Kozminski University

Corporate Financial Reporting

(1)

PhD Adrian Struciński

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Mode of assessment
Case study 50 points
Written exam 50 points
Additional short tests 10 points

Grading scheme:
• 5 92 – 100
• 4+ 84 – 91
• 4 76 – 83
• 3+ 68 – 75
• 3 60 – 67
• 2 0 – 59

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Corporate Financial Reporting:
• Corporate reporting standards
• Financial reporting framework
• Communication and reporting systems in business

External users of information on financial position and financial performance of business

entities:

Owners

Competitors Lenders

External
Community Suppliers
users

Government
and tax Customers
authorities
Investment
analysts

Internal Employeees
Managers users

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1. Financial reporting framework
1.1 International Standards

The International Financial Reporting Standards Foundation or IFRS Foundation

(formerly known as The International Accounting Standards Committee or IASC Foundation) –
not-for-profit international organisation responsible for developing and promoting global
accounting standards – IFRS Standards.

The International Accounting Standards Board or IASB - an independent, private-sector

body which operates under IFRS Foundation. IASB is responsible for developing, approving
and publishing International Financial Reporting Standards (IFRSs), so it deals with technical
matters of the IFRS Foundation. IASB is the successor of the International Accounting
Standards Committee (IASC).

International Financial Reporting Standards or IFRSs - common global accounting

standards issued by IASB. The main aim of IFRSs is to provide common language for business.
They replaced some of International Accounting Standards (IAS) issued by IASC, but many of
IAS are still within use.

1.1 The Conceptual Framework for Financial Reporting

1.1.1 Goals of The Conceptual Framework for Financial Reporting

The Conceptual Framework for Financial Reporting, issued by IASB, is a statement of

generally accepted theoretical accounting principles and it provides frame for financial
reporting. It gradually replaces The Framework for the Presentation of Financial Reporting
produced in 1989. IASB issued The Conceptual Framework for Financial Reporting because:

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• there has been increasing need for global standards as a result of the growth of the
global economy,
• key elements of financial statements, like assets, liabilities have various definitions in
different countries as well as they apply various criteria for recognition of items in
financial reports.

Above mentioned factors result in low comparability of entities reporting under different legal
systems which hamper evaluation of company’s performance and financial position. The main
goal of The Conceptual Framework for Financial Reporting is to support harmonisation of
national regulations. IASB enumerates following purposes of The Conceptual Framework for
Financial Reporting:

a) to assist the Board in the development of future IFRSs and in its review of existing
IFRSs;
b) to assist the Board in promoting harmonisation of regulations, accounting standards and
procedures relating to the presentation of financial statements by providing a basis for
reducing the number of alternative accounting treatments permitted by IFRSs;
c) to assist national standard-setting bodies in developing national standards;
d) to assist preparers of financial statements in applying IFRSs and in dealing with topics
that have yet to form the subject of an IFRS;
e) to assist auditors in forming an opinion on whether financial statements comply with
IFRSs;
f) to assist users of financial statements in interpreting the information contained in
financial statements prepared in compliance with IFRSs; and
g) to provide those who are interested in the work of the IASB with information about its
approach to the formulation of IFRSs.

However it must be noted that The Conceptual Framework for Financial Reporting is not an
IFRS hence it does not override any individual IFRS. In case of any conflicts the IFRS prevails
over The Conceptual Framework for Financial Reporting.

1.1.2 The objective of general purpose financial reporting

I. The Conceptual Framework for Financial Reporting states that:

a) The objective of general purpose financial reporting is to provide financial

information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to
the entity. Those decisions involve buying, selling or holding equity and debt
instruments, and providing or settling loans and other forms of credit.

