Reporting Financial Performance

The accounting standards that relates to financial performance are:

1. IAS 8: Accounting policies, changes in accounting estimates and errors.

IAS 8: Accounting policies, changes in accounting estimates and errors

• Selection of accounting policies

Definitions
• Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an entity in
preparing and presenting financial statements.
• A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability or the amount of
the periodic consumption of an asset, that results from the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new
information or new developments and, accordingly, are not corrections of errors.
• Prior period errors are omissions from, and misstatements in, the entity's financial statements for one or more prior
periods arising from a failure to use, or misuse of, reliable information that:
– Was available when financial statements for those periods were authorised for issue, and
– Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of
those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud.
• Retrospective application is applying a new accounting policy to transactions, other events and conditions as if that
policy had always been applied.
• Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of elements of
financial statements as if a prior period error had never occurred.
• Prospective application of a change in accounting policy and of recognising the effect of a change in an accounting
estimate, respectively, are:
– Applying the new accounting policy to transactions, other events and conditions occurring after the date as at
which the policy is changed; and
– Recognising the effect of the change in the accounting estimate in the current and future periods affected by the
change
Accounting Policies
IAS 8 requires an entity to select and apply appropriate accounting policies complying with International Financial
Reporting Standards (IFRSs) and interpretations to ensure that the financial statements provide information that is:
• Relevant to the decision making needs of users
• Reliable in that they:
- Represent faithfully the results and financial position of the entity
- Reflect the economic substance of events and transactions and not merely the legal form
- Are neutral i.e. free from bias
- Are prudent

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 - Are complete in all material respects
Changes in accounting policies
The general rule is that accounting policies are normally kept the same from period to period to ensure comparability of
financial statements over time.
IAS 8 requires accounting policies to be changed only if the change:
• Is required by IFRSs or
• Will result in a reliable and more relevant presentation of events or transactions.
A change in accounting policy occurs if there has been a change in:
• Recognition e.g. an expense is now recognized rather than an asset
• Presentation e.g. depreciation is now included in cost of sales rather than administrative expenses, or
• Measurement basis, e.g. stating assets at replacement cost rather than historical cost.
The standard highlights two types of event which do not constitute changes in accounting policy.
(a) Adopting an accounting policy for a new type of transaction or event not dealt with previously by the entity.
(b) Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not
material.
Accounting for a change in accounting policies
The required accounting treatment is that:
– change in accounting policies to be applied retrospectively with an adjustment to the opening balance of retained
earnings in the statement of changes in equity.
– Comparative information should be restated unless it is impracticable to do so.
– If the adjustment to opening retained earnings cannot be reason ably determined, the change should be adjusted
prospectively i.e. included in the current period’s statement of profit or loss.
Certain disclosures are required when a change in accounting policy has a material effect on the current period or any
prior period presented, or when it may have a material effect in subsequent periods.
(a) Reasons for the change
(b) Amount of the adjustment for the current period and for each period presented
(c) Amount of the adjustment relating to periods prior to those included in the comparative information
(d) The fact that comparative information has been restated or that it is impracticable to do so
An entity should also disclose information relevant to assessing the impact of new IFRS on the financial statements where
these have not yet come into force.
Accounting Estimates
An accounting estimate is a method adopted by an entity to arrive at estimated amounts for the financial statements.
Most figures in the financial statements require some estimation:
• The exercise of judgement based on the latest information available at the time
• At a later date, estimates may have to be reviewed as a result of the availability of new information, more experience
or subsequent developments.
Changes in accounting estimates
The requirements of IAS 8 are:
• The effects of a change in accounting estimate should be included in the statement of profit or loss in the period of the
change and, if subsequent periods are affected, in those subsequent periods
• The effect of the change should be included in the same income or expense classification as was used for the original
estimate
• If the effect of the change is material, its nature and amount must be disclosed.
Examples of changes in accounting estimates are changes in:
• The useful lives of non-current assets
• The residual values of non-current assets
• The method of depreciating non-current assets
• Warranty provisions, based upon more up to date information about claims frequency
• Bad debt estimate
Errors
Prior period errors are omissions from, and misstatements in the financial statements for one or more prior periods arising
from a failure to use information that:

