Part 1 - Refresher, IFRS, Special Transactions

Part 1 - REFRESHER

Balance Sheet

Asset = What company OWNS (cash, inventory, building, equipment) & is the total of resources needed to operate the business

Equity = What owners CLAIM to company (RE, invested K)

Liability = What company OWES (loans, acc payables, other debts)

→ L + E = total of means of financing of the assets

Theory of Assets

Asset is:

1) resource controlled by the company on the BS date

2) arising from past events or transactions

3) expected to bring future economic benefits

→ can be tangible / intangible as long as it is legally controlled

Recognition of assets:

• it is probable that future economic benefits will flow to the company

• its cost can be measured reliably

→ ASSET generates VALUE for the business

Assets

Theory of Liabilities

Liability is:

1) present obligation as of the balance sheet date

2) Arising from past events or transactions

3) That will likely lead to an outflow of resources (e.g., cash or services) to settle it

Recognition of liability:

• it is probable that an outflow of economic benefits will occur

• its amount of outflow can be measured reliably

→ LIABILITY represents COST or DEBT for the business

Liabilities

Theory of Equity

= what is left after the company paid all liabilities → what belongs to the OWNERS / SHAREHOLDERS

Equity = composed of:

1) Capital & Past Reserve

• Share Capital = money investors put in by buying shares

• Reserves = profits from past years set aside

• Retained Earnings = profits kept in company instead of being paid out as dividends

2) Results of the Year

• Net balance of the income statement = income - expenses = profit or loss

→ 1) + 2) = Total Equity

Equity

what can be distributed as Dividends

• Only the distributable part of equity → retained earnings or reserves

• decided after allocation of the result of the year

Theory of Income

Income is:

• increase in future economic benefits during an accounting period

Recognition of Income:

• can be measured reliably

• linked to an increase in assets (receiving cash / receivables) or decrease in liabilities (debt being forgiven)

→ results in an INCREASE in EQUITY, other than those relating to contributions by equity participants

Theory of Expenses

Expenses is:

• decrease in future economic benefits during an accounting period

Recognition of Expense:

• can be measured reliably

• linked to a decrease in assets (using up inventory / paying salaries) or an increase in liabilities (incurring bills to pay later)

→ results in DECREASES in EQUITY, other than those relating to distributions to equity participants

Part 1 - IFRS

IFRS = International Financial Reporting Standard

= global standard used in many countries

= created bc businesses expanded on a worldwide scale, which underlined the need of having a common set of accounting rules

= ensures transparency, consistency & comparability across different countries (except US)

IFRS - Origin of the differences in accounting systems

• legal system (roman law vs. common law)

• companies financing (debt vs. equity ; concentrated vs. widespread)

• taxation system (unicity vs. dissociation)

• accidents of history (crash of 1929, Enron, Worldcom…)

IFRS - Requirements for common accounting standards

• globalisation of the markets

• cost of living on several markets

• lack of transparency for investors

• will induce a reduction of the cost of capital

IFRS - Belgium

Belgium Accounting Standard Commission follows IAS/IFRS (apply a set of IAS & IFRS standards)

IAS/IFRS :

• Mandatory for all listed companies

• Optional for some non-listed companies, if requested

• Ongoing discussions about:

  • Applying IFRS to consolidated accounts of non-listed firms

  • Using IFRS in statutory (separate) accounts

IFRS - US

• Still uses US GAAP (Generally Accepted Accounting Principles)

• A conversion to IFRS has been discussed but not fully adopted

• Non-US companies listed in the US can file IFRS financial statements

IFRS - What are the four components of the IAS/IFRS Conceptual Framework?

1. The objective of financial statements

2. Underlying assumptions

3. Qualitative characteristics of financial statements

4. Measurement of the elements of financial statements

IFRS - What is the objective of financial statements according to IAS/IFRS?

To provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions

IFRS - What aspects are included under financial position?