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b) (…) Investors’, lenders’ and other creditors’ expectations about returns depend on their
assessment of the amount, timing and uncertainty of (the prospects for) future net
cash inflows to the entity. Consequently, existing and potential investors, lenders and
other creditors need information to help them assess the prospects for future net cash
inflows to an entity.
c) To assess an entity’s prospects for future net cash inflows, existing and potential
investors, lenders and other creditors need information about the resources of the
entity, claims against the entity, and how efficiently and effectively the entity’s
management and governing board have discharged their responsibilities to use the
entity’s resources.
d) However, general purpose financial reports do not and cannot provide all of the
information that existing and potential investors, lenders and other creditors need.
Those users need to consider pertinent information from other sources, for example,
general economic conditions and expectations, political events and political climate, and
industry and company outlooks. General purpose financial reports are not designed to
show the value of a reporting entity; but they provide information to help existing and
potential investors, lenders and other creditors to estimate the value of the reporting
entity.
e) The management of a reporting entity is also interested in financial information about
the entity. However, management need not rely on general purpose financial reports
because it is able to obtain the financial information it needs internally. Other parties,
such as regulators and members of the public other than investors, lenders and other
creditors, may also find general purpose financial reports useful. However, those
reports are not primarily directed to these other groups.

II. The Conceptual Framework for Financial Reporting indicates following information as
being especially useful for investors, lenders and other creditors:

a) Economic resources and claims

a. Information about the nature and amounts of a reporting entity’s economic
resources and claims can help users to (…) to assess the reporting entity’s
liquidity and solvency, its needs for additional financing (…). Information
about priorities and payment requirements of existing claims helps users to
predict how future cash flows will be distributed among those with a claim
against the reporting entity.
b. Different types of economic resources affect a user’s assessment of the reporting
entity’s prospects for future cash flows differently. Some future cash flows result
directly from existing economic resources, such as accounts receivable. Other

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cash flows result from using several resources in combination to produce and
market goods or services to customers. (…)
b) Changes in economic resources and claims
a. Changes in a reporting entity’s economic resources and claims result from that
entity’s financial performance and from other events or transactions such as
issuing debt or equity instruments. To properly assess the prospects for future
cash flows from the reporting entity, users need to be able to distinguish
between both of these changes.
b. Information about a reporting entity’s financial performance helps users to
understand the return that the entity has produced on its economic resources.
Information about the return the entity has produced provides an indication of
how well management has discharged its responsibilities to make efficient and
effective use of the reporting entity’s resources. Information about the variability
and components of that return is also important, especially in assessing the
uncertainty of future cash flows. Information about a reporting entity’s past
financial performance and how its management discharged its responsibilities is
usually helpful in predicting the entity’s future returns on its economic
resources.
c) Financial performance reflected by accrual accounting

Example 1.1

Please, explain what “accrual accounting” means and give an example.

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a. Information about a reporting entity’s financial performance during a period,
reflected by changes in its economic resources and claims other than by
obtaining additional resources directly from investors and creditors, is
useful in assessing the entity’s past and future ability to generate net cash
inflows. That information indicates the extent to which the reporting entity
has increased its available economic resources, and thus its capacity for
generating net cash inflows through its operations rather than by obtaining
additional resources directly from investors and creditors.
d) Financial performance reflected by past cash flows
a. Information about a reporting entity’s cash flows during a period also helps users
to assess the entity’s ability to generate future net cash inflows. It indicates
how the reporting entity obtains and spends cash, including information
about its borrowing and repayment of debt, cash dividends or other cash
distributions to investors, and other factors that may affect the entity’s liquidity
or solvency. Information about cash flows helps users understand a reporting
entity’s operations, evaluate its financing and investing activities, assess its
liquidity or solvency and interpret other information about financial
performance.

1.1.3 Qualitative characteristics of useful financial information

The Conceptual Framework for Financial Reporting underlines two fundamental qualities of
financial information if it is to be useful:

• Relevance
• Faithful representation.