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• Was available when the financial statements for those periods were authorised for issue and
• Could reasonably be expected to have been taken into account in the preparing those financial statements.
Such errors include mathematical mistakes, mistakes in applying accounting policies, mis interpretation of facts
oversights and fraud.
Current period errors that are discovered in that period should be corrected before the financial statements are authorised
for issue.
Correction of prior period errors
Prior period errors are dealt with by:
• Restating the opening balance of assets, liabilities and equity as if the error had never occurred and
presenting the necessary adjustment to the opening balance of retained earnings in the statement of changes
in equity.
• Restating the comparative figures presented, as if the error has never occurred.
• Disclosing within the accounts a statement of financial position at the beginning of the earliest comparative
period. In effect this means that three statement of financial position will be presented within a set of
financial statements:
- At the end of the current year
- At the end of the previous year
- At the beginning of the previous year.
Example 1
During 2012 a company discovered that certain items had been included in inventory at 31st December 2011 at a
value of N2.5 million but they had in fact been sold before the year end.
The original figures reported for the year ending 31st December 2011 and the figures the current year 2012 are
given below:
2012 2011
N’000 N’000
Sales 52,100 48,300
Cost of sales (33,500) (30,200)
Gross profit 18,600 18,100
Tax (4,600) (4,300)
Net profit 14,000 13,800
The cost of goods sold in 2011 includes the N2.5 million in opening inventory. The retained earnings at 1st
January 2011 were N11.2 million. (Assume that the adjustment will have no effect on the tax charge).
Show the 2012 Statement of profit or loss with comparative figures and the retained earnings for each year.
Example 2
During 20X7 Global discovered that certain items had been included in inventory at 31 December 20X6, valued at $4.2m,
which had in fact been sold before the year end. The following figures for 20X6 (as reported) and 20X7 (draft) are
available.
20X6 20X7
N'000 N'000
Sales 47,400 67,200
Cost of goods sold (34,570) (55,800)
Profit before taxation 12,830 11,400
Income taxes (3,880) (3,400)
Profit for the period 8,950 8,000
Retained earnings at 1 January 20X6 were $13m. The cost of goods sold for 20X7 includes the $4.2m error in opening
inventory. The income tax rate was 30% for 20X6 and 20X7. No dividends have been declared or paid.
Required
Show the statement of profit or loss for 20X7, with the 20X6 comparative, and retained earnings.

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IFRS 5: Non-current assets held for sale and discontinued operations
Objective
The objectives of IFRS 5 are to set out:
• Requirements for the classification, measurement and presentation of non-current assets held for sale, in particular
requiring that such assets should be presented separately on the face of the statement of financial position.
• Updated rules for the presentation of discontinued operations, in particular requiring that the results of discontinued
operations should be presented separately in the statement of profit or loss.
Classification as held for sale
A non-current asset should be classified as held for sale if its carrying amount will be recovered principally through a sale
transaction rather than through continuing use.
For this to be the case, the following conditions must apply:
• The asset must be available for immediate sale in its present condition
• The sale must be highly probable meaning that:
- Management are committed to a plan to sell the asset
- There is an active programme to locate a buyer, and
- The asset is being actively marketed
• The sale is expected to be completed within 12 months of its classification as held for sale.
• It is unlikely that the plan will be significantly changed or will be withdrawn.\
Measurement of non-current assets held for sale
Non-current assets that qualify as held for sale should be measured at the lower of:
• Their carrying amount and
• Fair value less costs to sell
Held for sale non-current assets should be:
• Presented separately on the face of the statement of financial position under current assets
• Not depreciated
Discontinued operations
A discontinued operation is a component of an entity that has either been disposed of, or is classified as held for sale, and:
• Represents a separate major line of business or geographical area of operations
• Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations,
or
• Is a subsidiary acquired exclusively with a view to resale.
Discontinued operations are required to be shown separately in order to help users to predict future performance i.e. based
upon continuing operations.
Presentation in the statement of profit or loss
An entity must disclose a single amount on the face of the statement of profit or loss, comprising the total of:
• The post -tax profit or loss of discontinued operations, and
• The post-tax gain or loss recognised on the measurement to fair value less costs to sell, or on the disposal of the assets
constituting the discontinued operation.
An analysis of this single amount must be presented, either in the notes or on the face of the statement of profit or loss.
The analysis must disclose:
• The revenue, expenses and pre-tax profit or loss of discontinued operations
• The related income tax expense
• The gain or loss recognized on the measurement to fair value less cost to sell, or on the disposal, of the assets
constituting the discontinued operation.
Question 1
On 1st January 2010, Michelle Co bought a chicken processing machine for N20,000. It has an expected useful life of 10
years and a nil residual value. On 30th September 2013, Michelle Co decides to sell the machine and starts actions to
locate a buyer. The machines are in short supply, so Michelle CO is confident that the machine will be sold fairly quickly.

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Its market value at 30th September 2013 is N13500 and it will cost N500 to dismantle the machine and make it available to
the purchaser. The machine has not been sold at the year end.
Question 2
St. Valentine produced cards and sold roses. However, half way through the year ended 31st march 2013, the rose business
was closed and the assets sold off, incurring losses on the disposal of non-current assets of N76,000 and a redundancy cost
of N37,000. The directors reorganized the continuing business at a cost of N98,000.
Trading results may be summarized as follows:
Cards Roses
N’000 N’000
Revenue 650 320
Cost of sales 320 150
Distribution 60 90
Administration 120 110
Other trading information (to be allocated to continuing operations) is as follows:
Totals
N’000
Finance costs 17
Tax 31
Required: draft the statement of profit or loss for the year ended 31st March 2013.