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Performance Reporting under IFRS

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					Performance Reporting under IFRS
by Peter Casson


Executive Summary
 •    International Accounting Standard 1 (revised), “Presentation of financial statements,” requires
      companies to report their performance in a statement of comprehensive income.
 •    The International Accounting Standards Board (IASB) and the US Financial Accounting Standards
      Board (FASB) have agreed to converge their financial reporting standards.
 •    As part of the convergence, the IASB and FASB are developing a new standard that is likely to affect
      the way in which performance is reported in the future.


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.

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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:



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 •    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.


Performance Reporting under IFRS in the Future
The IASB and the FASB agreed in 2004 to conduct a joint project on the presentation of financial statements
with a view to developing a standard on the organization and presentation of information in such statements.
As part of this project, the IASB and FASB issued a joint discussion paper, “Preliminary views on financial
                                    1
statement presentation,” in 2008.
In the discussion paper, the IASB and FASB propose a classification of items within a statement of
comprehensive income. This classification first distinguishes between continuing and discontinued
operations, and then further classifies continuing operations into business and financing, with further
subclassifications of business and financing. As a result, the statement of comprehensive income would
present the following components of comprehensive income:
Business:
 •    Operating income and expenses;
 •    Investment income and expenses.
Financing:
 •    Financing asset income;
 •    Financing liability expenses;
 •    Income taxes on continuing operations (business and financing);
 •    Discontinued operations (net of tax);
 •    Other comprehensive income.
The statement would also include a subtotal for profit or loss and a total for comprehensive income
for the period. Under the proposals, all companies would be required to present a single statement of
comprehensive income.


Alternative Performance Measures
Companies frequently report additional performance measures to those required under IFRS. Such
additional measures may be designed to reflect the particular circumstances of the company and/or
special features of the period being reported. In some cases these alternative performance measures are
derived directly from a company’s audited financial statements. This includes such measures as EBIT
(earnings before interest and tax) and EBITDA (earnings before interest, tax, depreciation, and amortization).
Sometimes the measures require adjustments to the figures reported under IFRS, such as “non-IFRS
income” and “non-IFRS earnings per share.” While some companies define and explain the alternative
performance measures they use, others do not.



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There are two explanations for the publication of alternative performance measures. The first is that
company managers are providing additional information in order to reduce information asymmetry. For
example, accounting information is adjusted for items that are regarded as transitory. The alternative
explanation is that managers report these numbers with the intention of misleading readers of financial
reports. Regulators have therefore attempted to address potential abuse. For example, the Committee of
European Securities Regulators (CESR) issued recommendations on the use of alternative performance
measures in 2005.


Conclusion
IAS 1 (revised) requires companies to present a statement of comprehensive income which includes the
profit or loss for the period together with other components of comprehensive income. The IASB assumes
that compliance with the provisions of the standard should ensure that companies provide users of financial
reports with key information that informs economic decisions.


Making It Happen
 •     The preparation of a statement of comprehensive income, together with the accompanying notes,
       requires compliance with IAS 1 (revised) and the application of IFRS with the overall objective of fairly
       representing the transactions and other events of the reporting entity.
 •     There may be circumstances in which a company needs to depart from IFRS in order to provide a fair
       representation.
 •     Users of financial statements should be aware of the accounting standards, and of any departures from
       standards, in their analysis of the statement of comprehensive income.


More Info
Book:
 •     Ernst & Young. International GAAP® 2009. 2 vols. Chichester, UK: Wiley, 2009. Online at:
       www.wiley.com/legacy/igaap09

Websites:
 •     Deloitte—IAS Plus: www.iasplus.com
 •     International Accounting Standards Board (IASB): www.iasb.org


Notes
1 FASB/IASB, “Discussion paper, preliminary views on financial statement presentation,” October 16, 2008.
Online at: www.fasb.org/draft/index.shtml.

To see this article on-line, please visit
http://www.qfinance.com/regulatory-compliance-best-practice/performance-reporting-under-ifrs?full




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