Moreover, according to The Conceptual Framework for Financial Reporting usefulness of

financial information is enhanced by some additional qualitative characteristics:

• Comparability
• Verifiability
• Timeliness
• Understandability

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I. Fundamental qualitative characteristics of useful financial information

The Conceptual Framework for Financial Reporting defines relevant information as:

a) Relevant financial information is capable of making a difference in the decisions

made by users.
b) Financial information is capable of making a difference in decisions if it has predictive
value, confirmatory value or both.
a. Financial information has predictive value if it can be used as an input to
processes employed by users to predict future outcomes. Financial information
need not be a prediction or forecast to have predictive value. Financial
information with predictive value is employed by users in making their own
predictions.
b. Financial information has confirmatory value if it provides feedback about
(confirms or changes) previous evaluations.

Example1.2

Explain predictive and confirmatory value of information on entity’s revenues.

Relevance of information is connected with materiality. The Conceptual Framework for

Financial Reporting states that “information is material if omitting it or misstating it could
influence decisions that users make on the basis of financial information about a specific
reporting entity.”

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The Conceptual Framework for Financial Reporting asserts that relevance of information is not
enough to make it useful for users. Financial information must also faithfully represent the
phenomena, so according to The Conceptual Framework for Financial Reporting depiction
should be:

a) Complete - depiction should include all information necessary for a user to understand
the phenomenon being depicted, including all necessary descriptions and explanations.
b) Neutral - neutral depiction is without bias in the selection or presentation of financial
information. A neutral depiction is not manipulated to increase the probability that
financial information will be received favourably or unfavourably by users.
c) Free from error – it means there are no errors or omissions in the description of
the phenomenon, and the process used to produce the reported information has been
selected and applied with no errors in the process.

Example 1.3

Does free from error mean that all information in financial reports must be perfectly accurate?

II. Enhancing qualitative characteristics

The Conceptual Framework for Financial Reporting provides following definitions of

enhancing qualitative characteristics:

a) Comparability is the qualitative characteristic that enables users to identify and

understand similarities in, and differences among, items. (…) Users’ decisions involve
choosing between alternatives, for example, selling or holding an investment, or
investing in one reporting entity or another. Consequently, information about a reporting
entity is more useful if it can be compared with similar information about other entities
and with similar information about the same entity for another period or another date.

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b) Verifiability means that different knowledgeable and independent observers could
reach consensus, although not necessarily complete agreement, that a particular
depiction is a faithful representation. (…) An example of verification is verifying the
carrying amount of inventory by checking the inputs (quantities and costs) and
recalculating the ending inventory using the same cost flow assumption (for example,
using the first-in, first-out method). (…) Verifiability helps assure users that information
faithfully represents the economic phenomena it purports to represent.
c) Timeliness means having information available to decision-makers in time to be
capable of influencing their decisions. Generally, the older the information is the less
useful it is. However, some information may continue to be timely long after the end of
a reporting period because, for example, some users may need to identify and assess
trends.
d) Understandability means classifying, characterising and presenting information
clearly and concisely. Financial reports are prepared for users who have a reasonable
knowledge of business and economic activities and who review and analyse the
information diligently. Some phenomena are inherently complex and cannot be made
easy to understand. Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to understand.
However, those reports would be incomplete and therefore potentially misleading.

III. The cost constraint

Collecting, processing and disseminating financial information may involve significant costs.
However, if users are provided with relevant information, which faithfully represents what it
purports to represent, then they can make decisions with more confidence and expect lower
return on investment. Thus, as The Conceptual Framework for Financial Reporting states, the
Board of the company has to assess whether the benefits of reporting particular information are
likely to justify the costs incurred to provide and use that information.

1.1.4 Going concern – assumption underlying financial reporting

The Conceptual Framework for Financial Reporting point out that the financial statements are
normally prepared on the assumption that an entity is a going concern and will continue in
operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention
nor the need to liquidate or curtail materially the scale of its operations; if such an intention or
need exists, the financial statements may have to be prepared on a different basis and, if so, the
basis used is disclosed.

