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Home > Accountancy Best Practice > Performance Reporting under IFRS

Accountancy Best Practice

Performance Reporting under IFRS

by Peter Casson

Executive Summary

Introduction

Financial statements prepared under International Financial Reporting Standards (IFRS) include a statement of comprehensive income which, together with associated notes, report a company’s performance for the accounting period. The International Accounting Standards Board (IASB), an independent body, sets the IFRS. The IASB took over responsibility for setting international accounting standards from the International Accounting Standards Committee (IASC), which issued International Accounting Standards (IAS). The IASB adopted the then existing IAS when it took over from the IASC, and the acronym IFRS is now used to include both IFRS and IAS, as well as the interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee.

The presentation of a company’s financial performance under IFRS is dealt with in IAS 1 (revised) “Presentation of financial statements.” Revisions to the standard in 2007, which are in effect for accounting periods beginning on or after January 1, 2009, include the requirement for reporting entities to present a statement of comprehensive income.

The development of IFRS is shaped by an agreement reached between the IASB and the US Financial Accounting Standards Board (FASB) to make their existing financial reporting standards compatible and to coordinate work programs. The IASB and FASB are collaborating on a project entitled “Financial statement presentation,” which may lead to further changes in the way entities report performance.

This article describes the essential features of reporting performance under IAS 1 (revised), possible future changes to performance reporting standards, and non-IFRS performance measures.

Reporting Performance under IAS 1

IAS 1 (revised) “Presentation of financial statements” sets out the basis for the presentation of financial statements so as to achieve comparability of a company’s financial statements over time and across the financial statements of different companies.

The revised standard, issued in 2007, requires a “statement of comprehensive income,” where only an income statement was previously required. This change increases the comparability with the US standard FAS 130 “Comprehensive income.” Comprehensive is defined in FAS 130 as “the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.”

Comprehensive income is more inclusive than profit or loss for a period because, although a company is generally required to recognize all income and expenses in the period in profit or loss, some IFRSs either require or permit otherwise. Items that should/may be excluded from profit or loss include: (1) correction of errors from prior periods; (2) changes in accounting policies; (3) revaluation surpluses; (4) gains and losses arising on the translation of the financial statements of a foreign operation; and (5) gains and losses on remeasuring available-for-sale financial assets. Such items, which are excluded from profit or loss, represent components of other comprehensive income as they result in a change in equity.

In looking at the reporting of performance under IFRS it is useful to consider: The general features of reporting under IFRS; the presentation of comprehensive income; the way in which expenses may be analyzed. It is also useful to look at the specific issues related to discontinued operations and exceptional items.

General Features of Financial Reports under IFRS

IAS 1 (revised) identifies a set of general features for the reporting of financial performance. The first requirement is the fair presentation of a company’s financial performance. This requires that the effects of a company’s transactions and other events are faithfully represented in its statement of comprehensive income. It is generally presumed that a company will achieve this through the application of IFRSs. However, in some rare instances, it is necessary to depart from IFRSs in order to achieve a fair presentation. Other general features identified in IAS 1 (revised) are:

  • Going concern: A company should prepare its statement of comprehensive income on the assumption that it will continue its operations into the indefinite future.

  • Accrual basis of accounting: A company should include income and expenses when they meet definition and recognition criteria.

  • Materiality and aggregation: A company should present each material class of item separately.

  • Offsetting: A company cannot usually offset items of income and expense.

  • Frequency of reporting: A company should usually publish its financial statements at least annually.

  • Comparative information: A company should disclose comparative information for the previous period.

  • Consistency of presentation: A company is required to present and classify items in its statement of comprehensive income on a consistent basis from one period to the next.

Presentation of Comprehensive Income

Companies are required to present a statement of all income and expenses recognized in an accounting period. This may be reported either in a single statement of comprehensive income or in two statements—an income statement showing the components of the profit or loss for the period, and a statement of comprehensive income that includes the components of other comprehensive income.

IAS 1 (revised) requires that the following 10 categories should, as a minimum, be presented in the statement of comprehensive income:

  • Revenue.

  • Finance costs.

  • Share of the profit or loss of joint ventures and associates, i.e., companies over which the reporting company exercises significant influence but which are not subsidiaries or joint ventures.

  • Tax expense.

  • The post-tax profit or loss on discontinued operations, together with the post-tax gain or loss on the disposal of the assets of the discontinued operations.

  • Profit or loss.

  • Each component of other comprehensive income.

  • Total comprehensive income.

Where a reporting company is a parent company presenting a consolidated statement of comprehensive income, it is necessary to show the allocation of:

  • Profit or loss for the period attributable to: Holders of the stock of the parent company; and minority interests, i.e., holders of the subsidiary companies’ common stock other than the stock held directly, or indirectly, by the parent company.

  • Total comprehensive income for the period attributable to: Stockholders of the parent company; and minority interests.

Analysis of Expenses

A company is required to present an analysis of its expenses. The analysis may take one of two forms:

  • The “nature of expense” method requires the company to classify expenses according to their nature—for example, expense groups such as raw materials and consumables, depreciation, employment costs, and advertising costs.

  • The “function of expense” or “cost of sales” method requires the company to aggregate expenses according to their function—for example, cost of sales, distribution costs, and administrative expenses.

Management is required to select the method which, in its view, is most reliable and relevant. Where a company uses the “function of expense” method, it must provide additional information on the nature of the expense.

IAS 1 (revised), as noted above, requires companies to distinguish between continuing and discontinued operations in its reporting of performance. A discontinued operation is a major part of the company (e.g., line of business or geographical area of operation) that has either been disposed of or is held for sale.

When items of income or expense are material, a company is required to disclose their nature and amounts separately. These include: Write-downs of inventories and of property, plant, and equipment; restructuring costs; disposals of items of property, plant, and equipment; disposals of investments; litigation settlements.

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