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Introduction to IFRS

Financial Reporting Standards International Financial Reporting Standards

Backgrounds For many years each European country had its own accounting regulations. The differences among national accounting regulations caused that similar entities presented different items in financial statements and measure them using different measurement basis. The same company could present different amount of profit/loss under e.g. German and French accounting regulations. The same company could present profit for given year under British regulations and loss (for the same year) under German regulations.

To improve comparability there was necessary to set unified accounting regulations for (at least) the largest companies. Unified rules of preparation and presentation of financial statements would allow European capital markets to develop and compete with American and Asiatic ones.

There were discussed different solutions: -Introduction of accounting principles of one European country as a basis for companies in whole EU; - Introduction of US GAAP (US Generally Accepted Accounting Principles) as a basis for companies in whole EU; - Preparation of completely new set of accounting regulations for European companies; - Introduction of regulations being prepared and published by independent body. -Introduction of regulations being prepared and published by independent body. One of such bodies was International Accounting Standards Committee. It was set up in London in the 70s as international independent organisation to prepare and issue the best practice in accounting. All EU countries accepted that solution and in 2002 EU enforced the idea into EU regulations. From 1st January 2005 some European companies are obliged to use International Accounting Standards.

IASC - IASB
International Accounting Standards Committee prepared and issued 41 accounting standards known as International Accounting Standards (IAS). In 2000 the IASC was renamed to International Accounting Standards Board. The Board decided that all newly published standards will be named International Financial Reporting Standards (old ones remain in force).

What companies are obliged to use IFRS/IAS?

IFRS/IAS are obligatory for: -large European companies that are listed in EU and form capital group (in consolidated financial statements), -banks (not necessary listed) that form capital group (in consolidated financial statements). Each of EU members may extend the scope of use of IFRS/IAS.

List of standards

IFRS/IAS in Poland
Obligatory for: In Poland IFRS/IAS there may use IFRS/IAS deliberately: -Companies listed on the Warsaw Stock Exchange forming capital group in their consolidated financial statements; -Banks forming capital group in their consolidated financial statements. - companies listed on the Warsaw Stock Exchange in their separate financial statements, - banks in their separate financial statements, - entities under control of companies listed in EU e.g. BSH Sprz t Gospodarstwa Domowego Sp. z.o.o. being under control of BSH Bosch und Siemens Hausgerte GmbH

IAS 1 Presentation of Financial Statements

&
IFRS/IAS

W
Accounting Act All other companies

An important standard regulating elements presented in Financial Statements. Financial Statements should include: -Balance Sheet (called also Statement of Financial Position) - Income Statement (called also Comprehensive Income Statement or Statement of Comprehensive Income ) - Cash Flow Statement (called also Statement of Cash Flows) - Statement of Changes in Equity - Notes (explanatory)

1. Large listed companies in consolidated fin. statements, 2. Banks in consolidated fin. statements, 3. Entities that chose to use IFRS/IAS deliberately

The items presented in Balance Sheet should be divided into non current (long term) and current (short term) or according to liquidity. Manufacturing companies usually choose noncurrent-current division. Banks usually choose presentation according to liquidity. IAS 1 does not require special order of items being presented in BALANCE SHEET. IAS 1 requires what information (as minimum) should be presented in Financial Statements. Apart from that each company using IFRS should add additional information necessary to explain its financial position or profit/loss.