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1.1.5 The elements of financial statements

Elements directly related

to the measurement of
financial position

Assets Liabilities Equity

Elements directly related to

the measurement of
performance

Income Expenses

I. Financial position

The Conceptual Framework for Financial Reporting defines elements related to financial
positions as:

a) An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity:
a. The future economic benefits embodied in an asset may flow to the entity in a
number of ways. For example, an asset may be:
i. used singly or in combination with other assets in the production of
goods or services to be sold by the entity;
ii. exchanged for other assets;
iii. used to settle a liability; or

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iv. distributed to the owners of the entity.
b. Many assets, for example, property, plant and equipment, have a physical form.
However, physical form is not essential to the existence of an asset; hence
patents and copyrights, for example, are assets if future economic benefits are
expected to flow from them to the entity and if they are controlled by the entity.
c. The assets of an entity result from past transactions or other past events.
Entities normally obtain assets by purchasing or producing them, but other
transactions or events may generate assets; examples include property received
by an entity from government as part of a programme to encourage economic
growth in an area and the discovery of mineral deposits. Transactions or events
expected to occur in the future do not in themselves give rise to assets; hence,
for example, an intention to purchase inventory does not, of itself, meet the
definition of an asset.
b) A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits.
a. An essential characteristic of a liability is that the entity has a present obligation.
b. A distinction needs to be drawn between a present obligation and a future
commitment. A decision by the management of an entity to acquire assets in the
future does not, of itself, give rise to a present obligation. An obligation normally
arises only when the asset is delivered or the entity enters into an irrevocable
agreement to acquire the asset.
c. Settlement of a present obligation may occur in a number of ways, for example,
by:
i. payment of cash;
ii. transfer of other assets;
iii. provision of services;
iv. replacement of that obligation with another obligation; or
v. conversion of the obligation to equity.
c) Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Substance over form:

It must be noted that in assessing whether an item meets the definition of an asset, liability or
equity, attention needs to be given to its underlying substance and economic reality and
not merely its legal form. Thus, for example, in the case of finance leases, the substance and
economic reality are that the lessee acquires the economic benefits of the use of the leased asset
for the major part of its useful life in return for entering into an obligation to pay for that right

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an amount approximating to the fair value of the asset and the related finance charge. Hence,
the finance lease gives rise to items that satisfy the definition of an asset and a liability and are
recognised as such in the lessee’s balance sheet.

II. Performance

The Conceptual Framework for Financial Reporting defines elements related to performance
as:

a) Income is increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants.
a. The definition of income encompasses both revenue and gains.
i. Revenue arises in the course of the ordinary activities of an entity and is
referred to by a variety of different names including sales, fees, interest,
dividends, royalties and rent.
ii. Gains represent other items that meet the definition of income and may,
or may not, arise in the course of the ordinary activities of an entity.
Gains represent increases in economic benefits and as such are no
different in nature from revenue. Gains include, for example, those
arising on the disposal of non-current assets. The definition of income
also includes unrealised gains; for example, those arising on the
revaluation of marketable securities and those resulting from increases
in the carrying amount of long-term assets. When gains are recognised
in the income statement, they are usually displayed separately because
knowledge of them is useful for the purpose of making economic
decisions.

Example 1.4

Issue of shares is an inflow of benefits (in the form of cash) to company and increases equity.
Please, answer if the issue of shares should be recorded as Income?

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b) Expenses are decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants.
a. The definition of expenses encompasses losses as well as those expenses that
arise in the course of the ordinary activities of the entity.
i. Expenses that arise in the course of the ordinary activities of the
entity include, for example, cost of sales, wages and depreciation.
ii. Losses represent other items that meet the definition of expenses and
may, or may not, arise in the course of the ordinary activities of the
entity. Losses represent decreases in economic benefits and as such they
are no different in nature from other expenses. Losses include, for
example, those resulting from disasters such as fire and flood, as well as
those arising on the disposal of non-current assets. The definition of
expenses also includes unrealised losses, for example, those arising from
the effects of increases in the rate of exchange for a foreign currency in
respect of the borrowings of an entity in that currency. When losses are
recognised in the income statement, they are usually displayed separately
because knowledge of them is useful for the purpose of making
economic decisions.

