BALIUAG UNIVERSITY

CPA Review Program

Theory of Accounts (FAR & AFAR)
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Module 3: Other Reporting Standards LVC

I. Event After the Reporting Period (IAS 10)

 Definition of terms
 Event after the reporting period – An event, which could be favorable or unfavorable, that occurs between the
end of the reporting period and the date that the financial statements are authorized for issue.
 Adjusting event – An event after the reporting period that provides further evidence of conditions that existed at
the end of the reporting period, including an event that indicates that the going concern assumption in relation
to the whole or part of the enterprise is not appropriate.
 Non-adjusting event – An event after the reporting period that is indicative of a condition that arose after the
end of the reporting period.

 Going concerns issues arising after end of the reporting period

An entity shall not prepare its financial statements on a going concern basis if management determines after the end
of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no realistic
alternative but to do so.

 Illustration. Determine whether each item is an adjusting event or non-adjusting event after reporting period.
1. The settlement after the reporting period of a court case that confirms that the entity had a present obligation
at the end of the reporting period.
2. A decline in fair value of investments between the end of the reporting period and the date when the financial
statements are authorized for issue.
3. The bankruptcy of a customer that occurs after the reporting period usually confirms that the customer was
credit-impaired at the end of the reporting period.
4. Dividends declared to holders of equity instruments after the reporting period.
5. A major business combination after the reporting period or disposing of a major subsidiary (IFRS 3).
6. The sale of inventories after the reporting period may give evidence about their net realizable value at the end
of the reporting period.
7. Announcing a plan to discontinue an operation.
8. Major purchases of assets, classification of assets as held for sale (IFRS 5), other disposals of assets, or
expropriation of major assets by government.
9. The destruction of a major production plant by a fire after the reporting period.
10. The determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold,
before the end of the reporting period.
11. The determination after the reporting period of the amount of profit-sharing or bonus payments, if the entity
had a present legal or constructive obligation at the end of the reporting period to make such payments as a
result of events before that date.
12. Announcing, or commencing the implementation of, a major restructuring.
13. Major ordinary share transactions and potential ordinary share transactions after the reporting period.
14. Abnormally large changes after the reporting period in asset prices or foreign exchange rates.
15. Changes in tax rates or tax laws enacted or announced after the reporting period that have a significant effect
on current and deferred tax assets and liabilities.
16. The discovery of fraud or errors that show that the financial statements are incorrect.
17. Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees.
18. Commencing major litigation arising solely out of events that occurred after the reporting period.

 Disclosure requirement
 Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the
ability of users to make proper evaluations and decisions. The required disclosure is
a. The nature of the event, and
b. An estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made.
 A company should update disclosures that relate to conditions that existed at the end of the reporting period to
reflect any new information that it receives after the reporting period about those conditions.
 Companies must disclose the date when the financial statements were authorized for issue and who gave that
authorization. If the enterprise's owners or others have the power to amend the financial statements after
issuance, the enterprise must disclose that fact

II. Related-Party Disclosure (IAS 24)

 Definition of terms

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 Related party – A person or entity that is related to the entity that is preparing its financial statements (referred
to as the 'reporting entity').
 Related party transaction – A transfer of resources, services, or obligations between related parties, regardless of
whether a price is charged.

 Related parties
A. A person or a close member of that person's family is related to a reporting entity if that person:
1. Has control or joint control over the reporting entity
2. Has significant influence over the reporting entity
3. A member of the key management personnel of the reporting entity or of a parent of the reporting entity
B. An entity is related to a reporting entity if any of the following conditions applies:
a. The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others).
b. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member
of a group of which the other entity is a member).
c. Both entities are joint ventures of the same third party.
d. One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
e. The entity is a post-employment defined benefit plan for the benefit of employees of either the reporting
entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring
employers are also related to the reporting entity.
f. The entity is controlled or jointly controlled by a person identified in (A).
g. A person identified in (A.1) has significant influence over the entity or is a member of the key management
personnel of the entity (or of a parent of the entity).
h. The entity, or any member of a group of which it is a part, provides key management personnel services
to the reporting entity or to the parent of the reporting entity.

