to evaluate the nature and

financial effects of the business activities in which it engages and the economic environments in which it

operates.



2.3 Scope

Only entities whose equity or debt securities are publicly traded (ie on a stock exchange) need disclose

segment information. In group accounts, only consolidated segmental information needs to be shown.

(The statement also applies to entities filing or in the process of filing financial statements for the purpose

of issuing instruments.)



2.4 Definition of operating segment

FAST FORWARD



Reportable segments are operating segments or aggregation of operating segments that meet specified

criteria.

You need to learn this definition, as it is crucial to the standard.



Key term



Operating segment: This is a component of an entity:

(a)



That engages in business activities from which it may earn revenues and incur expenses (including

revenues and expenses relating to transactions with other items of the same entity)



(b)



Whose operating results are regularly reviewed by the entity's chief operating decision maker to

make decisions about resources to be allocated to the segment and assess its performance, and



(c)



For which discrete financial information is available.



IFRS 8



The term 'chief operating decision maker' identifies a function, not necessarily a manager with a specific

title. That function is to allocate resources and to assess the performance of the entity's operating

segments



2.5 Aggregation

Two or more operating segments may be aggregated if the segments have similar economic

characteristics, and the segments are similar in each of the following respects:













The nature of the products or services

The nature of the production process

The type or class of customer for their products or services

The methods used to distribute their products or provide their services, and

If applicable, the nature of the regulatory environment



2.6 Determining reportable segments

An entity must report separate information about each operating segment that:

(a)



Has been identified as meeting the definition of an operating segment; and



(b)



Segment total is 10% or more of total:

(i)

(ii)

(iii)



Revenue (internal and external), or

All segments not reporting a loss (or all segments in loss if greater), or

Assets



At least 75% of total external revenue must be reported by operating segments. Where this is not the

case, additional segments must be identified (even if they do not meet the 10% thresholds).



290



10: Performance reporting  Part B Accounting standards



Two or more operating segments below the thresholds may be aggregated to produce a reportable

segment if the segments have similar economic characteristics, and the segments are similar in a majority

of the aggregation criteria above.

Operating segments that do not meet any of the quantitative thresholds may be reported separately if

management believes that information about the segment would be useful to users of the financial

statements.



2.6.1 Decision tree to assist in identifying reportable segments

The following decision tree will assist in identifying reportable segments.

Identify operating segments based

on management reporting system



Do some operating segments

meet all aggregation criteria?



Yes



Aggregate

segment

if desired



No

Yes



Do some operating segments

meet the quantitative thresholds?

No



Aggregate

segments

if desired



Do some remaining operating

segments meet a majority of the

aggregation criteria?



Yes



No

Do identified reportable segments

account for 75 per cent of the entity’s

revenue?



Yes



No

Report additional segment if external

revenue of all segments is less than

75 per cent of the entity’s revenue



These are reportable

segments to be disclosed



Exam focus

point



Aggregate remaining segments

into ‘all other segments’ category



As this is a financial analysis paper, you may well be given a segment report and asked to interpret it, or to

comment generally on the need for this kind of report.



Part B Accounting standards  10: Performance reporting



291



2.7 Disclosures

FAST FORWARD







IFRS 8 disclosures are of:















Operating segment profit or loss

Segment assets

Segment liabilities

Certain income and expense items



Disclosures are also required about the revenues derived from products or services and about the

countries in which revenues are earned or assets held, even if that information is not used by

management in making decisions.



Disclosures required by the IFRS are extensive, and best learned by looking at the example and proforma,

which follow the list:

(a)



Factors used to identify the entity's reportable segments



(b)



Types of products and services from which each reportable segment derives its revenues



(c)



Reportable segment revenues, profit or loss, assets, liabilities and other material items:



External

Revenue

inter segment

Interest revenue

Interest expense

Depreciation and amortisation

Other material non-cash items

Material income/expense (IAS 1)

Profit, assets



Share of profit of associates/jointly controlled entities

equity



& liabilities



accounted

Profit or loss (as reported to chief operating decision



)

Income tax expense

Non-current assets

Investments in associates/ jointly controlled entities

Expenditures for reportable assets

Segment liabilities

A reconciliation of each of the above material items to the entity's reported figures is required.