Example 1.5

Payment of dividends is an outflow of benefits (in the form of cash) from the company and
decreases equity. Please, answer if dividends should be recorded as Expense?

1.1.6 Recognition of the elements of financial statements

According to The Conceptual Framework for Financial Reporting:

a) An item that meets the definition of an element should be recognised if:

a. it is probable that any future economic benefit associated with the item will
flow to or from the entity; and

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b. the item has a cost or value that can be measured with reliability (information is
reliable when it is complete, neutral and free form error).

I. Recognition of assets

The Conceptual Framework for Financial Reporting states, that an asset is recognised in the
balance sheet when it is probable that the future economic benefits will flow to the entity and
the asset has a cost or value that can be measured reliably:

a) An asset is not recognised in the balance sheet when expenditure has been incurred for
which it is considered improbable that economic benefits will flow to the entity beyond
the current accounting period. Instead such a transaction results in the recognition of an
expense in the income statement
b) The second criterion for the recognition of an asset is that it possesses a cost or value
that can be measured with reliability. In many cases, cost or value must be estimated;
the use of reasonable estimates is an essential part of the preparation of financial
statements and does not undermine their reliability. When, however, a reasonable
estimate cannot be made the item is not recognised in the balance sheet or income
statement.

Example 1.6

Please, answer if the expected proceeds from a lawsuit can be recorded as an asset.

II. Recognition of liabilities

The Conceptual Framework for Financial Reporting states, that a liability is recognised in the
balance sheet when it is probable that an outflow of resources embodying economic benefits
will result from the settlement of a present obligation and the amount at which the settlement
will take place can be measured reliably.

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III. Recognition of income

The Conceptual Framework for Financial Reporting states, that income is recognised in the
income statement when an increase in future economic benefits related to an increase in an asset
or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that
recognition of income occurs simultaneously with the recognition of increases in assets or
decreases in liabilities (for example, the net increase in assets arising on a sale of goods or
services or the decrease in liabilities arising from the waiver of a debt payable).

IV. Recognition of expense

The Conceptual Framework for Financial Reporting states, that expenses are recognised in the
income statement when a decrease in future economic benefits related to a decrease in an asset
or an increase of a liability has arisen that can be measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with the recognition of an increase in liabilities
or a decrease in assets (for example, the accrual of employee entitlements or the depreciation
of equipment):

a) Expenses are recognised in the income statement on the basis of a direct association
between the costs incurred and the earning of specific items of income. This process,
commonly referred to as the matching of costs with revenues, involves the simultaneous
or combined recognition of revenues and expenses that result directly and jointly from
the same transactions or other events.

Example 1.7

Please, give an example of matching expenses with revenues and explain how this rule affects
financial position and performance of the business entity.

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b) When economic benefits are expected to arise over several accounting periods and the
association with income can only be broadly or indirectly determined, expenses are
recognised in the income statement on the basis of systematic and rational allocation
procedures.

Example 1.8

Please, give an example of expenses recognized in the income statement over a specified period
of time.

c) An expense is recognised immediately in the income statement when an expenditure

produces no future economic benefits or when, and to the extent that, future economic
benefits do not qualify, or cease to qualify, for recognition in the balance sheet as an
asset.

Example 1.9

Please, give an example of expenses recognized immediately in the income statement.

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2. Financial Statements presentation
2.1 General purpose financial statements

Presentation of financial statements is determined by International Accounting Standard 1 (IAS

1) Presentation of Financial Statements, which states that:

a) General purpose financial statements (financial statements) are those intended to

meet the needs of users who are not in a position to require an entity to prepare reports
tailored to their particular information needs.
b) Financial statements are a structured representation of the financial position and
financial performance of an entity. The objective of 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. Financial
statements also show the results of the management’s stewardship of the resources
entrusted to it. To meet this objective, financial statements provide information about
an entity’s:
a. assets;
b. liabilities;
c. equity;
d. income and expenses, including gains and losses;
e. contributions by and distributions to owners in their capacity as owners; and
f. cash flows.

