Reporting financial performance

1. Reporting financial performance Joint World Bank and IFRS Foundation ‘train the trainers’ workshop hosted by the ECCB 30 April to 4 May 2012

2. The concepts

3. Objective of financial reporting 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. The information provided about financial performance helps existing and potential investors, lenders and other creditorsto understand the return the entity has produced on its economic resources. 3

4. Objective of financial reporting continued Decisions by investors about buying, selling or holding equity and debt instruments depend on the returns that they expect from an investment in those instruments, eg dividends, principal and interest payments or market price increases. Decisions by lenders about providing or settling loans and other forms of credit depend on the principal and interest payments or other returns that they expect. Information must reflect the effect on performance of changes in market prices and/or interest rates. 4

5. Objective of financial reporting continued Information about an entity’s financial performance in a period, reflected by changes in economic resources (other than by obtaining additional resources directly from investors or creditors)is useful in assessing the entity’s past and future ability to generate net cash inflows (see CF.OB18) 5

6. Elements Asset resource controlled by the entity result of past event expected inflow of economic benefits Liability present obligation arising from past event expected outflow of economic benefits Income recognised increase in asset/decrease in liability in current reporting period that result in increased equity except… Expense recognised decrease in asset/increase in liability in current reporting period that result in decreased equity except… 6 6

7. Examples—applying the concepts Fair value model—measure element at fair value with changes in fair value recognised as income or expense for the period in which it arises Depreciation represents the consumption of the assets service potential in the period. land with an indefinite useful life is not depreciated because its service potential does not reduce with time 7

8. IAS 1Presentation of Financial Statements © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

9. Introduction • IAS 1 provides guidance on the presentation of financial statements. • Financial performance is presented in the form of the statement of profit or loss and other comprehensive income • One statement or two statements © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

10. Income and expenses • Concepts for income and expenses • no concepts for other comprehensive income (OCI) • IAS 1 defines profit or loss as the total of income less expenses, excluding the components of OCI • OCI includes items of income or expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

11. Profit or loss • IAS1.82 prescribes line-items for profit or loss (eg revenue and finance costs) • In addition, items required by other IFRSs must also be presented • Additional line items, headings and sub-totals should be used only when relevant to an understanding of financial performance • no extraordinary items • Expenses may be classified by nature or function (IAS 1.102–105) © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

12. Other comprehensive income • Items to be classified by nature • Grouped based on those that will: • not be reclassified subsequently to profit or loss; and • be reclassified to profit or loss when specified conditions are met • Income tax effects must be disclosed (net versus aggregate) • Reclassification adjustments must be disclosed © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

13. Other comprehensive income continued • Items included in OCI include: • gains on property revaluation • remeasurements of defined benefit pension plans • exchange differences on translating foreign operations • cash flow hedges © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

14. IAS 18Revenue © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

15. Conceptual context • Financial information must be relevant • Relevant financial information is capable of making a difference in decisions about providing resources to the entity, ie the information has • predictive value • confirmatory value • both predictive and confirmatory value (these concepts are interrelated) • For example, current year revenue information can be used as a basis for predicting future revenue and can be compared to revenue predictions made in previous years (CF.QC10) © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

16. Introduction • Revenue is income that arises in the course of ordinary activities of the entity • IAS 18 prescribes accounting for revenue from sale of goods, from rendering of services, and from the use by others of entity assets yielding interest, royalties and dividends. • Revenue from construction contracts is accounted for in accordance with IAS 11 Construction Contracts © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

17. Scope exclusions • IAS 18 does not deal with revenue from: • Lease agreements; • Dividends accounted for in accordance with the equity method; • Insurance contracts; • Changes in the fair value of financial instruments and biological assets; • Initial recognition of agricultural produce; and • Extraction of mineral ores © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

18. Revenue recognition • In general, revenue is recognised when it is probable that economic benefits from the transaction will flow to the entity and those benefits can be measured reliably. • Revenue from the sale of goods is recognised when: • significant risks and rewards of ownership have been transferred to the buyer; and • the entity has neither continuing managerial involvement in, nor effective control over, the goods. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