Balance sheet items:

Cash 10000 Short-term investments (shares of listed company) 12000 Trade recievables 14000 PPE 30000 Intangible assets 4000 Trade payables 18000 Long term bank loan 22000 Net profit 13000 Share capital 17000

Balance sheet statement of financial position

Equity Assets Equity amounts assigned to owners of the entity Liabilities

Assets economic resources under control of an company

Assets

Liabilities amounts to pay (to lenders, employees, trade counterparties)

Equity Liabilities

Assets division into current (short term) and non-current (long term)

Assets division according to liquidity (how fast they can be transformed into cash)

Non-current assets (long term) - probably will stay in a company longer than 12 months
Share

Cash
Share

Listed securities

Loan agreement
repayment 2016

Amounts receivable
40000 PLN 13.03.2015

Loan agreement

40000 PLN 13.03.2013

10000 PLN 2 months

Current assets (short term) - probably will stay in a company shorter than 12 months
Loan agreement
repayment 2010

Inventories

Property investments

Property, plant and equipment

10000 PLN 2 months

Intangible assets Goodwill

Assets main groups

Property, plant and equipment buildings, machinery, tools, vehicles Intangible assets licenses, patents, software Biological assets Property investments buildings, land Inventories materials, finished products, goods for resale Trade receivables amount receivable in relation to main bussiness activities Financial assets shares (participation in other companies), loans granted, securities Cash

IAS 16 Property, plant and equipment

Property, plant and equipment are tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period.

Examples of PP&E
(a) land; (b) land and buildings; (c) machinery; (d) ships; (e) aircraft; (f) motor vehicles; (g) furniture and fixtures; (h) office equipment;

Initial measurement of PP&E

An item of property, plant and equipment shall be measured at its cost. The cost of an item of PP&E comprises: (a) purchase price or cost of manufacture; (b) any costs directly attributable to bringing the item to the location and condition necessary for it to be capable of operating in the manner intended by management; (c) borrowing costs if * they are directly attributable to acquisition, construction or production of the item, * it takes substantial period to take the item into active use.

Ex 1.1.1i A company X has 200000 PLN in cash (bank account) and share capital of the same amount. On 15th March 2008 the company X bought a production machine. The purchase of the machine was financed with bank loan of 120000 PLN. Expenses relating to purchase, transport, assembly and renovation covered by the company reached 25000 (bank transfer). Expenses relating to administrative personnel 5000 a month (cash payment). The entity pays interest on bank loan of 14,6% p.a. (nominal rate) at the end of each month (interest basis ACT/365). At the end of June the entity should also pay 50000 of bank loan. Calculate initial value of PP&E. a) PP&E was taken into active use on 30th June 2008 (long term adjustment is not needed).

Ex 1.1.2i A company X has 200000 PLN in cash (bank account) and share capital of the same amount. On 15th March 2008 the company X bought a production machine. The purchase of the machine was financed with bank loan of 120000 PLN. Expenses relating to purchase, transport, assembly and renovation covered by the company reached 25000 (bank transfer). Expenses relating to administrative personnel 5000 a month (cash payment). The entity pays interest on bank loan of 14,6% p.a. (nominal rate) at the end of each month (interest basis ACT/365). At the end of June the entity should also pay 50000 of bank loan. Calculate initial value of PP&E. b) PP&E was taken into active use on 30th September 2008 (longterm adjustment e.g. renovation is needed),

Ex 1.1.3i An company X has 300000 PLN in cash (bank account) and share capital of the same amount. On 15th March 2008 the company X bought a production machine. The purchase of the machine was financed with own resources (cash) 120000 PLN. Expenses relating to purchase, transport, assembly and renovation covered by the company reached 25000 (bank transfer). Expenses relating to administrative personnel 5000 a month (cash payment). c) PP&E was taken into active use on 30th September 2008, but the company bought it with its own cash (without bank loan),

Ex 1.1.4i A company X has 400000 PLN in cash (bank account) and share capital of the same amount. On 15th March 2008 the company X bought a production machine. The purchase of the machine was financed with bank loan of 120000 PLN. Expenses relating to purchase, transport, assembly and renovation covered by the company reached 25000 (bank transfer). Expenses relating to administrative personnel 5000 a month (cash payment). The entity pays interest on bank loan of 14,6% p.a. (nominal rate) at the end of each month (interest basis ACT/365). Calculate initial value of PP&E. d) PP&E was taken into active use on 30th October 2008, but the company paid of on 13th June 2008 50000 of principal of bank loan.