 Disclosure requirements
1. Relationships between parents and subsidiaries
Regardless of whether there have been transactions between a parent and a subsidiary, an entity must disclose
the name of its parent and, if different, the ultimate controlling party. If neither the entity's parent nor the
ultimate controlling party produces financial statements available for public use, the name of the next most
senior parent that does so must also be disclosed.
2. An entity shall disclose key management personnel compensation in total and for each of the following
categories:
a. Short-term employee benefits
b. Post-employment benefits
c. Other long-term benefits
d. Termination benefits
e. Share-based payment.
3. If an entity has had related party transactions during the periods covered by the financial statements, it shall
disclose the nature of the related party relationship as well as information about those transactions and
outstanding balances, including commitments, necessary for users to understand the potential effect of the
relationship on the financial statements.
a. The amount of the transactions
b. The amount of outstanding balances, including terms and conditions and guarantees.
c. Provisions for doubtful debts related to the amount of outstanding balances.
d. The expense recognized during the period in respect of bad or doubtful debts due from related parties.

 Unrelated parties
The following are deemed not to be related:
1. Two entities simply because they have a director or key manager in common
2. Two venturers who share joint control over a joint venture
3. Providers of finance, trade unions, public utilities, and departments and agencies of a government that does not
control, jointly control or significantly influence the reporting entity, simply by virtue of their normal dealings
with an entity (even though they may affect the freedom of action of an entity or participate in its decision-
making process)
4. A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a significant
volume of business merely by virtue of the resulting economic dependence.

III. Operating Segments (IFRS 8)

 Scope
 IFRS 8 applies to the separate or individual financial statements of an entity (and to the consolidated financial
statements of a group with a parent):
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a. whose debt or equity instruments are traded in a public market or that files, or
b. is in the process of filing, its (consolidated) financial statements with a securities commission or other
regulatory organization for the purpose of issuing any class of instruments in a public market.
 However, when both separate and consolidated financial statements for the parent are presented in a single
financial report, segment information need be presented only on the basis of the consolidated financial
statements.

 Operating segments
 An operating segment is a component of an entity:
- that engages in business activities from which it may earn revenues and incur expenses
- whose operating results are reviewed regularly by the entity's chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance and
- for which discrete financial information is available

 Reportable segments
 IFRS 8 requires an entity to report financial and descriptive information about its reportable segments.
 The 10% rule. Reportable segments are operating that meet any of the specified criteria:
a. its reported revenue, (external customers and intersegment sales), is 10% or more of the combined revenue
(internal and external)
b. the reported profit/loss (absolute amount) is 10% or more of the greater between
- the combined reported profit of all operating segments that did not report a loss and
- the combined reported loss of all operating segments that reported a loss (absolute amount), or
c. its assets are 10% or more of the combined assets of all operating segments.
 Two or more operating segments may be aggregated into a single operating segment if aggregation is consistent
with the core principles of the standard, the segments have similar economic characteristics and are similar in
various prescribed respects.
 The 75% rule.
- The sum of the segments’ external revenues must constitute at least 75% of the entity’s total revenue.
- If the total external revenue reported by operating segments constitutes less than 75%of the entity's
revenue, additional operating segments must be identified as reportable segments (even if they do not meet
the quantitative thresholds set out above) until at least 75% of the entity's revenue is included in reportable
segments.