19. Revenue recognition continued • For the rendering of services, revenue is recognised as work is performed (percentage of completion method). • However, when the outcome of a service contract cannot be estimated reliably, revenue is recognised only to the extent of expenses recognised that are recoverable. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

20. Revenue recognition continued • Interest is recognised over time, computed on the effective yield on the asset. • Royalties are recognised in accordance with the substance of the agreement. • Dividends are recognised when the shareholder has the right to receive payment. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

21. Measurement • Revenue is measured at the fair value of the consideration received or receivable by the entity on its own account. • revenue does not include amounts collected on behalf of third parties. • when receipt of cash is deferred, the nominal consideration is split between sales revenue and interest revenue. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

22. Example: cash discount • Goods sold for 500, due in 60 days. Customer can take 10% discount if paid in 30 days. • If customer gets the discount, revenue is 450. • Would be wrong to have revenue 500 and interest or some other expense of 50. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

23. Example: ‘sale’ to agent • We sell goods for 100 through an intermediary (agent) who gets a commission of 10. We own goods until sold to end users. We are responsible for defects and returns from end users. • We have revenue of 100 and commission expense of 10 only when agent sells goods to end user. • Would be wrong to recognise revenue when goods are shipped to agent. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

24. Example: deferred payment • Example: We sell goods costing 1,500,000 for 2,000,000 due in 2 years interest free. Current cash price would have been 1,652,893. • Financing transaction. Up front revenue is 1,652,893. Profit is 152,893. • PV = (FV) / ((1+int)^periods) • 1,652,893 = (2,000,000) / ((1+int)^2) • Int = .10 (10%) by solving the equation © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

25. Exampledeferred paymentcontinued • Interest income year 1 = 1,652,893 x 10% = 165,289, unpaid, bringing receivable up to 1,818,182. • Interest income year 2 = 1,818,182 x 10% = 181,818, bringing receivable up to 2,000,000, which is then repaid. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

26. Exampledeferred paymentcontinued © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

27. Measurementcontinued • An exchange for dissimilar items generates revenue measured at the fair value of the goods or services received. • An exchange of goods or services for similar items does not generate revenue. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

28. Comparison with the IFRS for SMEs • IAS 18 and Section 23 Revenueof the IFRS for SMEs share the same principles. However, the IFRS for SMEs is written in simplified language. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

29. Judgements and estimates • The primary issue in accounting for revenue is determining when to recognise revenue. • whether the risks and rewards have been transferred to the buyer (sale of goods or financing arrangement?) • measuring the fair value of consideration received or receivable. • bifurcating multiple element sales (ie determining different elements). • services—estimating the stage of completion. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

30. Judgements and estimates continued • Examples of circumstances in which the timing of recognition of revenue requires careful consideration include: • sales with delayed delivery • sales subject to conditions, eg installation, inspection and right of return • sale and repurchase agreements • consignment sales • sales to others for resale • multiple element contracts. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

31. IAS 33Earnings per Share © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

32. Introduction • IAS 33 deals with the calculation and presentation of earnings per share (EPS). • It applies to entities whose ordinary shares or potential ordinary shares (for example, convertibles, options and warrants) are publicly traded. • An entity must present basic EPS and diluted EPS with equal prominence in the statement of comprehensive income. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

33. Dilution • Dilution is a notional reduction in Earnings (losses) per share resulting from the assumption that • convertible instruments are converted, • options or warrants are exercised, • or ordinary shares are issued upon the satisfaction of specified conditions. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

34. Earnings • The ‘earnings’ of two entities subject to identical transactions and events could differ because they have adopted different accounting policies. • These differences are not adjusted for when calculating EPS. • The numerators used in the calculation of basic and diluted EPS must be reconciled to profit or loss attributable to the ordinary equity holders of the parent. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

35. Shares • The denominators (weighted average number of ordinary shares ‘WANOS’) used in the calculation of basic and diluted EPS might be affected by: • share issues during the year • shares to be issued upon conversion of a convertible instrument • contingently issuable or returnable shares; • bonus issues • share splits and share consolidation • the exercise of options and warrants • contracts that may be settled in shares • written put options © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

36. Example:share split An entity issued 100 ordinary shares at incorporation on 1 January 20X1. • The only change to the issued share capital occurred on 1 January 20X2 when all ordinary shares were split—each ordinary share became two ordinary shares • The entity earned a profit of CU1,000 in each period, 20X1 and 20X2 © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

