Presentation and disclosure in financial statements: formula sheet

Key formulas

Operating profit

Operating profit = Revenue − all income and expenses classified in the operating category

Operating is the residual category. Anything not investing, financing, tax or discontinued stays here.

Profit before financing and income taxes

Profit before financing and income taxes = Operating profit + investing category income − investing category expenses

Investing items include income from cash and equity-accounted investments for most entities.

Profit before tax

Profit before income taxes = Profit before financing and income taxes + financing category income − financing category expenses

The financing category covers income and expenses on liabilities that arise from transactions that only involve raising finance (borrowings, lease liabilities). It also covers the effects of interest rates on other liabilities such as pensions and provisions, for an entity with no main business activity of providing financing.

Profit or loss

Profit or loss = Profit before income taxes − income tax expense ± discontinued operations result

Income taxes and discontinued operations are their own categories.

MPM reconciliation

MPM = most directly comparable total or subtotal required by IFRS Accounting Standards ± reconciling items

That subtotal is operating profit, profit before financing and income taxes, or profit or loss. Disclose the tax and NCI effect of each reconciling item separately. Do not deduct them from a pre-tax MPM. Disclose in one note, with an explanation of why the measure is useful.

Change in accounting policy

Retrospective application: adjust opening equity of earliest period presented and restate comparatives

On initial application of a new standard, follow its transitional rules first. Retrospective application is the default only where there are none. Limited exemption if impracticable.

Change in accounting estimate

Prospective: recognise effect in profit or loss in the period of change (and future periods if affected)

No restatement. If the change relates to assets, liabilities or equity, adjust the carrying amount in the period of change.

Prior period material error

Restate comparatives retrospectively; if error is before earliest period presented, restate opening balances of that earliest period

Not corrected in current-period profit or loss. Immaterial errors may be corrected in the current period.

Revised depreciation after estimate change

New annual charge = (Carrying amount at start of year − revised residual value) ÷ remaining useful life

Applied from the start of the year of change, with no catch-up for earlier years.

Third statement of financial position

Required when retrospective application or restatement has a material effect on the information in the opening statement of financial position

Presented as at the start of the preceding period, in addition to the minimum comparatives. IAS 1 paragraph 40A requires this third statement.

Tax effect of restatement

Adjustment to retained earnings = error or policy effect × (1 − tax rate)

Use only if the question tells you tax applies. Adjust the tax liability or deferred tax balance too.

Period covered

Reporting date → date financial statements are authorised for issue

Includes events up to authorisation, even if after a profit announcement.

Adjusting event rule

Evidence of condition existing at reporting date → adjust recognised amounts

Also adjust related disclosures.

Non-adjusting event rule

Condition arose after reporting date → no adjustment; disclose nature and estimated financial effect if material

If an estimate cannot be made, say so.

Dividends

Equity dividends declared after reporting date → no liability at reporting date; disclose in the notes

IAS 10 prohibits recognising a liability for dividends declared after the reporting period, and the dividend is disclosed in the notes under IAS 1. Declared before the reporting date means a liability is recognised.

Going concern

Management intends to liquidate or cease trading, or has no realistic alternative → do not use going concern basis

Applies even if the deterioration occurs after the reporting date.

Measurement on classification

Carry at the lower of: carrying amount; fair value less costs to sell

Carrying amount is measured under the applicable standards just before classification. Any write-down goes to profit or loss as an impairment loss.

Held for sale criteria

Available for immediate sale in present condition AND sale highly probable

Highly probable means management committed, active buyer search, reasonable price, completion expected within one year (with limited exceptions), and plan unlikely to change.

Depreciation

Depreciation = nil after classification as held for sale

Applies to non-current assets in the group. Interest and other expenses on liabilities in a disposal group continue to be recognised.

Later gains

Gain recognised ≤ cumulative impairment losses previously recognised

Cumulative losses include those recognised under IFRS 5 and earlier impairment under IAS 36 on the non-current assets in scope. A gain on remeasurement cannot reverse a goodwill impairment loss (IAS 36.124 and IFRS 5.21-22).

Discontinued operation presentation

Single amount = post-tax profit or loss of the operation + post-tax gain or loss on remeasurement or disposal

Shown on the face of the statement of profit or loss. Comparatives are re-presented to show it as discontinued.

Allocation of a write-down in a disposal group

Loss reduces the carrying amounts of the non-current assets within IFRS 5 measurement scope, using the IAS 36 allocation order: goodwill first, then pro rata to the other in-scope non-current assets

Assets outside scope, such as financial assets, deferred tax and inventory, are remeasured under their own standards first.

