ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)
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Chapter 16: Reporting financial performance
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The remaining $10,000 of the impairment loss should be allocated to the non-
current assets in the disposal group pro rata to their carrying value.
Carrying amount
as re-measured
immediately
before
classification as
held for sale
Allocated
impairment loss
Carrying
amount after
allocation
of impairment
loss
$ $ $
Goodwill 20,000 20,000 0
Property, plant and
equipment
(carried at re-valued
amounts)
52,000 3,939 48,061
Property, plant and
equipment
(carried at cost)
80,000 6,061 73,939
Inventory 21,000 0 21,000
Available for sale
financial assets
17,000 0 17,000
Total
190,000 30,000 160,000
This impairment loss of $30,000 will be included in the reported profit or loss from
discontinued operations in the statement of comprehensive income for the year.
2.5 Presentation and disclosure
IFRS 5 states: ‘An entity shall present and disclose information that enables users of
the financial statements to evaluate the financial effects of discontinued operations
and disposals of non-current assets (or disposal groups)’.
Disclosure in the statement of financial position
Non-current assets classified as held for sale must be disclosed separately from
other assets in the statement of financial position.
Similarly, assets and liabilities that are part of a disposal group held for sale must
be disclosed separately from other assets and liabilities in the statement of financial
position. (The assets and liabilities in a disposal group should not be offset and
presented as a single net amount).
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Income statement disclosure
Information about discontinued operations (both operations already discontinued
and those classified as held for sale) must be presented in profit or loss or in a note
to the financial statements.
There must be a single amount on the face of the statement of comprehensive
income (or income statement) for the total of:
the after-tax profit or loss for the period from the discontinued operations, and
the after-tax gain or loss on measurement to fair value (less costs to sell) or on
the disposal of the asset or disposal group.
On the face of the income statement/statement of comprehensive income or in a
note to the accounts, this total amount should be analysed into:
the revenue, expenses and pre-tax profit for the period from the discontinued
operations
the related tax expense
the pre-tax gain or loss on measurement to fair value (less costs to sell) or on the
disposal of the asset or disposal group
the related tax expense.
If this analysis is shown on the face of the income statement, it should be presented
in a separate section relating to discontinued operations, separately from continuing
operations.
For comparative purposes, the figures for the previous year should be re-presented,
so that disclosures relating to discontinued operations in the prior period relate to
all discontinued operations up to the end of the current year.
Note on discontinued operations and the statement of cash flows
IFRS 5 states that in the statement of cash flows, there should be separate disclosure
of the net cash flows in the period attributable to operating activities, investing
activities and financing activities of the discontinued operations. These disclosures
may be presented either on the face of the statement or in the notes to the accounts.
Additional disclosures
Additional disclosures about discontinued operations must be included in the notes
to the accounts. These include:
a description of the non-current asset or disposal group
a description of the facts and circumstances of the sale
in the case of operations and non-current assets ‘held for sale’, a description of
the facts and circumstances leading to the expected disposal and the expected
manner and timing of the disposal.
Chapter 16: Reporting financial performance
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Example
Information relating to discontinued operations might be presented as follows:
Income statement
ABCDEntity
Incomestatementfortheyearended31stDecember20X6
20X6 20X5
$000 $000
Continuingoperations
Revenue 9,000 8,500
Costofsales (5,100) (4,700)
––
–
––––– ––––––––
Grossprofit 3,900 3,800
Otherincome 50 100
Distributioncosts (1,200) (1,000)
Administrativeexpenses (1,400) (1,200)
Otherexpenses (150) (200)
Financecosts (300) (300)
–
––––––– ––––––––
Profitbeforetax 900 1,200
Incometaxexpense (300) (400)
Profitfortheperiodfromcontinuingoperations 600 800
–
––––––– ––––––––
Discontinuedoperations
Profitfortheperiodfromdiscontinuedoperations 250 180
–
––––––– ––––––––
Profitfortheperiod 850 980
–
––––––– ––––––––
Note
In this example, a single figure of $250,000 is shown for after-tax profit or loss from
discontinued operations. This figure should be analysed in a note to the accounts, as
explained earlier. Alternatively, the analysis could be given on the face of the
income statement.
Statement of financial position
An entity has two disposal groups held for sale:
Disposalgroup
Group1 Group2
$000 $000
Property,plantandequipment 600 300
Liabilities (50) (20)
–
––––––
–
––––––
Netcarryingamount 550 280
–
––––––
–
––––––
An amount of $50,000 relating to the assets of disposal group 1 has been recognised
directly in equity, as a result of an asset revaluation.