• Economic resources controlled

• Financial structure

• Liquidity

• Solvency

IFRS - What aspects are included under financial performance?

• Profitability

• Variability of performance

• Ability to generate cash

• Predict cash flows

IFRS - What changes in financial position should be assessed?

• Operating activities

• Investing activities

• Financing activities

IFRS - What are the two underlying assumptions in IFRS financial statements?

• accural basis: effects of transaction = recognised when they OCCUR, NOT when cash = received

  Accural basis accounting rely on :

  • Not only past transactions but obligations to pay and resources to be received

  • Accounting based on legal rights, as opposed to cash basis

• going concern: that financial statements are prepared assuming the entity will continue operations in the foreseeable future & it ≠ the intention to liquidate or curtail operations

IFRS - What are the qualitative characteristics of financial statements?

• understandability (assumes reasonable knowledge of users)

• relevance (to decision making, predictive, confirmatory, materiality concept)

• comparability (consistency of acc policies)

• reliability (faithful representation, substance over form, neutrality, prudence, completeness)

• constraints on relevant + reliable information (timeliness, balance between cost + benefit and qualitative characteristics)

• true + fair presentation (use of qualitative characteristics + appropriate acc standards)

IFRS - What is measurement of financial statements in the conceptual framework?

• determination of the monetary amount at which the elements of FS are to be recognised + reported

• measurement bases :

  1. Historical cost – Most commonly used

  2. Current cost – Value to acquire now

  3. Realizable value – Sale/settlement value

  4. Present value – Discounted future inflows or outflows

  5. Fair value – Market-based value representing the amount at which an asset could be exchanged or a liability settled, in a transaction between knowledgeable, willing parties acting independently and without compulsion → Mainly used for:

     • Business combinations

     • Financial instruments

     • Investment properties

What are the 5 IFRS Financial Reporting Basic Requirements?

1. The set of IFRS financial statements

2. IAS/IFRS Balance Sheet (« Statement of Financial Position »)

3. IAS Income Statement (« Statement of Comprehensive Income »)

4. IAS Statement of Changes in Equity

5. Compliance Requirement

What is the set of IFRS financial statements ?

• Statement of financial position (Balance sheet)

• Statement of comprehensive income: performance (Income statement)

• Statement of cash flows: changes in financial position

• Statement of changes in equity: shows the movements in the different components of equity

  → share capital, reserves, retained earnings,…

• Statement of recognized income & expenses: details income and expenses recognized directly in equity

  → foreign currency translation gains, hedges, certain unrealized gains, available-for-sale investments, actuarial gains on pensions,…

• Notes (disclosures) and supplementary schedules → gives a lot of extra information

What is the IAS/IFRS Balance Sheet?

Format of financial statement (FS):

• No mandatory format or presentation (bc gives more transparency, flexibility + added value)

• Lists of minimum items to be presented “on the face” of balance sheet and income statement

• Items (lines) can be added or deleted as appropriate

• Under Belgian GAAP, legally imposed preprinted forms for balance sheet, income statement and notes/disclosures, provided by the National Ban

→ IFRS need to show FS that is aligned with the type of activity of company (consulting firm shows less detail in FA)

What are the minimum items requires on the IAS Income Statement (IStat)?

• Revenue

• Financial expenses

• Share of profits/losses of associates or joint ventures (equity method)

• Tax expense

• Gain/loss on the disposal of assets or settlement of liabilities from discontinued operations (= parts of a business that are planned to be sold → present as 1 aggregate line IStat, separately showinf activities that will no longer contribute to future operations)

• Profit or loss

• Allocation of result to non-controlling interests and parent equity holders

• Basic and diluted earnings per share (IAS 33)

→ revenue = only specific line required for operating activities (choice between nature of expense or function of expense (= used by most companies) & BE GAAP = by nature

What is the Statement of Changes in Equity?

