PAS/IAS 7

SUMMARY OF IAS 7

Objective of IAS 7 The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period according to operating, investing and financing activities. Fundamental Principle in IAS 7 All enterprises that prepare financial statements in conformity with IAS are required to present a cash flow statement. [IAS 7.1] The cash flow statement analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an enterprise's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8] Presentation of the Cash Flow Statement Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10] Key principles specified by IAS 7 for the preparation of a cash flow statement are as follows: operating activities are the main revenue-producing activities of the enterprise that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14] investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6] financing activities are activities that alter the equity capital and borrowing structure of the enterprise [IAS 7.6] interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period [IAS 7.31] cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35] for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18] The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the cash flow statement under the direct method would appear something like this: Cash receipts from customers xx,xxx Cash paid to suppliers xx,xxx Cash paid to employees xx,xxx Cash paid for other operating expenses xx,xxx Interest paid xx,xxx Income taxes paid xx,xxx Net cash from operating activities xx,xxx The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the cash flow statement under the indirect method would appear something like this: Profit before interest and income taxes   xx,xxx Add back depreciation   xx,xxx Add back amortisation of goodwill   xx,xxx Increase in receivables   xx,xxx Decrease in inventories   xx,xxx Increase in trade payables   xx,xxx Interest expense xx,xxx Less Interest accrued but not yet paid xx,xxx   Interest paid   xx,xxx Income taxes paid   xx,xxx Net cash from operating activities   xx,xxx cash flows relating to extraordinary items should be classified as operating, investing or financing as appropriate and should be separately disclosed [IAS 7.29] the exchange rate used for translation of transactions denominated in a foreign currency and the cash flows of a foreign subsidiary should be the rate in effect at the date of the cash flows [IAS 7.25] cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place [IAS 7.26] as regards the cash flows of associates and joint ventures, where the equity method is used, the cash flow statement should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash flow statement should include the venturer's share of the cash flows of the investee [IAS 7.37-38] aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.39] cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis: [IAS 7.22-24] cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a property) cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from credit card customers, and purchase and sale of investments) cash receipts and payments relating to fixed maturity deposits cash advances and loans made to customers and repayments thereof investing and financing transactions which do not require the use of cash should be excluded from the cash flow statement, but they should be separately disclosed elsewhere in the financial statements [IAS 7.43] the components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts reported in the balance sheet [IAS 7.45] the amount of cash and cash equivalents held by the enterprise that is not available for use by the group should be disclosed, together with a commentary by management [IAS 7.48] You will find a sample IAS cash flow statement in our Model IAS Financial Statements.

SUMMARY OF IAS 2

Objective of IAS 2 The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Scope Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6] However, IAS 2 excludes certain inventories from its scope: [IAS 2.2] work in process arising under construction contracts (see IAS 11, Construction Contracts financial instruments (see IAS 39, Financial Instruments) biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41, Agriculture). Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3] producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change. commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change. Fundamental Principle of IAS 2 Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9] Measurement of Inventories Cost should include all: [IAS 2.10] costs of purchase (including taxes, transport, and handling) net of trade discounts received costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition Inventory cost should not include: [IAS 2.16-2.18] abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms. The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22] For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS 2.23] For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed. The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the enterprise. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25] Write-Down to Net Realisable Value NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. [IAS 2.34] Expense Recognition IAS 18, Revenue, addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur. [IAS 2.34] Disclosure Required disclosures: [IAS 2.36] accounting policy for inventories. carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the enterprise. carrying amount of any inventories carried at fair value less costs to sell. amount of any write-down of inventories recognised as an expense in the period. amount of any reversal of a writedown to NRV and the circumstances that led to such reversal. carrying amount of inventories pledged as security for liabilities. cost of inventories recognised as expense (cost of goods sold). IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an enterprise to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). This is consistent with IAS 1, Presentation of Financial Statements, which allows presentation of expenses by function or nature.

PAS/IAS 1

SUMMARY OF IAS 1

Objective of IAS 1

The objective of IAS 1 (revised 1997) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity's financial statements of previous periods and with the financial statements of other entities. IAS 1 sets out the overall framework and responsibilities for the presentation of financial statements, guidelines for their structure and minimum requirements for the content of the financial statements. Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations.

Scope

Applies to all general purpose financial statements based on International Financial Reporting Standards. [IAS 1.2]

General purpose financial statements are those intended to serve users who do not have the authority to demand financial reports tailored for their own needs. [IAS 1.3]

Objective of Financial Statements

The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1.7]

• Assets.
  
