Performance Reporting
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The Big Picture The Big Picture
Revenue recognition may arguably be named as “
Revenue recognition may arguably be named as “the the ” key issue of financial reporting, as, on” key issue of financial reporting, as, on the one hand, reported turnover and profits have such a great imp
the one hand, reported turnover and profits have such a great impact on users’ perceptionact on users’ perception of reporting entity’s business performance and financial strength and, on the other hand, of reporting entity’s business performance and financial strength and, on the other hand, selected accounting policies and management’s estimates, assumptions, conservative or selected accounting policies and management’s estimates, assumptions, conservative or aggressive approach in applying the “
aggressive approach in applying the “substance over form substance over form ” principle”, and business ethics” principle”, and business ethics can heavily influence the way revenue is
can heavily influence the way revenue is accounted for and financial performance isaccounted for and financial performance is reported.
reported.
The revenue recognition issue was already touched within sub-section (c) of this section of The revenue recognition issue was already touched within sub-section (c) of this section of your F7 Express Notes, when addressing accounting for construction contracts. Within this your F7 Express Notes, when addressing accounting for construction contracts. Within this particular sub-section we will expand to addressi
particular sub-section we will expand to addressing particular of revenue recognition fromng particular of revenue recognition from sale of goods are
sale of goods are services, emphasising on the application of the “services, emphasising on the application of the “substantial transfer of substantial transfer of risks and rewards
risks and rewards ”. Application of the “substance over form” principle will be again visited, in”. Application of the “substance over form” principle will be again visited, in the context of more complex arrangements like consignments, sale
the context of more complex arrangements like consignments, sale & repurchase, sale & & repurchase, sale &
leasebacks and factorings.
leasebacks and factorings.
Then, we move on to performance reporting related aspects, which, to
Then, we move on to performance reporting related aspects, which, to a certain extent,a certain extent, have been already addressed within sub-section (b) of section A o
have been already addressed within sub-section (b) of section A of these Notes. At thisf these Notes. At this stage, we will go
stage, we will go into greater detail into applying the new key requirements of IAS 1 revisedinto greater detail into applying the new key requirements of IAS 1 revised in respect of presenting financial performance under a single Statement of Comprehensive in respect of presenting financial performance under a single Statement of Comprehensive Income or, alternatively, under an Income Statement followed by a Statement of
Income or, alternatively, under an Income Statement followed by a Statement of Comprehensive Income. This second part of the sub-section also add
Comprehensive Income. This second part of the sub-section also addresses performanceresses performance reporting for discontinuing operations and refreshes you on the format and p
reporting for discontinuing operations and refreshes you on the format and p reparationreparation guidance of the Statement of Changes in Equity.
guidance of the Statement of Changes in Equity.
Revenue recognition is specifically addressed by
Revenue recognition is specifically addressed by IAS 18 “Revenue” IAS 18 “Revenue” , financial performance, financial performance reporting is covered, as mentioned, by
reporting is covered, as mentioned, by IAS 1 (R) “Presentation of financial statements” IAS 1 (R) “Presentation of financial statements” andand discontinued operations’ performance reporting is dealt with by
discontinued operations’ performance reporting is dealt with by IFRS 5 “Non-current assets IFRS 5 “Non-current assets
KEY DEFINITIONS KEY DEFINITIONS
Risks of ownership =
Risks of ownership =risks generally borne an asset’s owner, such as risk of theft orrisks generally borne an asset’s owner, such as risk of theft or destruction, risk of damage
destruction, risk of damage or (temporary) loss of (full) operating or (temporary) loss of (full) operating capacity. Bearing suchcapacity. Bearing such risks means incurring the costs of eliminating or keeping under control s
risks means incurring the costs of eliminating or keeping under control s uch risk factors.uch risk factors.
Rewards of ownership =
Rewards of ownership = benefits generally enjoyed by an asset’s owner, such asbenefits generally enjoyed by an asset’s owner, such as deciding on asset’s purpose, location and manner of usage,
deciding on asset’s purpose, location and manner of usage, and benefiting from asset’sand benefiting from asset’s usage over (most of) its useful life.
usage over (most of) its useful life.