Balance sheet measurement

A company can choose one of two models for each main class of PP&E: Cost model (sometimes called historical cost model)
Methods of depreciation

Cost model
Cost (usually initial value) minus accumulated depreciation minus impairment losses

Revaluation model
Straight-line (based on assumption that the item is used up evenly through its useful life)

Main classes of PP&E: Land, buildings, machinery, hardware, ships, aircraft, motor vehicles, furniture and fixtures, office equipment etc.

Degresive (based on assumption that the item is used up faster in its first years of use) Activity depreciation method (UnitsofProduction Depreciation Method) (based on actual production units)

Straight line method PP&E

Annual depreciation = depreciable amount / expected years of use Depreciable amount = Initial value (or net value) minus residual value

The cost model ex. 1.2i

(acc. depr.) (1,2 or 3) (acc. impairment loss ) (4) (depr.) (3)

PP&E u. constr. P/L for the period

(depr. charges) (1) (impairment loss) (4)

Monthly depreciation = Annual depreciation / 12

Fin. products (depr.) (2) Work in progress (depr.) (2)

1) Item used for administrative or selling purposes; 2) Item used for production purposes; 3) Item used to construct (produce) another item of PP&E. 4) Impairment loss

The cost model sale of the item

PP&E (6a
(5)

The revaluation model

PP&E (depr. charges) (1,2 or 3) Revaluation reserve
(5)

PP&E u. constr.
(depr. charges) (3)

P/L for the period Receivable/cash (6a

(6a

P/L for the period Fin. products (depr. charges) (2) Work in progress (depr. charges) (2)
(depr. charges) (1) (5)

(6) A sale of the item. 6a gain or loss on sale = amount received or receivable minus carrying amount of item

(5) Revaluation of the item to fair (market) value. The revaluation reserve (recognised in equity) can not be negative all amounts reducing the revaluation reserve below 0 are transferred to profit/loss.

The revaluation model Ex. 1.3i sale of the item

PP&E (6a Revaluation reserve (6b) Retained earnings (P/L of previous years) (6b) P/L for the period Receivable/cash (6a
(6) A sale of revalued item. 6a gain or loss on sale = amount received or receivable minus carrying amount of item 6b transfer of surplus from revaluation reserve to retained earnings (6a

IAS 40 Investment property

Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation (increase of value) or both. Examples of investment property: - Land held for long-term capital appreciation - Land held for undecided future use - Building leased out under an operating lease - Vacant building held to be leased out under an operating lease - Property that is being constructed or developed for future use as investment property

Items not being investment property

- property held for use in the production or supply of goods or services or for administrative purposes item of PP&E (IAS 16) - property held for sale in the ordinary course of business or in the process of construction of development for such sale item of inventories (IAS 2 Inventories); - property being constructed or developed on behalf of third parties item of inventories (IAS 11 Construction Contracts);

Items not being investment property

- owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owneroccupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees and owner-occupied property awaiting disposal; and - property leased to another entity under an finance lease.

Initial measurement
Investment property is initially measured at cost being acquisition (purchase) price or manufacture (production) costs plus transaction costs and borrowing costs. Borrowing costs are included in cost (initial value) only if item is financed with bank loan and needs long assembly/ installation.

Balance sheet measurement

- cost model (the same as for PPE) - fair value model One of methods must be adopted for all of an entity's property investment. A change of model is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for the change from a fair value model to a cost model.

The cost model Ex. 2.1i

Investment property
(depr. charges) (1) (1)

The fair value model Ex. 2.1i

Investment property P/L for the period
(1)

P/L for the period

(depr. charges) (1)

1) Depreciation of investment property

1) Remeasurement at fair value at each balance sheet day. Investment property is remeasured at fair value. Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. Fair value should reflect the actual market state and circumstances as of the balance sheet date.

If an entity chose the cost model for its investment property, it should present the fair value of investment properties in notes.

