Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fifth Edition

Chapter 23

Presentation and Disclosure in Financial Reporting

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Learning Objectives
After studying this chapter, you should be able to:
LO 1 Describe the full disclosure principle and how it is
implemented.
LO 2 Discuss the disclosure requirements for related-party
transactions, subsequent events, major business
segments, and interim reporting.
LO 3 Identify the major disclosures in the auditor’s report and
management’s responsibilities for the financial
statements.
LO 4 Describe other reporting issues related to
implementation of the full disclosure principle.
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PREVIEW OF CHAPTER 23

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 Learning Objective 1
Describe the full disclosure principle
and how it is implemented.

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Full Disclosure Principle
Full disclosure principle calls for financial reporting of any
financial facts significant enough to influence the judgment
of an informed reader.
Financial disasters at Mahindra Satyam (IND) and Société
Générale (FRA) highlight the difficulty of implementing the
full disclosure principle.

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Full Disclosure Principle
Types of Financial Information

ILLUSTRATION 23.1 Types of Financial Information

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Full Disclosure Principle
Increase in Reporting Requirements
Reasons: Underlying Concepts
• Complexity of the Surveys indicate that to meet
business environment. users’ changing needs, business
reporting must (1) provide more
• Necessity for timely forward-looking information; (2)
information. focus more on the factors that
• Accounting as a control create longer-term value,
and monitoring device. including non-financial measures;
and (3) better align information
reported externally with the
information reported internally.

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Full Disclosure Principle
Differential Disclosure
IASB has developed IFRS for small- and medium-sized entities
(SMEs). SMEs is less complex in a number of ways:
• Topics not relevant for SMEs are omitted.
• Allows fewer accounting policy choices.
• Many principles for recognizing and measuring assets,
liabilities, revenue, and expenses are simplified.
• Significantly fewer disclosures are required.
• Revisions to the IFRS for SMEs will be limited to once every
three years.

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Notes to the Financial Statements
Notes are the means of amplifying or explaining the items
presented in the main body of the statements.
Accounting Policies
• Companies should present the disclosure as the first note
or in a separate Summary of Significant Accounting
Policies section preceding the notes to the financial
statements.
In addition, companies must:
1. Identify judgments made in the process of applying the
accounting policies.
2. Disclose information about assumptions made.

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Notes to the Financial Statements
Major Disclosures
• Inventory
• Property, Plant, and Equipment
• Creditor Claims
• Equityholders’ Claims
• Contingencies and Commitments
• Fair Values
• Deferred Taxes, Pensions, and Leases
• Changes in Accounting Principles

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 Notes to the Financial Statements
Accounting Policies

1. Identify the judgments that management made in applying the

accounting policies which have the most significant effect on
the amounts recognized in the financial statements.

2. Disclose management’s assumptions about the future, that

have a significant risk of resulting in a material adjustment to
the carrying amounts of assets and liabilities within the next
financial year.

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Accounting Policies

ILLUSTRATION 23.2 Accounting Estimate and Judgment Disclosure

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 Learning Objective 2
Discuss the disclosure requirements for
related-party transactions, subsequent
events, major business segments, and
interim reporting.

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Disclosure Issues
Disclosure of Special Transactions or Events

• Related-party transactions:
o Nature of relationship.
o Amount of transaction and outstanding balances.
o Provision for doubtful debts.
o Expense recognized during the period in respect of bad or
doubtful debts due from related parties.
• Errors and fraud

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Disclosure of Special Transactions or Events

ILLUSTRATION 23.3 Disclosure of Related-Party Transactions

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Events After the Reporting Period
(Subsequent Events)
Time Periods for Subsequent Events

ILLUSTRATION 23.4 Time Periods for Subsequent Events

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Events After the Reporting Period
(Subsequent Events)
Time Periods for Subsequent Events

1. Events that provide additional evidence about conditions that

existed at the statement of financial position date.