Revenue from sale of goods
Revenue from sale of goods = to be recognised at fair value of = to be recognised at fair value of considerationconsideration
received/receivable if this is measurable, likely to be collected, can be matched against received/receivable if this is measurable, likely to be collected, can be matched against measurable costs incurred in earning it, and when control and significant risks and rewards measurable costs incurred in earning it, and when control and significant risks and rewards of ownership are transferred from seller to
of ownership are transferred from seller to buyerbuyer Revenue from rendering of services
Revenue from rendering of services = to be recognised at fair value of consideration= to be recognised at fair value of consideration received/receivable if this is measurable, likely to be collected, can be matched against received/receivable if this is measurable, likely to be collected, can be matched against measurable costs incurred in earning it, and when stage of service completion can be measurable costs incurred in earning it, and when stage of service completion can be reliably measured.
reliably measured.
Consignment
Consignment = delivery of inventories, with consignor preserving legal ownership until= delivery of inventories, with consignor preserving legal ownership until eventual sale by consignee to final customers, and with consignee having the right to return eventual sale by consignee to final customers, and with consignee having the right to return the goods if sale to
the goods if sale to final customer is not achieved.final customer is not achieved.
Commonly, the consignor withholds the substantial risks & rewards
Commonly, the consignor withholds the substantial risks & rewards of ownership, in whichof ownership, in which case he must recognise revenue from consignment deliveries (and associated cost of sales) case he must recognise revenue from consignment deliveries (and associated cost of sales) only upon occurrence of sale (by consignee) or expiration of consignee’s right of
only upon occurrence of sale (by consignee) or expiration of consignee’s right of return.return.
From a SoFP perspective, consignment inventories stay in consignor’s books until the From a SoFP perspective, consignment inventories stay in consignor’s books until the aforementioned cut-off point for revenue/cost of sales recognition.
aforementioned cut-off point for revenue/cost of sales recognition.
Sale & repurchase =
Sale & repurchase = sale of an asset, with seller able to sale of an asset, with seller able to repurchase at a certain point inrepurchase at a certain point in the future under certain conditions.
the future under certain conditions.
If seller continues to use the asset and has
If seller continues to use the asset and has an option to repurchase symmetrically withan option to repurchase symmetrically with buyer’s option to sell back if there is
buyer’s option to sell back if there is a fall in value of the asset, then it is more a fall in value of the asset, then it is more probable thatprobable that the substance of the arrangement is a loan granted by the buyer to the
the substance of the arrangement is a loan granted by the buyer to the seller and securedseller and secured on the asset sold. If the case, t
on the asset sold. If the case, the asset stays in seller’s SoFP, who will he asset stays in seller’s SoFP, who will debit sale proceedsdebit sale proceeds
against a loan liability against the buyer, with any difference up to the repurchase price against a loan liability against the buyer, with any difference up to the repurchase price spread over the life of the arrangement as interest ex
spread over the life of the arrangement as interest expense.pense.
Sale & leaseback
Sale & leaseback = transaction involving the sale of an asset and the leasing back of the= transaction involving the sale of an asset and the leasing back of the same asset.
same asset.
Depending on whether the leasing back is finance or operating, accounting treatment is Depending on whether the leasing back is finance or operating, accounting treatment is different in both lessor’s and lessee’s books (see
different in both lessor’s and lessee’s books (see Key Workings section below)Key Workings section below) Factoring
Factoring = transfer of receivables to a factor, with factor managing collection and entitled= transfer of receivables to a factor, with factor managing collection and entitled to keep cash-ins as receivables get collected. Instead, transferor receives an advance
to keep cash-ins as receivables get collected. Instead, transferor receives an advance payment on the value of factored receivables.
payment on the value of factored receivables.
Similarly, depending on whether the credit (non-collection) risk is substantially transferred to Similarly, depending on whether the credit (non-collection) risk is substantially transferred to the factor or not, the receivables are taken-out of entity’s SoFP (they are sold)
the factor or not, the receivables are taken-out of entity’s SoFP (they are sold) or they stayor they stay in entity’s SoFP with the cash received from the factor credited to loans
in entity’s SoFP with the cash received from the factor credited to loans (as the arrangement(as the arrangement is in substance a loan from the factor, secured on the factored
is in substance a loan from the factor, secured on the factored receivables).receivables).
Statement of
Statement of Comprehensive IncomeComprehensive Income = under the single statement option available for= under the single statement option available for financial performance presentation, a structured representation of
financial performance presentation, a structured representation of entity’s financialentity’s financial performance for the reporting period setting out all non-owner changes in equity.
performance for the reporting period setting out all non-owner changes in equity.
