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External Financial Reporting Regulatory Context & Income Statements D Robey 1 IFRS ‘Major Works’ (images from https://shop.ifrs.org/product-detail?id=2167) External Financial Reporting Course Objectives T...

External Financial Reporting Regulatory Context & Income Statements D Robey 1 IFRS ‘Major Works’ (images from https://shop.ifrs.org/product-detail?id=2167) External Financial Reporting Course Objectives To improve ability to read and understand listed companies’ financial statements prepared under IFRS, including developing ability to interpret accounting policy disclosures Understand the key principles underpinning the accounting for a range of topics, including revenue recognition, financial instruments, intangible assets and leasing To understand the need for judgement in applying IFRS and to begin to develop it To appreciate current challenges in financial accounting, notably, reflecting the effects of climate change in financial reports To be aware of some key differences between international and US financial reporting requirements D Robey 3 Regulatory context & Income Statements Session Objectives To be aware of the regulatory context of corporate reporting To understand the benefits and drawbacks of IFRS and why the EU chose to adopt IFRS, and which companies use it To appreciate the global significance of IFRS and the significance of the terms equivalence and convergence To understand the governance structure of the IFRS Foundation and the IASB’s process for developing standards To become familiar with the formats of income statements D Robey 4 Corporate Reporting Warm Up Quiz Working in groups, answer as many of the following as you can in 10 minutes: What do the following acronyms stand for and what do they refer to: IASs and IFRSs, and why do both exist? / GAAP and non-GAAP; how many GAAPs can you name? What are the primary financial statements? What is their purpose? Who are the primary users of them? What is a DP and an ED? Why do they both exist? Who replies to them and why? What does ‘endorsement’’ mean? Who endorses what and why? What does PIR stand for? What is the purpose of a PIR? What is a management report / MD&A / strategic report? D Robey 5 Corporate Reporting Context - some key acronyms International Accounting Standards (IAS), International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles (GAAP) Discussion Paper (DP); Exposure Draft (ED) Post-Implementation Review Management Discussion and Analysis (MD&A) D Robey 6 IFRS Standards Exercise 1: Why do we need accounting standards? In your groups, discuss why there is a need for financial reporting standards. Watch this video: https://www.ifrs.org/use-around-the-world/why-global-accounting-stand ards/ And write down any further benefits from IFRS. D Robey 7 The benefits of using IFRS “Global standards for Global markets” IFRS is a common language for corporate reporting Without IFRS each jurisdiction (eg each EU member state) would use its own national standards (ie its own GAAP) IFRS brings transparency and enhances comparability between companies in different jurisdictions IFRS facilitates cross-border transactions IFRS enables global investors to make better decisions about capital allocation (and, hence, improves the efficiency of capital markets) D Robey 8 The benefits of using IFRS cont'd IFRS brings a high quality of financial information IFRS strengthens accountability (holding management ‘accountable’ for their ‘stewardship’) Investors can hold management to account and demand explanations of how they have used the capital invested in the business IFRS facilitates reporting in global groups Knowledge and understanding of IFRS is portable around the world https://www.ifrs.org/use-around-the-world/why-global-accounting- standards/ D Robey 9 Some drawbacks of IFRS Costs and complexity Costly for companies to implement and apply Initially difficult to understand (affecting companies, auditors, investors and analysts, academics, students and trainee accountants) Alignment of financial reporting and national tax and other legal rules can be challenging Frequently, IFRS required for consolidated a/cs, but not for individual companies IFRS more often required for public reporting (listed companies) than private companies because benefits then outweigh costs D Robey 10 IFRS Are IFRS truly global standards? Exercise 2 In your groups, discuss the map on the following slide (countries in blue use IFRS), in order to: Give your views, with reasons, about whether IFRS are global standards. Suggest what factors influence jurisdictions when they decide whether to use IFRS. D Robey 11 IFRS Global Application D Robey 12  IFRS Global Application Some facts 147 jurisdictions require IFRS for all / most listed Co's 12 permit the use 28,695 of the 53,959 Co's listed on 101 major securities exchanges are required to report using IFRS*; 4,115 companies opt to use IFRS Most Co's not using IFRS are in China, India, and the USA Investors and analysts around the world read financial statements prepared using IFRS * Data as at 2022 per IASB website (accessed 5/9/2024): https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#analysis-of-the-profiles-by-number-of-domestic-listed-companies D Robey 13  IFRS Global Application European Union: listed companies preparing group accounts Canada: most listed companies and financial institutions Australia: all reporting entities Brazil: all reporting entities Mexico: all listed companies except financial institutions and insurance companies South Africa: all listed entities D Robey 14  IFRS Global Application China: Chinese standards are substantially converged with IFRS. China committed to adopt IFRS for some Co's. Japan: IFRS are one of four permitted frameworks. More than 40% of Cos choose to use it (eg Toyota). India: Indian standards are substantially converged with IFRS D Robey 15  IFRS Global Application The special case of the USA The US standard setter (FASB) has worked with the IASB to produce some “converged” standards IFRS deemed “equivalent” to US GAAP and SEC permits foreign Co's to use it - since 2007 But, IFRS NOT permitted for use