2. Events that provide evidence about conditions that did not

exist at the statement of financial position date.

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Events After the Reporting Period
(Subsequent Events)
Illustration 23.5 presents an example of subsequent events
disclosure, excerpted from the annual report of A.P. Møller -
Maersk (DNK).

ILLUSTRATION 23.5 Disclosure of Subsequent Events

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Subsequent Events Exercise
For each events, indicate whether a company should (a) adjust the
financial statements, (b) disclose in notes to the financial statements, or
(c) neither adjust nor disclose.
a 1. Settlement of tax case at a cost considerably in excess of the
amount expected at year-end.
c 2. Introduction of a new product line.
b 3. Loss of assembly plant due to fire.
b 4. Sale of a significant portion of the company’s assets.
c 5. Retirement of the company president.
b 6. Issuance of a significant number of ordinary shares.

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Subsequent Events Exercise (continued)
For each events, indicate whether a company should (a) adjust the
financial statements, (b) disclose in notes to the financial statements, or
(c) neither adjust nor disclose.

c 7. Loss of a significant customer.

c 8. Prolonged employee strike.
a 9. Material loss on a year-end receivable because of a customer’s
bankruptcy.
c 10. Hiring of a new president.
a 11. Settlement of prior year’s litigation against the company.
b 12. Merger with another company of comparable size.

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Reporting for Diversified Conglomerate
Companies
Segmented Income Statement
Investors and investment analysts want income statement,
statement of financial position, and cash flow information on the
individual segments that compose the total income figure.

ILLUSTRATION 23.6
Segmented Income
Statement

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Objective of Reporting Segmented
Information
To provide information about the different types of business
activities in which an enterprise engages and the different
economic environments in which it operates.
Meeting this objective will help users:
a) Better understand the enterprise’s performance.
b) Better assess its prospects for future net cash flows.
c) Make more informed judgments about the enterprise as a
whole.

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Basic Principles
• IFRS requires that general-purpose financial statements
include selected information on a single basis of
segmentation.
• A company can meet the segmented reporting objective
by providing financial statements segmented based on
how the company’s operations are managed
(management approach).

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Operating Segments
An operating segment is a component of an enterprise:

a. That engages in business activities from which it earns

revenues and incurs expenses.

b. Whose operating results are regularly reviewed by the

company’s chief operating decision maker.

c. For which discrete financial information is available.

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Identifying Operating Segments
An operating segment is deemed significant and therefore a
reportable segment if it satisfies one or more of the following
quantitative thresholds.
1. Its revenue is 10% or more of the combined revenue of all the
company’s operating segments.
2. The absolute amount of its profit or loss is 10% or more of the
greater, in absolute amount, of (a) the combined operating
profit of all operating segments that did not incur a loss, or (b)
the combined loss of all operating segments that did report a
loss.
3. Its identifiable assets are 10% or more of the combined assets
of all operating segments.

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Identifying Operating Segments
(continued)
In applying these tests, the company must consider two
additional factors:
1. Segment data must explain a significant portion of the
company’s business. Specifically, the segmented results
must equal or exceed 75% of the combined sales to
unaffiliated customers for the entire company.
2. The IASB decided that 10 is a reasonable upper limit for
the number of segments that a company must disclose.

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Data for Different Possible Reporting
Segments
Revenue Test

ILLUSTRATION 23.7 Data for Different Possible Reporting Segments

The company would apply the respective tests as follows:
Revenue test: .10 × €2,150 = €215; C, D, and E meet this test.
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Data for Different Possible Reporting
Segments Operating Profit (Loss) Test

ILLUSTRATION 23.7 Data for Different Possible Reporting Segments

The company would apply the respective tests as follows:

Operating profit (loss) test: .10 × €90 = €9 (note that the €5 loss is
ignored, because the test is based on non-loss segments); A, C, D,
and E meet this test.
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Data for Different Possible Reporting
Segments Identifiable Assets Test