Purpose = Make equity movements understandable to users and show changes in components like capital, reserves, and retained earnings

CAPITAL & RESERVES = items MANDATORY shown separately in BS

movements = typically included in the Statement of Changes in Equity:

• Changes in accounting policy

• Revaluations (e.g., of property, plant & equipment, or investments)

• Currency translation differences

• Net result for the period

• Dividends paid

• Capital increases/decreases

• Intra-equity transfers

What are the general compliance requirements for IFRS financial statements?

• Full compliance with all IFRS/IAS standards is mandatory

• Improper accounting can't be corrected by disclosure or notes

• If IFRS compliance would be misleading, deviation is allowed only if full disclosure is made (including quantified impacts)

• Departure is not allowed because another method than IFRS would also give a true and fair view

• Comparative financial statements

• Must be provided at least annually

• If the balance sheet date changes, financial statements cover a period < or > 1 year

  → disclosure needed:

  • Reason for the period difference

  • Fact there will be no comparability for income statement, changes in equity & cash flow statement

Annual Report

Composed of 4 main sections:

• Economic Report / Business Review

  → strategic presentation of economic report (company performance, strategy, key figures, invest types…)

• CSR / Sustainability Report

  → mandatory in EU, not in US but often required by investors / banks

• Financial Statements

  → 5 IFRS requirements seen before

• Governance Report / Corporate Governance

  → how company is managed, member of board, executive comite, salary, hierarchy,…

Who reads the financial statement?

Who is the Boss of a Company?

SHAREHOLDERS are the BOSS (not CEO or BOARD)

→ in listed companies:

Shareholders:

• elect the board of directors (10 - 15 people) to represent their interests

• have voting rights based on the number of shares they hold

• approve major decisions such as mergers, K increases, company’s strategic direction

Board of Directors:

• acts as link between shareholders + management

• appoints CEO + supervises top management

• validates + oversees execution of company’s strategy

• removes CEO if performance / alignment fails

CEO & Executive Team:

• Handle the daily operations + decision-making

• Implement the strategy approved by the board

• Are accountable to board + by extension to shareholders

CSR = Corporate Social Responsability

= new regulation in EU which obliges companies to prepare an integrated reporting where they present financial & non-financial data (carbon emission, footprint)

= focuses on ethical, social & environmental responsabilities

Is there an equivalent to IFRS for non-financial information (CSR)?

YES

equivalent to IFRS is GRI (Global Reporting Initiative)

mission is to enable organizations to be :

• transparent

• take responsibility for their impacts

through the world’s most widely used standards for sustainability

In EU = CSRD:

= all things that have to be disclosed in terms of sustainability, if you are a company (harmonized reporting to avoid greenwashing)

Part 1 - SPECIAL TRANSACTIONS

IAS 18 - Revenue recognition

IAS 11 - Long term contract

IAS 16 - P. P. & E.

IAS 40 - Invest properties

IAS 2 - P. P. & E. held for sale

IFRS 16 - Accounting for leases

IAS 21 - Foreign currency transactions

IAS 37 - Provision

IAS 38 - Intangible Assets

Revenue Recognition (IAS 18):

• Objective IAS 18

• Issues in Rev Recognition

Objective IAS 18:

→ prescribe the accounting treatment for revenue arising from certain types of transactions

2 issues in rev recog:

• measurement of revenue based on:

  • FV of the consideration received

    hierarchy for determining FV under IAS 39

    → Use a quoted market price if available

    → If not, use a valuation method based on market inputs and parameters

• moment of recog → when to credit the income statement

Revenue Recognition (IAS 18) → types of rev recog:

1. Recognition of a sale of GOOD when:

   • Significant risks and rewards of ownership have transferred to the buyer

   • Seller loses effective control of the goods

   • Revenue can be measured reliably

   → closely linked to shipping and sales cut-off rules.