Reporting of a measure of profit or loss and total assets by segment is compulsory. Other items

are disclosed if included in the figures reviewed by or regularly provided to the chief operating

decision maker.



292



10: Performance reporting  Part B Accounting standards



(d)



External revenue by each product and service (if reported basis is not products and services)



(e)



Geographical information:



Geographical

areas



External revenue (1)



b y:

 entity's count ry o f do micile, and



Non-current assets(2)



 all foreign countries (subdivided if material)



Notes



(1)



External revenue is allocated based on the customer's location.



(2)



Non-current assets excludes financial instruments, deferred tax assets, post-employment

benefit assets, and rights under insurance contracts.



(f)



Information about reliance on major customers (ie those who represent more than 10% of

external revenue)



(g)



Following the improvements to IFRS issued in April 2009, segment asset disclosure is no longer

compulsory if it is not reported internally.



2.7.1 Disclosure example from IFRS 8

The following example is adapted from the IFRS 8 Implementation Guidance, which emphasises that this

is for illustrative purposes only and that the information must be presented in the most understandable

manner in the specific circumstances.

The hypothetical company does not allocate tax expense (tax income) or non-recurring gains and losses to

reportable segments. In addition, not all reportable segments have material non-cash items other than

depreciation and amortisation in profit or loss. The amounts in this illustration, denominated as dollars,

are assumed to be the amounts in reports used by the chief operating decision maker.

Car

parts

$



Motor

vessel

$



Software

$



Electronics

$



Finance

$



Revenues from external

customers



3,000



5,000



9,500



12,000



5,000



Intersegment revenues











3,000



1,500











4,500



450



800



1,000



1,500











3,750



350



600



700



1,100











2,750



















1,000







1,000



Depreciation and

amortisation



200



100



50



1,500



1,100







2,950



Reportable segment profit



200



70



900



2,300



500



100



4,070







200



















200



2,000



5,000



3,000



12,000



57,000



2,000



81,000



Expenditure for reportable

segment non-current assets



300



700



500



800



600







2,900



Reportable segment liabilities



1,050



3,000



1,800



8,000



30,000







43,850



Interest revenue

Interest expense

(b)



Net interest revenue



All

other

$



Totals

$



1,000(a)



35,500



Other material non-cash items:

Impairment of assets

Reportable segment assets



(a)



Revenues from segments below the quantitative thresholds are attributable to four operating

segments of the company. Those segments include a small property business, an electronics

equipment rental business, a software consulting practice and a warehouse leasing operation.

None of those segments has ever met any of the quantitative thresholds for determining reportable

segments.



Part B Accounting standards  10: Performance reporting



293



(b)



The finance segment derives a majority of its revenue from interest. Management primarily relies

on net interest revenue, not the gross revenue and expense amounts, in managing that segment.

Therefore, as permitted by IFRS 8, only the net amount is disclosed.



2.7.2 Suggested proforma

Information about profit or loss, assets and liabilities



Revenue – external

customers

Revenue – inter segment



Interest revenue

Interest expense

Depreciation and

amortisation

Other material non-cash

items

Material income/expense

(IAS 1)

Share of profit of

associate/JVs

Segment profit before tax

Income tax expense

Unallocated items

Profit for the year

Segment assets

Investments in

associate/JVs

Unallocated assets

Entity's assets

Expenditures for reportable

assets

Segment liabilities

Unallocated liabilities

Entity's liabilities



Segment

A

X



Segment

B

X



Segment

C

X



All other

segments

X



Inter

segment





Entity

total

X



X

X



X

X



X

X



X

X



X

(X)