ILLUSTRATION 23.7 Data for Different Possible Reporting Segments

The company would apply the respective tests as follows:

Identifiable assets tests: .10 × €970 = €97; C, D, and E meet this
test.
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Reporting Segments

ILLUSTRATION 23.7 Data for Different Possible Reporting Segments

Reporting segments are therefore A, C, D, and E, assuming that

these four segments have enough sales to meet the 75% of
combined sales test.
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75% of Combined Sales Test

ILLUSTRATION 23.7 Data for Different Possible Reporting Segments

75% of combined sales test: .75 × €2,150 = €1,612.50.

The sales of A, C, D, and E total €2,000 (€100 + €700 + €300 + €900); therefore,
the 75% test is met.

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Measurement Principles
• Accounting principles that companies use for segment
disclosure need not be the same as the principles they
use to prepare the consolidated statements.

• The IASB does not require allocations of joint, common,

or company-wide costs solely for external reporting
purposes.

• Common costs are those incurred for the benefit of more

than one segment and whose interrelated nature
prevents a completely objective division of costs among
segments.
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Segmented Information Reported
IASB requires that an enterprise report the following:
1. General information about operating segments.
2. Segment profit and loss and related information.
3. Segment assets and liabilities.
4. Reconciliations.
5. Information about products and services and geographic
areas.
6. Major customers.

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Segmented Information Reported

ILLUSTRATION 23.8 Segment Disclosure

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Interim Reports
Cover periods of less than one year.
IFRS requires companies to follow the discrete approach.
• Treat each interim period as a separate accounting period.
• Follow the principles for deferrals and accruals used for
annual reports.
• Report accounting transactions as they occur, and expense
recognition should not change with the period of time
covered.

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Unique Problems of Interim Reporting

1. Income taxes.
2. Seasonality.

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Unique Problems of Interim Reporting
To illustrate why seasonality is a problem, assume the
information as shown in Illustration 23.9.

ILLUSTRATION 23.9 Data for Seasonality Example

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Unique Problems of Interim Reporting
Illustration 23.10 shows sales for four quarters and the year
(projected and actual).

ILLUSTRATION 23.10 Sales Data for Seasonality Example

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Unique Problems of Interim Reporting
Under the present accounting framework, the income statements
for the quarters might be as shown in Illustration 23.11.

ILLUSTRATION 23.11 Interim Net Income for Seasonal Business—Discrete Approach

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Unique Problems of Interim Reporting
Some enterprises have avoided this problem by making all
fixed non-manufacturing costs follow the sales pattern, as shown
in Illustration 23.12.

ILLUSTRATION 23.12 Interim Net Income for Seasonal Business—Integral Approach

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 Learning Objective 3
Identify the major disclosures in the
auditor’s report and management’s
responsibilities for the financial
statements.

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Auditor’s Report
Unmodified Opinion

Auditor expresses the opinion that the financial statements are

presented fairly in accordance with I FRS.
Other opinions:
• Qualified
• Adverse
• Disclaimer

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Auditor’s Report Example

ILLUSTRATION 23.13 Auditor’s Report

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Auditor’s Report Example (continued)

ILLUSTRATION 23.13 Auditor’s Report

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Auditor’s Report Example (concluded)

ILLUSTRATION 23.13
Auditor’s Report

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Unmodified Opinion
Explanatory Paragraph

Certain circumstances, although they do not affect the

auditor’s unqualified opinion, may require the auditor to add
an explanatory paragraph to the audit report.
• Going concern
• Lack of consistency
• Emphasis of a matter

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Auditor’s Report
Qualified Opinion
Qualified opinion contains an exception to the standard
opinion. Usual circumstances may include:
1. Scope limitation.
2. Statements do not fairly present financial position or
results of operations because of:
a. Lack of conformity with accepted accounting principles and
standards.
b. Inadequate disclosure.