Reclassification of investment property

Inventories investment property measured at cost basis: manufacture cost /acquisition cost Inventories investments property measured at FV basis: FV; change to P/L PP&E investment property measured at cost basis: manufacture cost /acquisition cost PP&E investment property measured at FV basis: FV; change to revaluation reserve (revaluation reserve can not be lower than 0)
investment property measured at cost PPE basis: net value (carrying amount) investment property measured at FV PPE basis: FV; change to P/L investment property measured at cost inventories basis: net value (carrying amount) investment property measured at FV inventories basis: FV, change to P/L inventories PPE (cost) basis: net value (carrying amount) inventories PPE (revaluaiton model) basis: FV, change (increase) to revaluation reserve, decrease to P/L

Financial investments - assets

Equity instruments shares giving control over another company not-giving control

Financial investments

/for issuer shares are part of equity/ Debt instruments bonds, loans granted, financial receivables, /for second party such instruments are liabilities/ Derivative instruments purchased options, forwards with positive value, swaps with positive value,

Shares giving control

Option A company X bought in bank put option. Exercise date 15th May 2009. Option premium (purchase price) 12000. Exercise price 4,5 pln/EUR. Nominal amount 100000 EUR. Settlement gross.

our company has enough shares of (interest in) another company to appoint its members of executive board

investments in subsidiaries (full control) investments in associates (part control) investments in joint ventures (part control) Forward contract A company X signed with Bank forward contract on sale of 100000 EUR (gross settlement) on 15th May 2009. Settlement price 4,65 pln/EUR.

Financial investments
Financial investments not giving control should be divided into (IAS 39): financial assets at fair value through profit or loss, held for trading (HFT) designated (deliberately) loans and receivables investments held to maturity (HTM) financial assets available for sale (AFS) A. Company X granted 3 month loan to entity S of 40000 . B. Company A set 15 month deposit in bank G of 100000. C. Company purchased call option on 100000 USD (right to purchase 100000 USD at set price). Amount paid 5000. D. Entity bought participation units in investment fund (for speculative purposes). E. Entity bought participation units in investment fund (longterm investment).

F. Entity bought shares of unlisted company (small package). Financial director expects their resale in close future (negociation with potential buyer being conducted). G. Company bought shares of unlisted company (small package). Financial executive is ready to sell it within 12 months if she got good offer. H. Company bought 20000 shares of listed company. Financial officer expects that of them will be sold in 2 month. The rest will be probably kept for longer (unstated) period.

H. Company Alfa bought 3500 Polish Treasury bonds. It is probable that 800 bonds will be resold in 8 weeks (to settle short term liabilities). Similar part will be resold next year. Chief Financial Officer want to hold to maturity 1000 bonds. How bonds should be classified? I. Entity X purchased 1000 shares of listed company. The shares are treated as long term investments. The entity (financial director) expects continuous increase of market value of shares. Financial director would like the entity to recognize any such increase in profit/loss for the period. How shares should be classified?

Financial investments IAS 39

* financial assets at fair value through profit or loss, Fair value; change P/L Although presentation in balance sheet depends on division according long-short term division or liquidity, measurement and recognition of change in value depend on classification to 4 categories. * loans and receivables Amortised cost; change (interest IRR or impairment loss) P/L * investments held to maturity (HTM) The same as for loans and receivables * financial assets available for sale (AFS) Fair value, change revaluation reserve

Example A entity X has 40000 in cash and 40000 as share capital. The entity purchased 1000 shares of Orlen at 20 pln/s. At balance sheet day the market value of one share is 25 pln. At following balance sheet day the market value of one share is 19 pln. Consider 2 possibilities: - shares were classified as FA at FV t. P/L - shares were classified as available for sale

Amortised cost
Initial value + interest accrued till date of measurement - amounts received as repayments - impairment loss amortised cost

Interest should be accrued under effective rate method = interest accrued with IRR (internal rate of return)