X



X

(X)



X

(X)



X

(X)



X

(X)



(X)

X



X

(X)



(X)



(X)



(X)



(X)







(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X/(X)



X

X

(X)



X

X

(X)



X

X

(X)



X

X

(X)





(X)





X

X

(X)

X/(X)

X



X



X



X



X



(X)



X



X



X



X



X







X

X

X



X

X



X

X



X

X



X

X



(X)

(X)



X

X

X

X



Information about geographical areas



Revenue – external customers

Non-current assets



294



10: Performance reporting  Part B Accounting standards



Country of

domicile

X

X



Foreign

countries

X

X



Total

X

X



2.8 Advantages and disadvantages of the old and new segment

definition approaches

Advantages



Disadvantages



'Risks and returns'

approach (IAS 14)



 The information can be

reconciled to the financial

statements

 It is a consistent method

 The method helps to highlight

the profitability, risks and

returns of an identifiable

segment



 The information may be

commercially sensitive

 The segments may include

operations with different risks and

returns



'Managerial' approach

(IFRS 8)



 It is cost effective because the

marginal cost of reporting

segmental data will be low

 Users can be sure that the

segment data reflects the

operational strategy of the

business



 Segment determination is the

responsibility of directors and is

subjective

 Management may report segments

which are not consistent for internal

reporting and control purposes

making its usefulness questionable



2.9 Criticisms of IFRS 8

(a)



Some commentators have criticised the 'management approach' as leaving segment identification

too much to the discretion of the entity.



(b)



The management approach may mean that financial statements of different entities are not

comparable.



(c)



Segment determination is the responsibility of directors and is subjective.



(d)



Management may report segments which are not consistent for internal reporting and control

purposes, making its usefulness questionable.



(e)



For accounting periods beginning on or after 1 January 2005 listed entities within the EU are

required to use adopted international standards in their consolidated financial statements. The EU

has not yet adopted IFRS 8 and until it does IAS 14 will continue to apply here. Some stakeholders

believe the standard to be flawed due to the amount of discretion it gives to management.



(f)



Geographical information has been downgraded. It could be argued that this breaks the link

between a company and its stakeholders.



(g)



There is no defined measure of segment profit or loss.



2.10 Example: Determining operating segments

Jesmond, a retail and leisure group, has three businesses operating in different parts of the world.

Jesmond reports to management on the basis of region. The results of the regional segments for the year

ended 31 December 20X9 are as follows.

Region



European

North America

Other regions



External

$m

200

300

500



Revenue

Internal

$m

3

2

5



Segment results

profit/(loss)

$m

(10)

60

105



Segment

assets

$m

300

800

2,000



Segment

liabilities

$m

200

300

1,400



There were no significant intra-group balances in the segment assets and liabilities. The retail outlets and

leisure centres are located in capital cities in the various regions, and the company sets individual

performance indicators for each hotel based on its city location.



Part B Accounting standards  10: Performance reporting



295



Required



Discuss the principles in IFRS 8 Operating segments for the determination of a company’s reportable

operating segments and how these principles would be applied for Jesmond plc using the information

given above.



Solution

IFRS 8 Operating segments states that an operating segment is reported separately if:

(i)



It meets the definition of an operating segment, ie:

(1)



It engages in business activities from which it may earn revenues and incur expenses



(2)



Its operating results are regularly reviewed by the entity's chief operating decision maker

to make decisions about resources to be allocated to the segment and assess its

performance



(3)



Discrete financial information is available for the segment,



and



(ii)



It exceeds at least one of the following quantitative thresholds:

(1)



Reported revenue is 10% or more the combined revenue of all operating segments

(external and intersegment), or



(2)



The absolute amount of its reported profit or loss is 10% or more of the greater of, in

absolute amount, all operating segments not reporting a loss, and all operating

segments reporting a loss, or



(3)



Its assets are 10% or more of the total assets of all operating segments.