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Auditor’s Report
Qualified Opinion

ILLUSTRATION 23.14 Auditor’s Report with Qualified Opinion

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Auditor’s Report
Adverse Opinion
Adverse opinion is required in any report in which the
exceptions to fair presentation are so material that in the
independent auditor’s judgment, a qualified opinion is not
justified.
• Financial statements taken as a whole are not presented in
accordance with IFRS.
• Rare because most companies change their accounting to
conform with IFRS.
• Market regulators will not permit a company listed on an
exchange to have an adverse opinion.

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Auditor’s Report
Disclaimer of an Opinion

Disclaimer of an opinion is appropriate when the auditor has

gathered so little information on the financial statements that
no opinion can be expressed.

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 Key Audit Matters
• Key audit matters (KAMs) are defined as “those matters that, in
the auditor’s professional judgment, were of the most
significance in the audit of the financial statement of the
current period.”

• Illustration 23.15 presents a KAM discussion from the audit

report of Puma (DEU) as shown in the next slide.

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 Key Audit Matters

ILLUSTRATION 23.15 Key Audit Matters

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 Key Audit Matters

ILLUSTRATION 23.15 Key Audit Matters (Continued)

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 Key Audit Matters

ILLUSTRATION 23.15 Key Audit Matters (Concluded)

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Management’s Report
Management commentary helps in the interpretation of the
financial position, financial performance, and cash flows of a
company. Such a report may include a review of the:
• Main factors and influences determining financial
performance;
• Company’s sources of funding and its targeted ratio of
liabilities to equity; and
• Company’s resources not recognized in the statement of
financial position in accordance with I FRS.

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Management’s Report
Management Commentary
Management commentary helps in the interpretation of the
financial position, financial performance, and cash flows of a
company.

ILLUSTRATION 23.16 Management’s Discussion and Analysis

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Management’s Report
Management Commentary

ILLUSTRATION 23.16 Management’s Discussion and Analysis

(Continued)
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 Management’s Report
Management Commentary

ILLUSTRATION 23.16 Management’s Discussion and Analysis

(Concluded)
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 Management’s Report
Alternative Performance Measures
Illustration 23.17 presents a selection of the alternative
performance measures reported by Marks and Spencer plc
(GBR).

ILLUSTRATION 23.17 Alternative Performance Measures

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 Management’s Report
Alternative Performance Measures

ILLUSTRATION 23.17 Alternative Performance Measures (Concluded)

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 Management’s Report
Alternative Performance Measures
An excerpt from M&S’s annual report is presented in Illustration
23.18.

ILLUSTRATION 23.18 Sustainability Reporting

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 Management’s Report
Alternative Performance Measures

ILLUSTRATION 23.18 Sustainability Reporting (Continued)

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 Management’s Report
Alternative Performance Measures

ILLUSTRATION 23.18 Sustainability Reporting (Concluded)

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Management’s Responsibility for
Financial Statements
• Management is responsible for preparing the financial
statements and establishing and maintaining an effective
system of internal controls.
• The auditor provides an independent assessment of
whether the financial statements are prepared in
accordance with IFRS.

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Management’s Responsibility for
Financial Statements

ILLUSTRATION 23.19 Report on Management’s Responsibilities

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Management’s Responsibility for
Financial Statements

ILLUSTRATION 23.19 Report on Management’s Responsibilities

(Concluded)
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 Learning Objective 4
Describe other reporting issues related to
implementation of the full disclosure
principle.

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Current Reporting Issues
Reporting on Financial Forecasts and Projections
• Financial forecast is a set of prospective financial
statements that present a company’s expected financial
position, results of operations, and cash flows.
• Financial projections are prospective financial statements
that present, given one or more hypothetical assumptions,
an entity’s expected financial position, results of
operations, and cash flows. Regulators have established a
Safe Harbor Rule. It provides protection to a company that
presents an erroneous forecast, as long as the company
prepared the forecast on a reasonable basis and disclosed
it in good faith.
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Current Reporting Issues
Internet Financial Reporting

A large proportion of companies’ websites contain links to

their financial statements and other disclosures.
• Allows firms to communicate more easily and quickly with
users.
• Allow users to take advantage of tools such as search
engines and hyperlinks.
• Can help make financial reports more relevant by allowing
companies to report expanded disaggregated data and
more timely data.