Basic EPS

Basic EPS = (Profit attributable to ordinary shareholders) ÷ (Weighted average number of ordinary shares)

Earnings are after tax, non-controlling interest and preference dividends. Use continuing and total profit if the entity reports discontinued operations.

Weighted average shares

Σ (shares in issue × months outstanding ÷ 12)

Shares issued at full market price count from the date consideration is receivable. Bonus issues are applied to the whole period and to comparatives.

Bonus issue

Multiply the shares in issue before the bonus by (total shares after ÷ shares before)

For example, a 1 for 4 bonus issue gives a factor of 5/4. Restate all periods presented.

Theoretical ex-rights price (TERP)

TERP = (Value of shares before + Cash raised) ÷ (Number of shares after the issue)

Use the cum-rights price just before the issue for the value of existing shares.

Rights issue bonus fraction

Bonus fraction = Cum-rights price ÷ TERP

Apply it to shares in issue before the rights date. Shares issued in the rights issue are time-weighted from the issue date.

Restated prior-year EPS after a rights issue

Previous EPS × (TERP ÷ Cum-rights price)

This is the inverse of the bonus fraction.

Diluted EPS with convertibles

Diluted EPS = (Earnings + after-tax interest saved) ÷ (Basic weighted shares + shares on conversion)

Interest saved includes the effective interest charge on the liability component, not just the coupon. Tax-effect it.

Options and warrants

Free shares = Options × (Market price − Exercise price) ÷ Market price

Use the average market price for the period. Options are dilutive only when the exercise price is below the average market price. The shares matching the exercise-price proceeds are treated as issued at the average market price, so they have no dilutive effect. Only the free (no-consideration) shares are added to the diluted denominator.

Revenue test

Segment revenue (external + inter-segment) ≥ 10% × combined revenue of all operating segments

Uses total segment revenue including inter-segment sales. Combined revenue is the total of all operating segments, before eliminations.

Profit or loss test

|Segment profit or loss| ≥ 10% × the greater of (combined profit of all segments in profit) and (combined loss of all segments in loss), in absolute terms

Compare the absolute amount of the segment result with the larger of the two absolute totals. Loss-making segments are included in the test.

Asset test

Segment assets ≥ 10% × combined assets of all operating segments

Apply the asset test using the segment asset measure where one is reported to the CODM. Disclosure of assets is required only if they are included in the measure the CODM reviews or are regularly provided to it. Meeting any one of the applicable tests is enough to make the segment reportable.

75% coverage test

External revenue of reportable segments ≥ 75% of entity revenue

If not met, add further operating segments, even below 10%, until 75% is reached.

Practical limit

Reportable segments are generally expected to be around ten

If it exceeds ten, consider whether a practical limit has been reached. This is guidance, not a hard cap.

Previous-period and new segments

A segment that was reportable last year but now fails the thresholds may still be reported if management judges it of continuing significance

Restate prior-period data when a segment becomes newly reportable, or when a change in the entity's structure changes its reportable segments. The exception is where the information is unavailable and the cost to develop it would be excessive.

Key disclosures

Factors used to identify segments; types of products and services; a measure of profit or loss (always); total assets and liabilities if reported to the CODM; reconciliations to entity totals

Also disclose measurement basis, revenue from external customers, interest, depreciation and similar items if included in the measure reviewed by the CODM or regularly provided to it.

Major customer disclosure

Disclose if revenue from a single external customer ≥ 10% of entity revenue

Disclose the amount and the segment reporting it. You need not name the customer.

Parent-subsidiary disclosure

Disclose the parent and the ultimate controlling party, even if there are no transactions

If neither the entity's parent nor the ultimate controlling party produces financial statements available for public use, disclose the name of the next most senior parent that does.

Transaction disclosure

Nature of relationship + amount of transactions + outstanding balances (with terms, security, settlement) + commitments + provisions or expense for bad debts

Required for each related party transaction, and for outstanding balances including commitments. Disclosure is by category where appropriate.

KMP compensation

Total, and each category: short-term, post-employment, other long-term, termination, share-based payment

Disclosed in total and by category. Only compensation of KMP, not other staff.

Arm's length statement

State that terms were equivalent to arm's length only if you can substantiate it

Do not assert it without evidence.

Common non-related examples

Two entities with a common director are not related by that fact alone; providers of finance, trade unions, utilities and a single customer or supplier are not related merely through normal dealings

Look for control, joint control or significant influence, or KMP links, before deciding.