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The summarised statement of financial position of the entity might be as follows:
$000
Assets
Non‐currentassets
Property,plantandequipment 2,000
Currentassets
Inventory 300
Receivables 400
Cash 20
–––––––––––––
2,720
Non‐currentassetsclassifiedasheldforsale
900
–––––––––––––
Totalassets 3,620
–––––––––––––
Equityandliabilities
Sharecapital 1,000
Reserves 1,900
Amountsrecogniseddirectlyinequityrelatingtonon‐currentassets
heldforsale
50
–––––––––––––
Totalequity 2,950
–––––––––––––
Non‐currentliabilities:loan
400
–––––––––––––
Currentliabilities
Tradepayables 200
Liabilitiesdirectlyassociatedwithnon‐currentassetsclassifiedas
heldforsale
70
–––––––––––––
270
–––––––––––––
Totalliabilities 670
–––––––––––––
Totalequityandliabilities 3,620
–––––––––––––
In the statement of financial position, the comparative figures for the previous year
are not re-presented. The amount for discontinued operations in the previous year
does not include discontinued items for the current year. The presentation in the
statement of financial position therefore differs from the income statement
presentation.
Note: In this summarised statement of financial position, the non-current assets
classified as ‘held for sale’ are the sum of the non-current assets of disposal groups 1
and 2 ($600,000 + $300,000). Similarly the ‘liabilities directly associated with non-
current assets classified as held for sale’ are the sum of the liabilities for disposal
groups 1 and 2.
Chapter 16: Reporting financial performance
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Related party disclosures: IAS 24
Impact on the financial statements
The objective of IAS 24
Definitions
Disclosure requirements
3 Related party disclosures: IAS 24
3.1 Impact on the financial statements
A user of financial statements will normally expect the financial statements to reflect
transactions that have taken place on normal commercial terms (‘at arm’s length’).
The user of the financial statements would want to be informed if:
transactions have taken place that were not at ‘arm’s length’, or
there are parties that could enforce transactions on the entity that are not on an
‘arm’s length’ basis.
For example, in a group of companies:
an entity might sell goods to its parent or fellow-subsidiaries on more favourable
terms than it would sell to other customers
a parent company may make supplies to a struggling subsidiary on more
favourable terms than it would to other companies. This would boost the
apparent profitability of that subsidiary.
In both situations, the financial performance or financial position reported by the
financial statements would be misleading. In each situation there is a special
relationship between the parties to the business transactions. This is referred to as a
‘related party relationship’.
IAS 24: Related party disclosures comments that a related party relationship could
have an effect on the profit or loss, or on the financial position of an entity, because
related parties might enter into transactions with each other on terms that other
entities or individuals (unrelated parties) would not.
3.2 The objective of IAS 24
The objective of IAS 24 Related party disclosures is to ensure that an entity’s financial
statements contain sufficient disclosures to draw attention to the possibility that the
entity’s financial position, or profit or loss may have been affected by:
the existence of related parties, and
transactions and outstanding balances with related parties.
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IAS 24 is a disclosure standard. It does not require the redrafting of financial
statements. Such redrafting would be difficult as without the related party
relationship the transactions might never have taken place, and even if they had, it
may not be possible to determine at what amount.
Specified disclosures are required of:
related party relationships, and
related party transactions.
3.3 Definitions
IAS 24 provides a lengthy definition of a related party and also a definition of a
related party transaction.
Related party
Related party: A party is related to an entity (it is a related party) in any of the
following circumstances:
The party controls the entity, or is controlled by it.
It has significant influence over the entity.
It has joint control over the entity.
The parties are under common control.
The party is an associate.
The party is a joint venture in which the entity is a venturer.
The party is a member of the key management personnel of the entity or its
parent.
The party is a close family member of any of the above.
A parent entity is related to its subsidiary entities (because it controls them) and its
associated entities (because it exerts significant influence over them). Fellow
subsidiaries are also related parties, because they are under the common control of
the parent.
In considering each possible related party relationship the entity must look to the
substance of the arrangement, and not merely its legal form. Although two entities
that have the same individual on their board of directors would not meet any of the
above conditions for a related party, a related party relationship would nevertheless
exist if influence can be shown.
Some examples are given by IAS 24 of likely exemptions, where a related party
relationship would usually not exist. However, the substance of the relationship
should always be considered in each case. Examples of entities that are usually not
related parties are:
Two venturers that simply share joint control over a joint venture
Providers of finance (such as a lending bank or a bondholder)
Trade unions
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Public utilities
Government departments and agencies
Customers, suppliers, franchisors, distributors or other agents with whom the
entity transacts a significant volume of business.
Close family members are those family members who may be expected to
influence, or be influenced by that individual. They include:
the individual’s partner, children and dependants
children or dependants of the individual’s partner.
Related party transactions
A related party transaction is:
a transfer of resources, services, or obligations between related parties
whether or not a price is charged.
The following examples of related party transactions are given in IAS 24. (These are
related party transactions when they take place between related parties.)