According to IAS 1, a complete set of financial statements comprises:

c) a statement of financial position as at the end of the period;

d) a statement of profit or loss and other comprehensive income for the period (statement
of comprehensive income);
e) a statement of changes in equity for the period;
f) a statement of cash flows for the period;
g) notes, comprising significant accounting policies and other explanatory information;
h) comparative information in respect of the preceding period
i) a statement of financial position as at the beginning of the preceding period when an
entity applies an accounting policy retrospectively or makes a retrospective restatement
of items in its financial statements, or when it reclassifies items in its financial
statements.

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2.2 Frequency of reporting

IAS 1 states that an entity shall present a complete set of financial statements (including
comparative information) at least annually. When an entity changes the end of its reporting
period and presents financial statements for a period longer or shorter than one year, an entity
shall disclose, in addition to the period covered by the financial statements:

a) the reason for using a longer or shorter period, and

b) the fact that amounts presented in the financial statements are not entirely comparable.

2.3 Comparative information

IAS 1 requires from entity to present comparative information in respect of the preceding period
for all amounts reported in the current period’s financial statements. Business entity should
present, as a minimum, two statements of financial position, two statements for comprehensive
income, two statements of cash flow, two statements of changes in equity and related notes.

2.4 Statement of financial position

According to IAS 1, the statement of financial position should include following items:

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 within the scope of IAS 41 Agriculture;
g) inventories;
h) trade and other receivables;
i) cash and cash equivalents;
j) the total of assets classified as held for sale and assets included in disposal groups
classified as held for sale in
k) trade and other payables;
l) provisions;
m) financial liabilities (excluding amounts shown under (k) and (l));
n) liabilities and assets for current tax,
o) deferred tax liabilities and deferred tax assets,
p) liabilities included in disposal groups classified as held for sale
q) non-controlling interests, presented within equity; and

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r) issued capital and reserves attributable to owners of the parent.

IAS 1 states that an entity shall present current and non-current assets, and current and non-
current liabilities, as separate classifications in its statement of financial position except when
a presentation based on liquidity provides information that is reliable and more relevant. When
that exception applies, an entity shall present all assets and liabilities in order of liquidity.

An entity shall classify an asset as current when:

a) it expects to realise the asset, or intends to sell or consume it, in its normal operating
cycle;
b) it holds the asset primarily for the purpose of trading;
c) it expects to realise the asset within twelve months after the reporting period; or
d) the asset is cash or a cash equivalent unless the asset is restricted from being exchanged
or used to settle a liability for at least twelve months after the reporting period.

An entity shall classify all other assets as non-current.

An entity shall classify a liability as current when:

a) it expects to settle the liability in its normal operating cycle;

b) it holds the liability primarily for the purpose of trading;
c) the liability is due to be settled within twelve months after the reporting period; or
d) it does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period

An entity shall classify all other liabilities as non-current.

An entity shall disclose, either in the statement of financial position or in the notes, further
subclassifications of the line items presented, classified in a manner appropriate to the entity’s
operations.

Example of statement of financial position:

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Statement of financial position

20X8 20X7
Assets €'000 €'000
Non-current assets
Property, plant and equipment 470 000 380 000
Goodwill 25 000 11 000
Other intangible assets 95 000 104 000
Investments in equity instruments 17 000 23 000
607 000 518 000
Current assets
Inventories 72 000 82 000
Trade receivables 95 000 69 000
Cash and cash equivalents 38 000 49 000
205 000 200 000

Total assets 812 000 718 000

Equity and liabilities

Equity attributable to owners of the parent
Share capital 170 000 140 000
Share premium (additional paid-in capital) 380 000 290 000
Retained earnings 42 000 27 000
Other components of equity 15 000 13 000
607 000 470 000
Non-controlling interest 35 000 28 000