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Current Reporting Issues
Fraudulent Financial Reporting
• Intentional or reckless conduct, whether through act or
omission, that results in materially misleading financial
statements.
• Frauds involving such well-known companies as Parmalat
(ITA), Mahindra Satyam (IND), and Société Générale (FR
A) indicate that more must be done to address this issue.

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Types of Economic Crime

ILLUSTRATION 23.20 Types of Economic Crime

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Causes of Fraudulent Financial Reporting
Common causes are the desire—
• to obtain a higher share price,
• to avoid default on a loan covenant, or
• to make a personal gain of some type (additional
compensation, promotion).

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Opportunities for Fraudulent Financial
Reporting
Common opportunities for fraudulent financial reporting are:
• Absence of a board of directors or audit committee.
• Weak or non-existent internal accounting controls.
• Unusual or complex transactions.
• Accounting estimates requiring significant judgment.
• Ineffective internal audit staffs.

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Criteria for Making Accounting and
Reporting Choices
• The IASB’s focus on principles-based standards is directed at
these very issues.

• It seeks to develop guidance that will result in accounting and

financial reporting that reflects the economic substance of the
transactions, not the desired financial result of management.

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 Learning Objective *5
Explain financial statement analysis.

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 Perspective on Financial Statement
Analysis
A logical approach to financial statement analysis is necessary,
consisting of the following steps:
1. Know the questions for which you want to find answers.
2. Know the questions that particular ratios and comparisons
are able to help answer.
3. Match 1 and 2 above. By such a matching, the statement
analysis will have a logical direction and purpose.

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Perspective on Financial Statement
Analysis (continued)
Analysis includes an understanding that—
1. Financial statements report on the past.
2. Single ratio by itself is not likely to be very useful.
3. Awareness of the limitations of accounting numbers used
in an analysis.

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Major Types of Ratios

LIQUIDITY RATIOS. Measures of the company’s short-run ability to

pay its maturing obligations.
ACTIVITY RATIOS. Measures of how effectively the company is
using the assets employed.
PROFITABILITY RATIOS. Measures of the degree of success or
failure of a given company or division for a given period of time.
COVERAGE RATIOS. Measures of the degree of protection for long-
term creditors and investors.

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Ratio Analysis
Liquidity Ratios

ILLUSTRATION 23A.1 Summary of Financial Ratios

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Ratio Analysis
Activity Ratios

ILLUSTRATION 23A.1 Summary of Financial Ratios

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Ratio Analysis
Profitability Ratios

ILLUSTRATION 23A.1 Summary of Financial Ratios

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Ratio Analysis
Coverage Ratios

ILLUSTRATION 23A.1 Summary of Financial Ratios

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Limitations of Ratio Analysis

• Based on historical cost.

• Use of estimates.
• Achieving comparability among firms in a given industry.
• Substantial amount of important information is not
included in a company’s financial statements.

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Comparative Analysis
Condensed Comparative Financial Information

ILLUSTRATION 23A.2 Condensed Comparative Financial Information

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Comparative Analysis
Condensed Comparative Financial Information

ILLUSTRATION 23A.2 Condensed Comparative Financial Information

(Concluded)

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Percentage (Common-Size) Analysis
Horizontal Percentage Analysis

ILLUSTRATION 23A.3 Horizontal Percentage Analysis

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Percentage (Common-Size) Analysis
Vertical Percentage Analysis

ILLUSTRATION 23A.4 Vertical Percentage Analysis

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 Learning Objective *6
Describe first-time adoption of IFRS.