by American companies to meet US filing requirements D Robey 16 EU Context IAS Regulation 2015 Report found objectives achieved D Robey 17 European Concerns Sovereignty Issues Governance of the IASB. A private organisation with no accountability to any government. Increasing European (and reducing US) influence over the IASB Funding the IASB (broadly aligned with GDPs) Ability to change a standard through the endorsement process (currently limited powers, but these have been used!) D Robey 18 Regulatory Environment … and international political issues The G-20 – forum of 20 leading economies (85% of global GDP and 2/3 population) G 20 Leaders called for standard setters to redouble efforts to complete convergence in global accounting standards (2009) “We support continuing work to achieve convergence to a single set of high quality accounting standards” (2012) However, IASB and Standards Problems for financial FASB unable to agree NOT regulators on accounting for converged financial instruments D Robey 19 The IFRS Foundation Structure and Governance Public Accountability Monitoring Board – capital market authorities Governance Trustees of the IFRS Foundation – responsible for governance and oversight Independent Standard Setting International Accounting Standards Board IFRS Interpretations Committee D Robey 20 The IFRS Foundation Structure and Governance Erkki Liikanen Andreas Barckow Emmanuel Faber Chairman of the Board of Trustees since 2018 IASB Chairman ISSB Chair since since July 2021 January 2022 Former European Commissioner Former Chair of Former Chief Executive & Governor of the Bank of German standard- and Chair of Danone Finland setter D Robey 21 IFRS Due Process Exercise 3 In your groups, discuss what is meant by “due process” and why it is important that that the IASB has one. Using the following link: https://www.ifrs.org/projects/completed-projects/2024/primary-financial-stat ements/ed-primary-financial-statements/#view-the-comment-letters You are required to: Identify the types of organisations that send comment letters in response to IASB consultations, and what their interests are. Decide what factors in comment letters would influence your views about the standard under development if you were on the IASB. D Robey 22 How IFRS are developed Key steps Agenda consultation (5 years) Identification of new topics Research project on new areas Discussion Paper (DP) published Standard setting Exposure Draft (ED) published Publication of standard Post Implementation Review (PIR) - can lead to amendments D Robey 23 Financial Statements Primary Financial Statements Statement of Comprehensive Income including Income Statement and Statement of Other Comprehensive Income (OCI) Balance Sheet Statement of Changes in Equity Cash Flow statement AND notes covering all areas D Robey 24 Orange D Robey 25 D Robey 26 IS Formats Pros and cons Exercise 4 In your groups: Identify the common elements of the two different formats Identify the differences between them Explain what the line items signify Discuss their pros and cons, and decide which format you prefer D Robey 27 Income Statement IAS 1 Requirements Revenue Finance costs Tax expenses Post-tax profit or loss of discontinued operations Share or profit or loss of associates and joint ventures accounted for using the equity method Profit or loss attributable to non-controlling interests and the group shareholders Earnings per share (basic and diluted) D Robey 28 Income Statement One off items IAS 1 does not permit items to be classified as “extraordinary” IAS 1 requires presentation of the nature and amount of material items Companies can highlight one-off, unusual items D Robey 29 Non-GAAP Measures Alternative Performance Measures (APMs) Management frequently want to present their own measures of performance which investors frequently find useful. Typical adjustments include: add back of amortisation / add back of impairment charges / add back of share-based payments for staff / add back of unusual items. Regulators seek to impose constraints around the use of non-GAAP KPIs. For example, they recommend that companies provide full reconciliations between non-GAAP measures and amounts reported under IFRS. The IASB has developed requirements for a sub-set of APMs, which it calls Management-defined Performance Measures (MPMs), with the objective of introducing greater transparency about them. The new requirements are included in IFRS 18, Presentation and Disclosure in D Robey Financial Statements (effective date 1 January 2027). 30 Non-GAAP – Thomas Cook Pros and cons Exercise 5 In your groups: Identify the net income under IFRS and the non-GAAP measure for net income Discuss the pros and cons of having non-GAAP measures presented in this way D Robey 31 Thomas Cook plc – Income Statement D Robey 32 Thomas Cook plc – Income Statement - SDIs D Robey 33 Comprehensive Income Statement of Comprehensive Income has 2 parts Comprehensive Income includes all changes in equity other than transactions with owners (eg new capital / dividends paid). It comprises: Net Income (from the Income Statement) AND Other Comprehensive Income (OCI) – includes certain gains /losses not reported in the Income Statement. D Robey 34 D Robey 35 Other Comprehensive Income Key points Items reported in OCI include: Foreign currency translation gains and losses Gains and losses on revaluing certain fixed assets to market values Gains and losses on certain financial instruments revalued to fair value Gains and losses on some derivatives held for hedging Pension fund adjustments These all affect the overall income and financial position of an entity and therefore must be reported! D Robey 36 RECAP Context and Regulatory Environment Context You should be able to explain: the broader context of corporate reporting and understand why it is becoming increasingly important, including the the issues that affect countries’ choices. Standard-setting You should be able to understand and describe the IASB’s due process, and the key stakeholders involved. Reporting performance You should be familiar with the way in which performance is reported and understand the significance of non-GAAP measures. D Robey 37