37. Exampleshare split continued • What is the basic EPS for the entity in 20X1? Profit: CU1,000 WANOS : 100 Basic EPS: CU10 (CU1,000 ÷ 100 shares) • What is the basic EPS for the entity in 20X2? Profit: CU1,000 WANOS : 200 Basic EPS: CU5 (CU1,000 ÷ 200 shares) © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

38. Exampleshare split continued • In the 20X2 financial statements, what EPS figures will be disclosed for each 20X2 and 20X1? 20X2: CU5 20X1: CU5 IAS 33.26—the WANOS must be adjusted for all periods presented that have resulted in a change in ordinary shares without an increase in resources, ie a share split © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

39. Exampleshare issue An entity issued 100 ordinary shares at incorporation on 1 January 20X1. • The only change to the issued share capital occurred on 1 January 20X2 when an additional 100 ordinary shares were issued for CU30 per share • The entity earned a profit of CU1,000 in each period, 20X1 and 20X2 © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

40. Exampleshare issue continued • What is the basic EPS for the entity in 20X1? Profit: CU1,000 WANOS : 100 Basic EPS: CU10 (CU1,000 ÷ 100 shares) • What is the basic EPS for the entity in 20X2? Profit: CU1,000 WANOS : 200 Basic EPS: CU5 (CU1,000 ÷ 200 shares) © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

41. Example—share issue continued • In the 20X2 financial statements, what EPS figures will be disclosed for each 20X2 and 20X1? 20X2: CU5 20X1: CU10 Shares were issued and the issue led to a corresponding change in the entity’s resources. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

42. Comparison to the IFRS for SMEs • The IFRS for SMEs does not specify requirements for Earnings per Share. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

43. Judgements and estimates • The calculation of EPS includes (as the numerator) a profit or loss figure. This amount is determined in accordance with IFRSs and, therefore, the judgements and estimates made in applying other IFRS will affect EPS. • Judgements must also be made relating to the extent of EPS-related explanations provided in management commentary. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

44. IAS 20Accounting for Government Grants and Disclosure of Government Assistance © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

45. Requirements • IAS 20 specifies the accounting for government grants and the disclosure of government assistance from which the entity has directly benefited. • Government grants are transfers of resources to an entity in return for compliance with specified conditions. • they include reductions in liabilities to the government and the benefit of a government loan at below market rate of interest. • Government assistance is a benefit available to entities that satisfy qualifying criteria. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

46. Recognition • Government grants are recognised when there is reasonable assurance that the entity will comply with any specified conditions and that the grants will be received. • Non-monetary grants (eg taxi licence, fishing quota) are either recognised at fair value or both the asset and the grant are recognised at a nominal amount. • Receipt of a grant is not always conclusive evidence that conditions will be fulfilled. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

47. Recognition continued • Government grants are recognised in profit or loss in the same periods as the costs they are intended to compensate for, ie they are not recognised directly in equity. • If there are no future related costs, a grant is recognised in profit or loss when receivable. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

48. Recognition continued • Government grants that relate to assets are initially recognised in the statement of financial position as deferred income or as a deduction from the related assets. • The grant is then recognised in profit or loss over the life of the asset, by reducing deferred income over that period, or by way of reduced depreciation. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

49. Comparison to the IFRS for SMEs • The main differences in the recognition and measurement requirements exist between IAS 20 and Section 24 Government Grants the IFRS for SMEs include: • IAS 20 contains numerous options for accounting for government grants. The IFRS for SMEs contains only one option • IAS 20 requires that grants should not be recognised until there is reasonable assurance that the entity will comply with the conditions and the grants will be received. Under Section 24, a grant is not recognised until the conditions are actually satisfied. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

50. Comparison to the IFRS for SMEs continued • IAS 20 requires government grants to be recognised as income over the periods necessary to match them with the related costs for which they are intended to compensate, on a systematic basis. • Section 24 does not allow an entity to match the grant with the expenses for which it is intended to compensate or the cost of the asset that it is used to finance. • Section 24 does not prescribe any presentation requirements relating to government grants. © IFRS Foundation. 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org