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First-Time Adoption of IFRS
IFRS requires that information in a company’s first I FRS
statements—
1. be transparent,
2. provide a suitable starting point, and
3. have a cost that does not exceed the benefits.
Overriding principle in converting from national GAAP to IFRS
(the conversion process) is full retrospective application of all
IFRS.

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First-Time Adoption of IFRS
General Guidelines
Objective is to present financial statements as if company always
reported on IFRS. To achieve this objective, a company must:
1. Identify the timing for its first IFRS statements.
2. Prepare an opening statement of financial position at the date
of transition to IFRS.
3. Select accounting policies that comply with IFRS and apply these
policies retrospectively.
4. Consider whether to apply any optional exemptions and apply
mandatory exceptions.
5. Make extensive disclosure to explain the transition to IFRS.

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First-Time Adoption of IFRS
Relevant Dates
Once a company decides to convert to IFRS, it must decide on the
following dates—transition date and reporting date.

ILLUSTRATION 23B.1 First-Time Adoption Timeline

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Implementation Steps
Opening IFRS Statement of Financial Position

Process involves the following steps:

1. Include all assets and liabilities that I FRS requires.
2. Exclude any assets and liabilities that I FRS does not
permit.
3. Classify all assets, liabilities, and equity in accordance
with IFRS.
4. Measure all assets and liabilities according to I FRS.

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Implementation Steps
Opening IFRS Statement of Financial Position

ILLUSTRATION 23B.2 Policy Changes—Opening Statement of Financial Position

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Implementation Steps
Opening IFRS Statement of Financial Position

ILLUSTRATION 23B.2 Policy Changes—Opening Statement of Financial Position

(Concluded)

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Implementation Steps
Opening IFRS Statement of Financial Position
Adjustments as a result of applying IFRS for the first time are generally
recorded in retained earnings.

NewWorld makes the following entries on January 1, 2025, to adjust the

accounts to IFRS treatment.

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Implementation Steps
Exemptions from Retrospective Treatment

The Board identified a number of areas in which companies

are prohibited from retrospective application in first-time
adoption of IFRS:
1. Estimates.
2. Hedge accounting.
3. Non-controlling interests.
4. Derecognition of financial assets and financial liabilities.
5. Classification and measurement of financial assets.

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Elective Exemptions
Companies may elect an exemption from retrospective application for one or
more of the following areas:
a) Share-based payment transactions.
b) Fair value or revaluation as deemed cost.
c) Leases.
d) Employee benefits.
e) Compound financial instruments.
f) Fair value measurement of financial assets or financial liabilities at initial
recognition.
g) Decommissioning liabilities included in the cost of property, plant, and
equipment.
h) Borrowing costs.

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Elective Exemptions

ILLUSTRATION 23B.3 Elective Exemption from Retrospective Treatment

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Presentation and Disclosure
An entity’s first IFRS financial statements shall include:
• three statements of financial position,
• two statements of comprehensive income,
• two separate income statements (if presented),
• two statements of cash flows, and
• two statements of changes in equity and related notes,
including comparative information.

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Presentation and Disclosure
Reconciliations
A company’s first IFRS financial statements shall include
reconciliations of:
• Its equity reported in accordance with previous G AAP to
its equity in accordance with I FRS at the transition date.
• Its total comprehensive income in accordance with I FRS
to total comprehensive income in accordance with
previous GAAP for the same period.

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Presentation and Disclosure
Reconciliations

ILLUSTRATION 23B.4 Reconciling Items for Equity

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Presentation and Disclosure
Reconciliations

ILLUSTRATION 23B.4 Reconciling Items for Equity (Concluded)

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Presentation and Disclosure
Reconciliations

ILLUSTRATION 23B.5 Reconciling Items for Total Comprehensive Income

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Presentation and Disclosure
Reconciliations

ILLUSTRATION 23B.5 Reconciling Items for Total Comprehensive Income (Concluded)

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