Purchases or sales of goods
Purchases or sales of property and other assets
Rendering or receiving of services
Leases
Transfer of research and development costs
Finance arrangements (such as loans or contribution to equity)
Provision of guarantees
Settlement of liabilities on behalf of the entity or by the entity on behalf of
another party.
Example
In the following examples, identify related party relationships between all parties
and state any additional factors to consider in order to form a conclusion:
(a) Entity HB holds a controlling interest in Daphne and Velma. Ronald is a
wholly owned subsidiary of Daphne.
(b) Mr Z holds 75% of the voting capital of Flora and 40% of the voting capital of
Donald.
(c) H and W (who are husband and wife) are the directors and majority
shareholders of Flint. The company makes purchases from Boris, a company
jointly controlled by W and their daughter, D. D is a director of Boris but
holds no share in Flint.
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Answer
(a) Entity HB
HB is related to both Daphne and Velma (both subsidiaries) because of its
controlling interest.
Daphne and Velma are related because they are under the common control
of HB.
Ronald is related to Daphne because of its subsidiary status.
Ronald is also related to HB as he is indirectly controlled by HB through
HB’s holding of Daphne.
(b) Mr Z
Mr Z is related to Flora because of the subsidiary status of Flora.
As an associate of Mr Z, Donald is also a related party
Flora and Donald are not related. Although they are both owned by Mr Z,
there is no common control because Mr Z only has a 40% stake in Donald.
(c) Flint Ltd
H and W are both related to Flint, because they are key management of the
entity
D could be considered to be close family to H and W, but this is only true if
it can be shown that she is influenced by them in business dealings (and
there is insufficient information in this example to ascertain whether this is
true).
Boris is related to Flint as it is jointly controlled by a member of the key
management of Flint. Therefore any business dealings between the two
entities will need to be disclosed.
3.4 Disclosure requirements
IAS 24 requires disclosure in the notes to the financial statements of the following,
whether or not transactions have taken place between those related parties:
the name of the entity’s parent
if different, the name of the ultimate controlling party
Where transactions have taken place between the related parties, irrespective of
whether a price was charged, the following should be disclosed:
The nature of the related party relationship
The amount of the transactions
In respect of outstanding balances
− the amount
− their terms and conditions
− any guarantees given or received
− any provision for doubtful/irrecoverable debts
The expense recognised in the period in respect of irrecoverable debts due from
related parties.
Chapter 16: Reporting financial performance
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The above disclosures should be given separately for each of the following
categories of related party:
The parent
Entities with joint control or significant influence over the entity
Subsidiaries
Associates
Joint ventures in which the entity is a venturer
Key management personnel of the entity or its parent
Other related parties
In addition, IAS 24 requires disclosure of compensation to key management
personnel, in total, and for each of the following categories:
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payments.
Example
An example of a note to the financial statements for related party transactions is
shown below, for Large Public Company, a quoted UK company.
Trading transactions
Salesto
related
parties
Purchases
fromrelated
parties
Amounts
owedby
relatedparties
Amounts
owedto
relatedparties
$m $m $m $m
Associates4817
Jointventures 57 14 12
Non-trading transactions
Loansto
relatedparties
Loansfrom
relatedparties
$m $m
Associates 11
Jointventures 33
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IAS 18: Revenue
The purpose of IAS 18
Measurement of revenue
Sale of goods: revenue recognition
Rendering of services: revenue recognition
Interest, royalties and dividends: revenue recognition
IAS 18: disclosure requirements
DP: Revenue recognition in contracts with customers
4 IAS 18: Revenue
4.1 The purpose of IAS18
For many business entities, revenue is the largest single item in their financial
statements and it has a direct impact on reported profit or loss for the period.
Without clear guidance from accounting standards, there would be some risk that
entities might over-state their revenue for the period, perhaps by recognising
revenue in profit or loss too early, in order to increase the reported profits.
The IASB Framework states that revenue is recognised in profit or loss when:
there is an increase in future economic benefits related to an increase in an asset
or a decrease in a liability, and
this increase in economic benefits can be reliably measured.
IAS 18: Revenue deals in more detail with:
revenue recognition – when revenue may be recognised in profit or loss, and
the measurement of revenue.
IAS 18 defines revenue as ‘income that arises in the ordinary course of activities … and
is referred to by a variety of different names including sales, fees, interest, dividends
and royalties.’
4.2 Measurement of revenue
IAS 18 states that revenue must be measured at ‘the fair value of the consideration
received or receivable’. Broadly speaking, this is the fair market price less any
volume rebates (discount allowed for buying in large quantities) or ‘trade discount
allowed’.
If a sale is a cash sale, the revenue is the immediate proceeds of the sale.
If a sale is a normal credit sale, the revenue is the expected future receipt.