   • Shipped but not billed → rev = recognized

   • Not shipped & not billed → no rev recognized

   • Billed but not shipped → no rev recognized

   • Billed & shipped → rev = recognized

2. Recognition of a sale of SERVICE

   • by using percentage of completion method

   → Revenue is only recognized when service is actually delivered, often spread across multiple periods

3. Recognition of FINANCIAL & other INCOME

   → when it is probable that economic benefit will flow to the entity

   • Royalties → on an accrual basis (per the fee agreement) = PATENT

   • Dividends → when the shareholder’s right to receive payment is established = DIVIDENDS

   • Interest → on a time-proportion basis, using the effective interest rate (pro rata temporis)

Long Term Contract (IAS 11):

• Objective IAS 11

• Issues in LT Contract

IAS 11 → applies to construction contracts typically lasting more than 1 year + special inventory category = used “Contracts in Progress“

Issues at year end:

• Work is in progress (WIP), but the delivery to the client has not occurred yes → which creates the following problems:

  • advance billings = made: is this a sale then?

  • cost occurred: should they be recorded in IStat as charges?

  • contract completed and delivered a profit/loss should be recognized: hasn’t part of the profit/loss already been generated?

Long Term Contract (IAS 11) → types of LT contract recog:

1. Percentage of Completion (PoC) Method:
   Used when revenues and costs can be reliably measured → recognize revenue over time

   → % of completion

   = (Cost incurred)/(Total estimated costs)

2. Completed Contract Method:
   If not reliably measurable → recognize all revenue and profit only at delivery

in FStat :

• Asset = CIP inventory =
  (Incurred costs + Estimated profit × % completion) − Billings

• If result is:

  • Positive (debit): show as a receivable (asset)

    → company has done more work than it has billed for

  • Negative (credit): show as a liability (due to client)

    → company has billed more than work performed

→ shows net work done BUT not yet billed or collected

Long Term Contract (IAS 11) → BE GAAP vs IAS

BE GAAP:

• Board chooses PoC or Completed

• Billings = liability

• CIP stays as inventory

IAS 11:

• PoC mandatory if conditions are met

• Deducted from CIP inventory

• Reclassified to receivable or liability

P. P. & E. - Default rules for PP&E (IAS 16):

• recognition

PPE is initially recognized at cost, which includes:

• Purchase price

  + Acquisition taxes & duties

  + Directly attributable costs (e.g., site prep, installation, transport, etc.)

  + Future dismantling/site cleanup costs, estimated and recorded as a provision

  + Borrowing costs: interest on loans is capitalized until the asset is ready for use (as per IAS 23, mandatory since 2009)

  - Subsidies: deducted from the cost unless treated as deferred income (per IAS 20)

P. P. & E. - Default rules for PP&E (IAS 16):

• depreciation rules

• Depreciation* when:

  PPE with a finite useful life must be depreciated.

  *straight-line, degressive, SYD (not allowed under BE GAAP) / Units of production methods

• NO Depreciation when:

  PPE with an infinite useful life (e.g., land)

• SEPERATE Depreciation when:

  1 asset has multiple components with different useful lives

P. P. & E. - Investment properties (IAS 40)

When using the Fair Value Model for investment properties:

• No depreciation is applied

• Annual adjustments to fair value (market value) is done.

  • Gains/losses go directly to the income statement

• IAS 40 recommends that fair value should ideally be determined by an independent real estate appraiser

P. P. & E. - Summary

Foreign Currency Transactions (IAS 21):

• examples

• concepts

Transactions in which the amount is denominated in a foreign currency (FC)

Common examples:

• Buying or selling goods/services in FC

• Borrowing or lending in FC

• Entering a foreign exchange contract (contract that gives the right to buy/sell a certain currency a couple of months before )

• Acquiring/disposing assets or settling liabilities in FC

Key concepts:

• Realized exchange difference: occurs when the transaction is settled

• Unrealized exchange difference: occurs when amounts are remeasured at period-end but not yet settled

Foreign Currency Transactions (IAS 21):

• recognition

• FC transactions must be recorded at the spot rate on the transaction date

• Using an approximate rate (e.g., average rate for the month) is allowed for practicality

exchange differences recognition:

• during year N :

  Realized exchange difference = when transaction is settled in the same period

• BS end of the year:

  Unrealized exchange difference = possible difference between spot rate and closing rate for monetary items

• during year N+1:

  difference between last BS amount and subsequent settlement / subsequent BS amount

→ All differences are recognized in income or expense.