• Liabilities.
  
• Equity.
  
• Income and expenses, including gains and losses.
  
• Other changes in equity.
  
• Cash flows.
  

That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.

Components of Financial Statements

A complete set of financial statements should include: [IAS 1.8]

• a balance sheet,
  
• income statement,
  
• a statement of changes in equity showing either:
  
  
  
  • all changes in equity, or
    
  • changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders;
    
  
  
• cash flow statement, and
  
• notes, comprising a summary of accounting policies and other explanatory notes.
  

Reports that are presented outside of the financial statements -- including financial reviews by management, environmental reports, and value added statements -- are outside the scope of IFRSs. [IAS 1.9-10]

Fair Presentation and Compliance with IFRSs

The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. [IAS 1.13]

IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs. [IAS 1.14]

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. [IAS 1.16]

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.17-18]

Going Concern

An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures. [IAS 1.23]

Accrual Basis of Accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. [IAS 1.25]

Consistency of Presentation

The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS. [IAS 1.27]

Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial. [IAS 1.29]

Offsetting>
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by a Standard or an Interpretation. [IAS 1.32]

Comparative Information

IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard requires otherwise. [IAS 1.36]

If comparative amounts are changed or reclassified, various disclosures are required. [IAS 1.38]

Structure and Content of Financial Statements in General

Clearly identify: [IAS 1.46]

• the financial statements
  
• the reporting enterprise
  
• whether the statements are for the enterprise or for a group
  
• the date or period covered
  
• the presentation currency
  
• the level of precision (thousands, millions, etc.)
  

Reporting Period

There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the enterprise must disclose the reason for the change and a warning about problems of comparability. [IAS 1.49]

Balance Sheet

An entity must normally present a classified balance sheet, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. [IAS 1.51] In either case, if an asset (liability) category commingles amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.52]

Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprise's normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent. [IAS 1.57]

Current liabilities are those to be settled within the enterprise's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent. [IAS 1.60]

Long-term debt expected to be refinanced under an existing loan facility is noncurrent, even if due within 12 months. [IAS 1.64]

If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the balance sheet date, the liability is current, even if the lender has agreed, after the balance sheet date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.65] However, the liability is classified as non-current if the lender agreed by the balance sheet date to provide a period of grace ending at least 12 months after the balance sheet date, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [IA 1.66]

Minimum items on the face of the balance sheet [IAS 1.68]

• (a) property, plant and equipment;
  
• (b) investment property;
  
• (c) intangible assets;
  
• (d) financial assets (excluding amounts shown under (e), (h) and (i));
  
• (e) investments accounted for using the equity method;
  
• (f) biological assets;
  
• (g) inventories;
  
• (h) trade and other receivables;
  
• (i) cash and cash equivalents;
  
• (j) trade and other payables;
  
• (k) provisions;
  
• (l) financial liabilities (excluding amounts shown under (j) and (k));
  
• (m) liabilities and assets for current tax, as defined in IAS 12;
  
• (n) deferred tax liabilities and deferred tax assets, as defined in IAS 12;
  
• (o) minority interest, presented within equity; and
  
• (p) issued capital and reserves attributable to equity holders of the parent.
  

Additional line items may be needed to fairly present the entity's financial position. [IAS 1.69]

IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable.

Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.76]

• numbers of shares authorised, issued and fully paid, and issued but not fully paid
  
• par value
  
• reconciliation of shares outstanding at the beginning and the end of the period
  
• description of rights, preferences, and restrictions
  
• treasury shares, including shares held by subsidiaries and associates
  
• shares reserved for issuance under options and contracts
  
• a description of the nature and purpose of each reserve within owners' equity
  

Income Statement

In the 2003 revision to IAS 1, the IASB is now using "profit or loss" rather than "net profit or loss" as the descriptive term for the bottom line of the income statement.

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.78]

Minimum items on the face of the income statement should include: [IAS 1.81]

• (a) revenue;
  
• (b) finance costs;
  
• (c) share of the profit or loss of associates and joint ventures accounted for using the equity method;
  
• (d) a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation; and;
  
• (e) tax expense; and
  
• (f) profit or loss.
  

The following items must also be disclosed on the face of the income statement as allocations of profit or loss for the period: [IAS 1.82]

• (a) profit or loss attributable to minority interest; and
  
• (b) profit or loss attributable to equity holders of the parent.
  

Additional line items may be needed to fairly present the enterprise's results of operations.