 Disclosure requirements
Required disclosures include:
a. General information about how the entity identified its operating segments and the types of products and
services from which each operating segment derives its revenues.
b. Judgements made by management in applying the aggregation criteria to allow two or more operating segments
to be aggregated
c. Information about the profit or loss for each reportable segment, including certain specified revenues and
expenses such as revenue from external customers and from transactions with other segments, interest revenue
and expense, depreciation and amortization, income tax expense or income and material non-cash items.
d. A measure of total assets and total liabilities for each reportable segment, and the amount of investments in
associates and joint ventures and the amounts of additions to certain non-current assets ('capital expenditure')
e. An explanation of the measurements of segment profit or loss, segment assets and segment liabilities, including
certain minimum disclosures, e.g. how transactions between segments are measured, the nature of
measurement differences between segment information and other information included in the financial
statements, and asymmetrical allocations to reportable segments.
f. Reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment
liabilities and other material items to corresponding items in the entity's financial statements.
g. Some entity-wide disclosures that are required even when an entity has only one reportable segment, including
information about each product and service or groups of products and services.
h. Analyses of revenues and certain non-current assets by geographical area – with an expanded requirement to
disclose revenues/assets by individual foreign country (if material), irrespective of the identification of operating
segments.
i. Information about transactions with major customers.

IV. Interim Financial Reporting (IAS 34)

 Key definitions
 Interim period – a financial reporting period shorter than a full financial year (most typically a quarter or half-
year).
 Interim financial report – a financial report that contains either a complete or condensed set of financial
statements for an interim period.
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Module 3: Other Reporting Standards LVC

 Matters left to local regulators

 IAS 34 specifies the content of an interim financial report that is described as conforming to International
Financial Reporting Standards. However, IAS 34 does not mandate:
- which entities should publish interim financial reports
- how frequently, or how soon after the end of an interim period.
 Such matters will be decided by national governments, securities regulators, stock exchanges, and accountancy
bodies.
 However, the Standard encourages publicly-traded entities to provide interim financial reports that conform to
the recognition, measurement, and disclosure principles set out in IAS 34, at least as of the end of the first half
of their financial year, such reports to be made available not later than 60 days after the end of the interim
period.

 Minimum content of an interim financial report

 The minimum components specified for an interim financial report are:
a. a condensed statement of financial position
b. either (a) a condensed statement of comprehensive income or (b) a condensed statement of comprehensive
income and a condensed income statement
c. a condensed statement of changes in equity
d. a condensed statement of cash flows
e. selected explanatory notes
 If a complete set of financial statements is published in the interim report, those financial statements should be
in full compliance with IFRSs.
 If the financial statements are condensed, they should include, at a minimum, each of the headings and sub-
totals included in the most recent annual financial statements and the explanatory notes required by IAS 34.
 Additional line-items or notes should be included if their omission would make the interim financial information
misleading.
 If the annual financial statements were consolidated (group) statements, the interim statements should be group
statements as well.

 The periods to be covered by the interim financial statements

a. Statement of financial position - as of the end of the current interim period and a comparative balance sheet
as of the end of the immediately preceding financial year
b. Statement of comprehensive income (and income statement, if presented) - for the current interim period
and cumulatively for the current financial year to date, with comparative statements for the comparable
interim periods (current and year-to-date) of the immediately preceding financial year
c. Statement of changes in equity - cumulatively for the current financial year to date, with a comparative
statement for the comparable year-to-date period of the immediately preceding financial year
d. Statement of cash flows - cumulatively for the current financial year to date, with a comparative statement
for the comparable year-to-date period of the immediately preceding financial year
 If the company's business is highly seasonal, IAS 34 encourages disclosure of financial information for the latest
12 months, and comparative information for the prior 12-month period, in addition to the interim period
financial statements.