Income Statement
Income Statement = under the two = under the two statements option available for statements option available for financial performancefinancial performance presentation, a structured representation of entity’s income and expenses taken to profit or presentation, a structured representation of entity’s income and expenses taken to profit or loss for the reporting period, p
loss for the reporting period, presented immediately before the Statement of Comprehensiveresented immediately before the Statement of Comprehensive Income. Income Statement’s bottom line (“profit/loss for the period”) comes as
Income. Income Statement’s bottom line (“profit/loss for the period”) comes as top line of top line of the Statement of Comprehensive Income under the two statements presentation option.
the Statement of Comprehensive Income under the two statements presentation option.
Other Comprehensive Income
Other Comprehensive Income = section of the Statement of Comprehensive Income= section of the Statement of Comprehensive Income (under both financial performance presentation options)
(under both financial performance presentation options) including non-owner changes inincluding non-owner changes in equity not taken to profit or loss
equity not taken to profit or loss due to requirements of specific standards, such asdue to requirements of specific standards, such as revaluation gains or losses on pro
revaluation gains or losses on property, plant and equipment or gains and losses on re-perty, plant and equipment or gains and losses on re-measuring available-for-sale financial assets.
measuring available-for-sale financial assets.
Statement of changes in shareholders’ equity
Statement of changes in shareholders’ equity = a structured representation of capital= a structured representation of capital contributions by/distributions to entity’s owners for the reporting period,
contributions by/distributions to entity’s owners for the reporting period, as well as of totalas well as of total comprehensive income for the period and of effects of any prior-year restatements on the comprehensive income for the period and of effects of any prior-year restatements on the opening equity.
opening equity.
Discontinued operations
Discontinued operations = line of business, geographical area of op= line of business, geographical area of operations orerations or subsidiary, that has been disposed of
subsidiary, that has been disposed of in the period or it is in the period or it is classified as held for sale.classified as held for sale.
KEY WORKINGS KEY WORKINGS
WORKING OUT ACCOUNTING ENTRIES FOR SALE & LEASEBACK AGREEMENTS WORKING OUT ACCOUNTING ENTRIES FOR SALE & LEASEBACK AGREEMENTS Finance leaseback
Finance leaseback
•
• Seller-lessee:Seller-lessee:
o
o Step 1: Sold asset is credited out oStep 1: Sold asset is credited out of the PPE at its carrying amount, against debitingf the PPE at its carrying amount, against debiting Cash for the sale proceeds. The difference is credited / debited
Cash for the sale proceeds. The difference is credited / debited to the SoFP asto the SoFP as deferred income/cost, and then released to P/L over asset’s remaining useful life deferred income/cost, and then released to P/L over asset’s remaining useful life along with depreciation.
along with depreciation.
o
o Step 2: Sold asset is debited back (reinstated) into PPE Step 2: Sold asset is debited back (reinstated) into PPE at its cash value (saleat its cash value (sale proceeds), against crediting Finance lease liability.
proceeds), against crediting Finance lease liability.
o
o No Sale revenue recorded in income for the period.No Sale revenue recorded in income for the period.
o
o Lease instalments paid-out over the lease term are split Lease instalments paid-out over the lease term are split per capital and interestper capital and interest elements based on the actuarial method (see sub-section (b)), then accounted for elements based on the actuarial method (see sub-section (b)), then accounted for accordingly (capital element debited against Finance lease liability in SoFP and accordingly (capital element debited against Finance lease liability in SoFP and interest element debited to Profit or Loss
interest element debited to Profit or Loss as Interest charge)as Interest charge)
•
• Buyer-lessorBuyer-lessor
o
o Purchase price paid to seller-lessee is credited out tPurchase price paid to seller-lessee is credited out the Cash against debiting Financehe Cash against debiting Finance lease receivables
lease receivables
o
o No PPE acquisition recorded in SoFPNo PPE acquisition recorded in SoFP
o
o Lease instalments received-in over the lease term are split per Lease instalments received-in over the lease term are split per capital and interestcapital and interest elements based on the actuarial method (see sub-section (b)), then accounted for elements based on the actuarial method (see sub-section (b)), then accounted for accordingly (capital element credited against Finance lease liabil