No items may be presented on the face of the income statement or in the notes as "extraordinary items". [IAS 1.85]

Certain items must be disclosed either on the face of the income statement or in the notes, if material, including: [IAS 1.87]

• (a) write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs;
  
• (b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
  
• (c) disposals of items of property, plant and equipment;
  
• (d) disposals of investments;
  
• (e) discontinuing operations;
  
• (f) litigation settlements; and
  
• (g) other reversals of provisions.
  

Expenses should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc.) either on the face of the income statement or in the notes. [IAS 1.88] If an enterprise categorises by function, additional information on the nature of expenses -- at a minimum depreciation, amortisation, and staff costs -- must be disclosed. [IAS 1.93]

Cash Flow Statement

Rather than setting out separate standards for presenting the cash flow statement, IAS 1.102 refers to IAS 7, Cash Flow Statements

Statement of Changes in Equity

IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.96]

• (a) profit or loss for the period;
  
• (b) each item of income and expense for the period that is recognised directly in equity, and the total of those items;
  
• (c) total income and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and
  
• (d) for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8.
  

The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.97]

• (a) capital transactions with owners;
  
• (b) the balance of accumulated profits at the beginning and at the end of the period, and the movements for the period; and
  
• (c) a reconciliation between the carrying amount of each class of equity capital, share premium and each reserve at the beginning and at the end of the period, disclosing each movement.
  

Notes to the Financial Statements

The notes must: [IAS 1.103]

• present information about the basis of preparation of the financial statements and the specific accounting policies used;
  
• disclose any information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement; and
  
• provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement that is deemed relevant to an understanding of any of them.
  

Notes should be cross-referenced from the face of the financial statements to the relevant note. [IAS 1.104]

IAS 1.105 suggests that the notes should normally be presented in the following order:

• a statement of compliance with IFRSs;
  
• a summary of significant accounting policies applied, including: [IAS 1.108]
  
  
  
  • the measurement basis (or bases) used in preparing the financial statements; and
    
  • the other accounting policies used that are relevant to an understanding of the financial statements.
    
  
  
• supporting information for items presented on the face of the balance sheet, income statement, statement of changes in equity, and cash flow statement, in the order in which each statement and each line item is presented; and
  
• other disclosures, including:
  
  
  
  • contingent liabilities (see IAS 37) and unrecognised contractual commitments; and
    
  • non-financial disclosures, such as the entity's financial risk management objectives and policies (see IAS 32).
    
  
  

Disclosure of judgements. New in the 2003 revision to IAS 1, an entity must disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognised in the financial statements. [IAS 1.113]

Examples cited in IAS 1.114 include management's judgements in determining:

• whether financial assets are held-to-maturity investments;
  
• when substantially all the significant risks and rewards of
  ownership of financial assets and lease assets are transferred to
  other entities;
  
• whether, in substance, particular sales of goods are financing
  arrangements and therefore do not give rise to revenue; and
  
• whether the substance of the relationship between the entity and
  a special purpose entity indicates that the special purpose entity
  is controlled by the entity.
  

Disclosure of key sources of estimation uncertainty. Also new in the 2003 revision to IAS 1, an entity must disclose,
in the notes, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. [IAS 1.116] These disclosures do not involve disclosing budgets or forecasts.

The following other note disclosures are required by IAS 1.126 if not disclosed elsewhere in information published with the financial statements:

• domicile of the enterprise;
  
• country of incorporation;
  
• address of registered office or principal place of business;
  
• description of the enterprise's operations and principal activities;
  
• name of its parent and the ultimate parent if it is part of a group.
  

Disclosures about Dividends

The following must be disclosed either on the face of the income statement or the statement of changes in equity or in the notes: [IAS 1.95]

• the amount of dividends recognised as distributions to equity holders during the period, and
  
• the related amount per share.
  

The following must be disclosed in the notes: {IAS 1.125]

• the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to equity holders during the period, and the related amount per share; and
  
• the amount of any cumulative preference dividends not recognised.
  

August 2005 Amendments re Capital Disclosures

As part of its project to develop IFRS 7 Financial Instruments: Disclosures, the IASB concluded also to amend IAS 1 to add requirements for disclosures of:

• the entity's objectives, policies and processes for managing capital;
  
• quantitative data about what the entity regards as capital;
  
• whether the entity has complied with any capital requirements; and
  
• if it has not complied, the consequences of such non-compliance.
  

These disclosure requirements apply to all entities, effective for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Illustrative examples are provided as guidance.