 Illustration Financial Statements For the Quarter Ended September 30, Y2

Financial Report Current Comparative
Statement of financial position
Statement of comprehensive
income
Statement of changes in equity
Statement of cash flows

 Note disclosures
 The explanatory notes required are designed to provide an explanation of events and transactions that are
significant to an understanding of the changes in financial position and performance of the entity since the last
annual reporting date. IAS 34 states a presumption that anyone who reads an entity's interim report will also
have access to its most recent annual report. Consequently, IAS 34 avoids repeating annual disclosures in interim
condensed reports.
 Examples of specific disclosure requirements of IAS 34
- write-down of inventories
- recognition or reversal of an impairment loss
- reversal of provision for the costs of restructuring

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- acquisitions and disposals of property, plant and equipment
- commitments for the purchase of property, plant and equipment
- litigation settlements
- corrections of prior period errors
- changes in business or economic circumstances affecting the fair value of financial assets and liabilities
- unremedied loan defaults and breaches of loan agreements
- transfers between levels of the 'fair value hierarchy' or changes in the classification of financial assets
- changes in contingent liabilities and contingent assets.
 Examples of other disclosures required
- changes in accounting policies
- explanation of any seasonality or cyclicality of interim operations
- unusual items affecting assets, liabilities, equity, net income or cash flows
- changes in estimates issues, repurchases and repayment of debt and equity securities
- dividends paid
- particular segment information
- events after the end of the reporting period
- changes in the composition of the entity, such as business combinations, obtaining or losing control of
subsidiaries, restructurings and discontinued operations
- disclosures about the fair value of financial instruments

 Accounting policies
 The same accounting policies should be applied for interim reporting as are applied in the entity's 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.
 A key provision of IAS 34 is that an entity should use the same accounting policy throughout a single financial
year. If a decision is made to change a policy mid-year, the change is implemented retrospectively, and previously
reported interim data is restated.

 Measurement
 Measurements for interim reporting purposes should be made on a year-to-date basis, so that the frequency of
the entity's reporting does not affect the measurement of its annual results.
 Several important measurement points:
a. Revenues that are received seasonally, cyclically or occasionally within a financial year should not be
anticipated or deferred as of the interim date, if anticipation or deferral would not be appropriate at the end
of the financial year.
b. Costs that are incurred unevenly during a financial year should 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.
c. Income tax expense should be recognized based on the best estimate of the weighted average annual
effective income tax rate expected for the full financial year.
 An appendix to IAS 34 provides guidance for applying the basic recognition and measurement principles at
interim dates to various types of asset, liability, income, and expense.

 Materiality
 In deciding how to recognize, measure, classify, or disclose an item for interim financial reporting purposes,
materiality is to be assessed in relation to the interim period financial data, not forecast annual data.

 Disclosure in annual financial statements

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

V. Non-current Assets Held for Sale and Discontinued Operations (IFRS 5)

 Held-for-sale classification
 In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for sale:
a. management is committed to a plan to sell
b. the asset is available for immediate sale
c. an active program to locate a buyer is initiated
d. the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions)
e. the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
f. actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or
withdrawn

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Module 3: Other Reporting Standards LVC
 The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or
abandoned would not meet the definition (but may be classified as discontinued once abandoned).
 An entity that is committed to a sale involving loss of control of a subsidiary that qualifies for held-for-sale
classification under IFRS 5 classifies all of the assets and liabilities of that subsidiary as held for sale, even if the
entity will retain a non-controlling interest in its former subsidiary after the sale.
 The classification, presentation and measurement requirements of IFRS 5 also apply to a non-current asset (or
disposal group) that is classified as held for distribution to owners. The entity must be committed to the
distribution, the assets must be available for immediate distribution and the distribution must be highly
probable.

 Disposal group concept

 A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to dispose
of in a single transaction.
 The measurement basis required for non-current assets classified as held for sale is applied to the group as a
whole, and any resulting impairment loss reduces the carrying amount of the non-current assets in the disposal
group in the order of allocation required by IAS 36.