Total equity 642 000 498 000

Non-current liabilities
Long-term borrowings 45 000 54 000
Deferred tax 12 000 16 000
Long-term provisions 7 000 11 000
64 000 81 000
Current liabilities
Trade and other payables 57 000 75 000
Short-term borrowings 35 000 47 000
Current portion of long-term borrowings 9 000 12 000
Current tax payable 4 000 3 000
Short term provisions 1 000 2 000
106 000 139 000

Total liabilities 170 000 220 000

Total equity and liabilities 812 000 718 000

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2.5 Statement of comprehensive income

According to IAS 1 the statement of profit or loss and other comprehensive income
(statement of comprehensive income) shall present:

a) profit or loss;
b) total other comprehensive income;
c) comprehensive income for the period, being the total of profit or loss and other
comprehensive income.

Other comprehensive income comprises items of income and expense (including

reclassification adjustments) that are not recognised in profit or loss as required or permitted
by other IFRSs.

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In addition to items required by other IFRSs, statement of profit and loss and other
comprehensive income should include:

In the profit or loss section In the other comprehensive income section

revenue, presenting separately interest revenue

items which will not be reclassified

subsequently to profit or loss
gains and losses arising from the derecognition of financial
assets measured at amortised cost

finance costs

items which will be reclassified

subsequently to profit or loss when
specific conditions are met
impairment losses (including reversals of impairment losses)

share of the profit or loss of associates and joint ventures

accounted for using the equity method
An entity may present items of other
comprehensive income either net of
if a financial asset is reclassified out of the amortised cost related tax effects, or before related
measurement category so that it is measured at fair value tax effects with one amount shown
through profit or loss, any gain or loss arising from a difference for the aggregate amount of income
between the previous amortised cost of the financial asset and tax relating to those items. If an
its fair value at the reclassification date entity elects second alternative, it
shall allocate the tax between the
items that might be reclassified
subsequently to the profit or loss
if a financial asset is reclassified out of the fair value through section and those that will not be
other comprehensive income measurement category so that it is reclassified subsequently to the
measured at fair value through profit or loss, any cumulative profit or loss section.
gain or loss previously recognised in other comprehensive
income that is reclassified to profit or loss

comprehensive income for the period

tax expense
attributable to:
- non-controlling interests, and
- owners of the parent

a single amount for the total of discontinued operations

profit or loss for the period attributable to:

- non-controlling interests, and
- owners of the parent

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IAS 1 asserts that an entity shall not present any items of income or expense as
extraordinary items, in the statement(s) presenting profit or loss and other comprehensive
income or in the notes.

IAS 1 allows two classifications of expenses in the Statement of Profit or Loss:

a) classification based on the nature of expenses – an entity aggregates expenses

according to their nature (e.g. depreciation, purchases of materials, advertising costs)
b) classification based on the function of expenses within the entity (costs of sales, costs
of distribution or administrative costs)

An entity classifying expenses by function shall disclose additional information on the nature
of expenses, including depreciation and amortisation expense and employee benefits expense.

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Statement of profit and loss and other comprehensive income
- classification based on the nature of expenses 20X8 20X7
€'000 €'000
Net sales 272 000 247 000
Other operating income 31 000 12 000
Changes in inventories of finished goods and work in progress (36 000) (21 000)
Purchases of materials (127 000) (105 000)
Employee benefits (54 000) (50 000)
Depreciation (35 000) (31 000)
Impairment loss (8 000) (6 500)
Other operating expenses (14 000) (12 000)

Operating income 29 000 33 500

Interest and other financial income 3 000 1 000

Interest and other financial expenses (19 000) (16 000)

Income before tax 13 000 18 500

Income taxes (3 000) (4 700)

Profit for the year from continuing operations 10 000 13 800

Loss for the year from discontinued operations (2 000) 0

Net profit for the year 8 000 13 800

Net profit for the year attributable to:

Shareholders of the parent company 7 800 13 400
Non-controlling interest 200 400

Other comprehensive income

Items that will not be reclassified to profit or loss

Gains on property revaluation 3 000 (1 700)
Investment in equity instruments (12 000) 9 000
Income tax relating to items that will not be reclassified 2 700 (1 300)

Items that may be reclassified to profit or loss

Cash flow hedges 3 700 5 600
Exchange differences on translating foreign operations (1 200) 3 200
Income tax relating to items that may be reclassified (500) (1 600)

Other comprehensive income for the year, net of tax (4 300) 13 200

Total comprehensive income for the year 3 700 27 000

Total comprehensive income attributable to:

Shareholders of the parent company 3 900 25 800
Non-controlling interest (200) 1 200

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Statement of profit and loss and other comprehensive income
- classification based on the function of expenses 20X8 20X7
€'000 €'000
Net sales 272 000 247 000
Cost of sales (109 000) (100 700)
Gross profit 163 000 146 300
Other operating income 31 000 12 000
Selling and distribution costs (35 500) (35 300)
Administrative expenses (52 500) (49 000)
Other operating expenses (15 000) (16 500)

Operating income 29 000 33 500

Interest and other financial income 3 000 1 000

Interest and other financial expenses (19 000) (16 000)

Income before tax 13 000 18 500

Income taxes (3 000) (4 700)

Profit for the year from continuing operations 10 000 13 800

Loss for the year from discontinued operations (2 000) 0

Net profit for the year 8 000 13 800

Net profit for the year attributable to:

Shareholders of the parent company 7 800 13 400
Non-controlling interest 200 400

Other comprehensive income

Items that will not be reclassified to profit or loss

Gains on property revaluation 3 000 (1 700)
Investment in equity instruments (12 000) 9 000
Income tax relating to items that will not be reclassified 2 700 (1 300)

Items that may be reclassified to profit or loss

Cash flow hedges 3 700 5 600
Exchange differences on translating foreign operations (1 200) 3 200
Income tax relating to items that may be reclassified (500) (1 600)

Other comprehensive income for the year, net of tax (4 300) 13 200

Total comprehensive income for the year 3 700 27 000

Total comprehensive income attributable to:

Shareholders of the parent company 3 900 25 800
Non-controlling interest (200) 1 200

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2.6 Statement of changes in equity

IAS 1 states that the statement of changes in equity includes the following information:

a) total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests;
b) for each component of equity, the effects of retrospective application or retrospective
restatement recognised
c) for each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately (as a minimum) disclosing changes
resulting from:
a. profit or loss;
b. other comprehensive income; and
c. transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners and changes in ownership interests
in subsidiaries that do not result in a loss of control.

Example of the statement of changes in equity

Share Retained Cash flow Revaluation

Share capital premium earnings hedges surplus Total
€'000 €'000 €'000 €'000 €'000 €'000
Balance at 1
January 20X7 700 000 1 500 000 230 000 19 000 6 000 2 455 000
Dividends -90 000 -90 000
Total
comprehensive
income 115 000 4 000 3 000 122 000
Balance at 31
December
20X7 700 000 1 500 000 255 000 23 000 9 000 2 487 000
Changes in
equity for
20X8
Issue of shares 200 000 150 000 350 000
Dividends -100 000 -100 000
Total
comprehensive
income 140 000 -7 000 -2 000 131 000
Transfer to
retained
earnings 4 000 -4 000 0
Balance at 31
December
20X8 900 000 1 650 000 299 000 16 000 3 000 2 868 000

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2.7 Notes

IAS 1 asserts that the notes shall:

a) present information about the basis of preparation of the financial statements and the
specific accounting policies used;
b) disclose the information required by IFRSs that is not presented elsewhere in the
financial statements; and
c) provide information that is not presented elsewhere in the financial statements, but is
relevant to an understanding of any of them.

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