Foreign Currency Transactions (IAS 21):

• exception

Certain long-term FC items (e.g., loans to foreign subsidiaries or FC borrowings funding investments) are:

• Unrealized exchange differences → Not recorded in income BUT go to equity (account: translation reserve)

• Cumulative translation reserve recycled into income when the investment is disposed of

Foreign Currency Transactions (IAS 21) - BE GAAP:

• For unrealized gains in BS:

  Treatment is to record as deferred income (liability) instead of income

• Realize as income only when settled

• But treating as immediate income is acceptable if consistent with group policy

Provisions & Contigent liabilities (IAS 37):

• objectives IAS 37

• definition

IAS 37 aims to avoid:

• Creating excess provisions

• Misusing provisions for unrelated purposes

• Reversing provisions in a way that distorts profits

Provision:

• A liability with uncertainty, e.g., about amount or timing

• types: litigation, termination, remediation, dismenting, environment, pension, garantie

Liability:

• A present obligation (legal or constructive), arising from past events, that is expected to lead to an outflow of economic resources.

Provisions & Contigent liabilities (IAS 37):

• recognition

recognize provision:

1. Present obligation
   – Legal (contract/law) or
   – Constructive (past actions created expectations)

2. Obligation comes from a past event (not a future plan)

3. It is probable that the company will have to pay (outflow of economic resources)

4. Amount can be measured reliably

Provisions & Contigent liabilities (IAS 37):

• obligations

Under IAS 37 company must have a present OBLIGATION to record provision

obligation is:

• legal : Required by law, contract, or regulation

• constructive : Arises from past actions that create a valid expectation (e.g., company policy or announcements)

→ A board decision alone is NOT enough unless it has been communicated and created a binding expectation

Obligating event:

• creates a legal or constructive obligation

• independently of entity’s future actions

• leaves no realistic alternative to settling the obligation

Provisions & Contigent liabilities (IAS 37):

• NO obligations

NO OBLIGATION → it may be a contigent liability or nothing

• A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the entity

Or

• A present obligation that arises from past events but is not recognized because:

  • it is not probable that an outflow of resources will be required to settled the obligation OR

  • amount cannot be measure reliably

SUMMARY of RECOGNITION

Contingent liabilities and contingent assets are not recognized in the financial statements

BUT they must be disclosed in the notes, if material

Provisions & Contigent liabilities (IAS 37):

• measurement

• Use the best estimate of cost at the balance sheet date and consider:

  • Risks and uncertainties

  • Expert advice

  • Weighted average of possible outcomes

  • Present value (if impact is material)

  • Future events

  • Excluding gain on disposal

• Reimbursements: Only recorded if virtually certain

• Provisions must be reviewed yearly and reversed if not needed

• Use provision only for the original purpose

Provisions & Contigent liabilities (IAS 37):

• special cases

• Future operating losses → ❌ no provision (no present obligation)

• Onerous contracts → ✅ provision allowed

  • Example: A contract where fulfilling it costs more than the benefits

  • Not for normal purchase orders or construction contracts

Provisions & Contigent liabilities (IAS 37):

• restructuring

Provision allowed if both:

1. There’s a detailed formal plan identifying:

   • Business or part of business concerned

   • Principal locations affected

   • Location, function and approximate number of employees to be compensated

   • Expenditures to be undertaken

   • When the plan will be implemented

2. Has raised valid expectation in those affected

→ measurement:

• Only direct costs are included

• Not future operating costs

Provisions & Contigent liabilities (IAS 37) - BE GAAP

Provisions are required if:

• They result from a past event

• Likely or certain to occur

• May not be reliably measurable

Examples: pensions, major maintenance, guarantees, litigations

• no legal or constructive obligation required

⚠ Belgian GAAP is more flexible — allows more provisions than IFRS + restructuring decision of the board of directors = sufficient

Intangible assets (IAS 38):

• definition

Intangible asset is:

• Identifiable, non-monetary, and has no physical substance

• It must be:

  • Separable (can be sold or transferred) OR

  • Arise from contractual or legal rights

• It is an asset & must be controlled by the entity and bring future economic benefits

Intangible assets (IAS 38):

• measurement

An intangible asset is recognized only if:

1. Probable future economic benefits will flow to the entity AND

2. Cost can be measured reliably

Intangible assets (IAS 38):

• recognition

Types of Intangible assets that are recognized:

• Intangible assets purchased separately

  • Measured at cost, i.e.

  • Purchase price, including import duties and non-refundable taxes; and– Any directly attributable cost of preparing the asset for its intended use (ex; professional fees, costs of testing,…,etc.)

• Intangible assets acquired as part of business combination

  • If it meets the definition of an asset and is identifiable

  • Measured at fair value

• Internally generated intangible assets which meet the criteria of paragraphs 52-67 of IAS 38 (see below)

→ not recognized as intangible assets

• Internally generated goodwill

• Internally generated intangible assets which do not meet the definition of an intangible asset or the recognition criteria of paragraphs 52-67 of IAS 38 → i.e. brands, publishing titles, customer lists

Intangible assets (IAS 38) - Research & Development:

• definition

• Research: early investigation to gain new knowledge → Always expensed

• Development: turning knowledge into usable or sellable products → May be capitalized if 6 criteria are met

Intangible assets (IAS 38) - Research & Development:

• recognition

Qualifying internally generated intangible assets. Distinction between

• Research phase

  • No asset recognition

  • Costs are expensed when incurred

• Development phase: recognition of an intangible asset if, and only if, an entity can demonstrate:

  • The technical feasibility

  • Its intention to complete the intangible asset

  • Its ability to use and sell the asset

  • How the intangible asset will generate probable future economic benefits (namely, existence of a market)

  • Availability of resources (technical, financial and others) to complete the development and to use or sell the intangible asset

  • Its ability to measure reliably the expenditure

• Directly attributable costs

  • Materials and services

  • Employee benefits

  • Fees to register legal rights

  • Amortisation of patents and trademarks used Recognition

• NOT recognized: Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognized Generally cannot be distinguished from the cost of developing the business

Intangible assets (IAS 38):

• cost model

Intangible assets are measured at:

Cost − Accumulated amortisation − Impairment losses

Intangible assets (IAS 38):

• amortization

Intangible assets with finite useful lives:

• Allocate cost systematically over useful life

• Assume residual value is zero unless:

  • A buyer commits to purchase it

  • There is an active market

• Methods:

  • Reflect usage pattern of generation of economic benefit

  • If unknown → use straight-line

• Must review every year when required by economic circumstances

Intangible assets with indefinite useful lives:

• Assets with indefinite useful lives:

  • No amortisation

  • Must be tested for impairment yearly

• If the carrying amount > recoverable amount → record impairment loss

Intangible assets (IAS 38) - BE GAAP

• Formation/start-up expenses → may be capitalized under Belgian GAAP

• R&D:

  • Can be expensed or capitalized if not exceeding a prudent estimate of value

• Only direct costs allowed

• Revaluation is not allowed

Accounting for Leases (IFRS 16):

• before IFRS 16 and now

Before IFRS 16 (under IAS 17):

• Only finance leases were shown on the balance sheet.

• Operating leases were “off-balance sheet”: no liability or asset recorded.

Under IFRS 16:

→ all leases are on the BS - unless they are:

• Short-term (less than 12 months), or

• Low-value items (e.g., small office equipment)