 Measurement
 The following principles apply:
a. At the time of classification as held for sale. Immediately before the initial classification of the asset as held
for sale, the carrying amount of the asset will be measured in accordance with applicable IFRSs. Resulting
adjustments are also recognized in accordance with applicable IFRSs.
b. After classification as held for sale. Non-current assets or disposal groups that are classified as held for sale
are measured at the lower of carrying amount and fair value less costs to sell (fair value less costs to
distribute in the case of assets classified as held for distribution to owners).
c. Impairment.
 At the time of classification as held for sale. Immediately prior to classifying an asset or disposal group
as held for sale, impairment is measured and recognized in accordance with the applicable IFRSs. Any
impairment loss is recognized in profit or loss unless the asset had been measured at revalued amount
under IAS 16 or IAS 38, in which case the impairment is treated as a revaluation decrease.
 After classification as held for sale. Calculate any impairment loss based on the difference between the
adjusted carrying amounts of the asset/disposal group and fair value less costs to sell. Any impairment
loss that arises by using the measurement principles in IFRS 5 must be recognized in profit or loss, even
for assets previously carried at revalued amounts.

d. Assets carried at fair value prior to initial classification. For such assets, the requirement to deduct costs to
sell from fair value may result in an immediate charge to profit or loss.
e. Subsequent increases in fair value. A gain for any subsequent increase in fair value less costs to sell of an
asset can be recognized in the profit or loss to the extent that it is not in excess of the cumulative impairment
loss that has been recognized in accordance with IFRS 5 or previously in accordance with IAS 36.
f. No depreciation. Non-current assets or disposal groups that are classified as held for sale are not
depreciated.
 The measurement provisions of IFRS 5 do not apply to deferred tax assets, assets arising from employee benefits,
financial assets within the scope of IFRS 9 Financial Instruments, non-current assets measured at fair value in
accordance with IAS 41 Agriculture, and contractual rights under insurance contracts.

 Presentation
 Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held
for sale, must be presented separately on the face of the statement of financial position. [IFRS 5.38]

Disclosures
 IFRS 5 requires the following disclosures about assets (or disposal groups) that are held for sale:
a. Description of the non-current asset or disposal group
b. Description of facts and circumstances of the sale (disposal) and the expected timing
c. Impairment losses and reversals, if any, and where in the statement of comprehensive income they are
recognized
d. If applicable, the reportable segment in which the non-current asset (or disposal group) is presented in
accordance with IFRS 8 Operating Segments
 Disclosures in other IFRSs do not apply to assets held for sale (or discontinued operations, discussed below)
unless those other IFRSs require specific disclosures in respect of such assets, or in respect of certain
measurement disclosures where assets and liabilities are outside the scope of the measurement requirements
of IFRS 5.

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 Classification as to discontinued operations
 A discontinued operation is a component of an entity that either has been disposed of or is classified as held for
sale, and:
a. represents either a separate major line of business or a geographical area of operations
b. is part of a single coordinated plan to dispose of a separate major line of business or geographical area of
operations, or
c. is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.
 IFRS 5 prohibits the retroactive classification as a discontinued operation, when the discontinued criteria are met
after the end of the reporting period.

 Disclosure in the statement of comprehensive income

 The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognized on
the measurement to fair value less cost to sell or fair value adjustments on the disposal of the assets (or disposal
group) is presented as a single amount on the face of the statement of comprehensive income. If the entity
presents profit or loss in a separate statement, a section identified as relating to discontinued operations is
presented in that separate statement.
 Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is required either in the
notes or in the statement of comprehensive income in a section distinct from continuing operations. Such
detailed disclosures must cover both the current and all prior periods presented in the financial statements.

 Cash flow information

The net cash flows attributable to the operating, investing, and financing activities of a discontinued operation is
separately presented on the face of the cash flow statement or disclosed in the notes. [IFRS 5.33]

 Disclosures
The following additional disclosures are required:
 Adjustments made in the current period to amounts disclosed as a discontinued operation in prior periods must
be separately disclosed.
 If an entity ceases to classify a component as held for sale, the results of that component previously presented
in discontinued operations must be reclassified and included in income from continuing operations for all periods
presented.

Multiple Choice Questions

“Whatever you do, work at it with all your heart, as working for the Lord, not for human
masters.” Colossians 3:23

“A dream doesn't become reality through magic; it takes sweat, determination and hard work.”
Colin Powell

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