At least 75% of total external revenue must be reported by operating segments. Where this is not the

case, additional segments must be identified (even if they do not meet the 10% thresholds).

Two or more operating segments below the thresholds may be aggregated to produce a reportable

segment if the segments have similar economic characteristics, and the segments are similar in a majority

of the following aggregation criteria:

(1)

(2)

(3)

(4)

(5)



The nature of the products and services

The nature of the production process

The type or class of customer for their products or services

The methods used to distribute their products or provide their services

If applicable, the nature of the regulatory environment



Operating segments that do not meet any of the quantitative thresholds may be reported separately if

management believes that information about the segment would be useful to users of the financial

statements.

For Jesmond, the thresholds are as follows.

(i)

(ii)

(iii)

(iv)



Combined revenue is $1,010 million, so 10% is $101 million.

Combined reported profit is $165 million, so 10% is $16.5 million.

Combined reported loss is $10 million, so 10% is $1 million.

Total assets are $3,100 million, so 10% is $310 million.



The North America segment meets the criteria, passing all three tests. Its combined revenue is

$302 million; its reported profit is $60 million, and its assets are $800 million.

The European segment also meets the criteria, but only marginally. Its reported revenue, at $203 million

is greater than 10% of combined revenue, and only one of the tests must be satisfied. However, its loss of

$10 million is less than the greater of 10% of combined profit and 10% of combined loss, so it fails this

test. It also fails the assets test, as its assets, at $300 million are less than 10% of combined assets

($310 million).



296



10: Performance reporting  Part B Accounting standards



IFRS 8 requires further that at least 75% of total external revenue must be reported by operating

segments. Currently, only 50% is so reported. Additional operating segments (the ‘other regions’) must be

identified until this 75% threshold is reached.

IFRS 8 may result in a change to the way Jesmond's operating segments are reported, depending on how

segments were previously identified.



2.11 Section summary

IFRS 8 is a disclosure standard D:





Segment reporting is necessary for a better understanding and assessment of:











Past performance

Risks and returns

Informed judgements







IFRS 8 adopts the managerial approach to identifying segments







The standard gives guidance on how segments should be identified and what information should

be disclosed for each



It also sets out requirements for related disclosures about products and services, geographical areas and

major customers.



3 IAS 33 Earnings per share

FAST FORWARD



Exam focus

point



Earnings per share is a measure of the amount of profits earned by a company for each ordinary share.

Earnings are profits after tax and preferred dividends.



You studied the bulk of IAS 33 for earlier papers. The examining team have stated that it is not going to

form the basis of a full question. However, you may have to talk about the potential for manipulation.

Remember that the objective of IAS 33 is to improve the comparison of the performance of different

entities in the same period and of the same entity in different accounting periods.



3.1 Definitions

The following definitions are given in IAS 33.



Key terms



Ordinary share: an equity instrument that is subordinate to all other classes of equity instruments.

Potential ordinary share: a financial instrument or other contract that may entitle its holder to ordinary

shares.

Options, warrants and their equivalents: financial instruments that give the holder the right to purchase

ordinary shares.

Contingently issuable ordinary shares are ordinary shares issuable for little or no cash or other

consideration upon the satisfaction of certain conditions in a contingent share agreement.

Contingent share agreement: an agreement to issue shares that is dependent on the satisfaction of

specified conditions.

Dilution is a reduction in earnings per share or an increase in loss per share resulting from the

assumption that convertible instruments are converted, that options or warrants are exercised, or that

ordinary shares are issued upon the satisfaction of certain conditions.

Antidilution is an increase in earnings per share or a reduction in loss per share resulting from the

assumption that convertible instruments are converted, that options or warrants are exercised, or that

ordinary shares are issued upon the satisfaction of certain conditions.

(IAS 33)



Part B Accounting standards  10: Performance reporting



297



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