accordingly (capital element credited against Finance lease liability in SoFP andity in SoFP and interest element credited to Profit or Loss as
interest element credited to Profit or Loss as Interest income)Interest income) Operating leaseback
Operating leaseback
•
• Seller-lesseeSeller-lessee
o
o Normally recorded sale revenue, gain/loss on disposal oNormally recorded sale revenue, gain/loss on disposal of PPE and operating rentalf PPE and operating rental expenses
expenses
•
• Buyer-lessorBuyer-lessor
o
o Normally recorded PPE acquisition and operating rental incomeNormally recorded PPE acquisition and operating rental income
DRAFTING AND FILLING-IN THE SOCI/INCOME STATEMENT & SOCI DRAFTING AND FILLING-IN THE SOCI/INCOME STATEMENT & SOCI PRO-FORMAS
FORMAS
•
• Remember from your F3 studies that there are two options Remember from your F3 studies that there are two options available for presentingavailable for presenting operating expenses: by function and by nature
operating expenses: by function and by nature
•
• Under the single statement approach, a typical SoCI pro-forma for an individual entity,Under the single statement approach, a typical SoCI pro-forma for an individual entity, with operating expenses presented “by function”, may look as follows:
with operating expenses presented “by function”, may look as follows:
o
o SoCI for the year ended 31 Dec 200XSoCI for the year ended 31 Dec 200X
Revenue X
Revenue X
Cost
Cost of of sales sales (X)(X)
Gross
Gross profit profit XX
Other
Other income income XX
Distribution
Distribution costs costs (X)(X)
Administrative
Administrative expenses expenses (X)(X)
Other
Other expenses expenses (X)(X)
Interest
Interest revenue revenue XX
Interest
Interest expense expense (X)(X)
Profit
Profit before before tax tax X X
Income
Income tax tax expense expense (X)(X)
Profit
Profit for for the the year year from from continuing continuing operations operations XX Loss
Loss for for the the year year from from discontinued discontinued operations operations (X)(X) Profit
Profit for for the the year year (1) (1) X X Other comprehensive income
Other comprehensive income Fair
Fair value value re-measurement re-measurement of of available-for-sale available-for-sale financial financial assets assets X/(X)X/(X) Revaluation
Revaluation surplus surplus on on property property XX Income
Income tax tax relating relating to to other other comprehensive comprehensive income income (X)(X) Other
Other comprehensive comprehensive income income for for the the year, year, net net of of tax tax (2) (2) X X Total
Total comprehensive comprehensive income income for for the the year year (3) (3) = = (1) (1) + + (2) (2) X X
o
o If presented “by nature” the part from top line “Revenues” down to line “ProfitIf presented “by nature” the part from top line “Revenues” down to line “Profit before tax” may look as follows:
before tax” may look as follows:
Revenue X
Revenue X
Changes
Changes in in inventories inventories X/(X)X/(X) Other
Other operating operating income income XX Costs
Costs of of materials materials and and services services (X)(X) Staff
Staff costs costs (X)(X)
Depreciation,
Depreciation, amortisation amortisation and and impairment impairment (X)(X) Other
Other operating operating expense expense (X)(X) Profit
Profit from from operating operating activities activities (1) (1) X X Interest
Interest income income XX
Interest
Interest expense expense (X)(X)
Financial
Financial result result (2) (2) X X
Profit
Profit before before tax tax (3) (3) = = (1) (1) + + (2) (2) X X
•
• Remember from your F3 studies that line “Changes in inventories” (part of the “Cost of Remember from your F3 studies that line “Changes in inventories” (part of the “Cost of Sales” line under the “by function” presentation) comes with a “-“(adverse impact on Sales” line under the “by function” presentation) comes with a “-“(adverse impact on operating profit) if Opening inventories > Closing inventories and with a “+” (favourable operating profit) if Opening inventories > Closing inventories and with a “+” (favourable impact on operating profit) if Opening Inventories < Closing inventories.
impact on operating profit) if Opening Inventories < Closing inventories.
•
• Under the two statements approach, the part from the top lUnder the two statements approach, the part from the top line “Revenues” down to lineine “Revenues” down to line “Profit for the year” is separated out under the heading “Income statement for the year “Profit for the year” is separated out under the heading “Income statement for the year
ended 31 Dec 200X”, with the
ended 31 Dec 200X”, with the remaining part left under the heading remaining part left under the heading “Statement of “Statement of comprehensive income for the year ended 31 Dec 200X” and showing the bottom line of
ended 31 Dec 200X”, with the remaining part left under the heading remaining part left under the heading “Statement of “Statement of comprehensive income for the year ended 31 Dec 200X” and showing the bottom line of