Government-related entities

Exempt from the para 18 disclosures of transactions, outstanding balances (including commitments) and related provisions for transactions and balances with a government that controls, jointly controls or significantly influences the entity, and with other entities that are related because the same government controls, jointly controls or significantly influences them

The exemption is partial and covers only the para 18 disclosures: transactions, outstanding balances including commitments, and related provisions or bad debt expense. Parent and ultimate controlling party disclosures and KMP compensation disclosures are still required. You must also disclose the name of the government and the nature of the relationship, the nature and amount of each individually significant transaction, and the extent of collectively significant transactions.

Quick revision

• IAS 1 requires going concern to be assessed, and accrual accounting to be applied except for cash flow information.
• Items of income and expense are not offset unless a standard requires or permits it.
• A change in accounting policy is applied retrospectively unless impracticable; a change in estimate is applied prospectively.
• Material prior period errors are corrected retrospectively by restating comparatives.
• Adjusting events give evidence of conditions existing at the reporting date; non-adjusting events arise afterwards.
• Dividends declared after the reporting date are not recognised as a liability at that date.
• IFRS 5 held for sale: the asset must be available for immediate sale in its present condition, management must be committed to a plan with an active programme to locate a buyer, the asset must be actively marketed at a reasonable price relative to its fair value, and the sale must be highly probable and expected to complete within one year, with limited exceptions.
• Held-for-sale assets are measured at the lower of carrying amount and fair value less costs to sell, and are not depreciated.
• IFRS 5 requires a single amount on the face of the statement of profit or loss for discontinued operations. It comprises the post-tax result of the discontinued operation plus any post-tax gain or loss on remeasurement or disposal.
• Basic EPS = profit attributable to ordinary equity holders ÷ weighted average number of ordinary shares.
• A bonus issue is applied to prior periods as if it had always existed; a rights issue includes a bonus element.
• IFRS 8 segments follow the information the chief operating decision maker reviews.
• IAS 24 requires disclosure of related party relationships involving control even where there have been no transactions, of transactions and outstanding balances where transactions have occurred, and of key management personnel compensation in total and by category.

Common mistakes

• Treating IFRS 18 as only a relabelling of IAS 1. Fix: State that IFRS 18 adds mandatory categories, defined subtotals and an MPM note.
• Putting items in operating by default without checking investing and financing first. Fix: Test for investing, financing, tax and discontinued first. Whatever remains is operating.
• Restating prior years for a change in useful life or residual value. Fix: Useful lives, residual values and provisions are estimates. Apply them prospectively from the start of the year of change.
• Treating a mistake in earlier accounts as a change in estimate. Fix: Ask whether reliable information was available at the time. If it was ignored or misused, it is an error and needs restatement.
• Recognising a dividend declared after the year end as a liability. Fix: A liability exists only if the entity has an obligation at the reporting date. Disclose the dividend in the notes instead.
• Treating every unfavourable event as adjusting. Fix: Focus on when the condition arose, not whether the news is good or bad. A fire after year end is non-adjusting.
• Classifying as held for sale because management has an intention to sell, with no active plan. Fix: Check each condition: committed plan, active programme to locate a buyer, reasonable price, expected completion within a year. Without these, no reclassification.
• Continuing to depreciate an asset after it is classified as held for sale. Fix: Stop depreciation from the classification date. Say this explicitly in your answer.
• Applying the bonus fraction to all shares, including the new shares issued in the rights issue. Fix: Apply the fraction to the opening shares up to the rights date only. Time-weight the new shares from the issue date with no adjustment.
• Forgetting to restate comparative EPS after a bonus or rights issue. Fix: Restate the comparative by dividing by the bonus factor, or multiplying by TERP ÷ cum-rights price. Say clearly that it is restated.

Exam tips

• Expect a scenario with a list of income and expense items. Marks are for correct category, subtotal and brief reason for each classification.
• When discussing MPMs, write the definition test first, then the reconciliation requirement. Examiners reward the link between the definition and the scenario.
• Use professional skills marks: challenge whether an MPM could be misleading, for example by excluding recurring costs, and comment on the ethical issue.
• Compare with IAS 1 only where asked. Focus on what is new: categories, subtotals, MPMs and aggregation rules.
• Always state the entity type assumption, such as non-financial entity, before classifying.
• Always start your answer with the classification. Markers give marks for naming it correctly as policy, estimate or error.
• Quote the treatment in plain words: retrospective means restate comparatives and opening equity, prospective means current and future periods only.
• In a scenario with management motives, comment on earnings management and the ethical duty. This earns professional skills marks.