IA2: BUSINESS COMBINATIONS, INTERIM FINANCIAL REPORTING, PRESENTATION OF FINANCIAL STATEMENTS, EVENTS AFTER THE REPORTING PERIOD AND REVENUE

In this unit, we shall discuss business combination, presentation of financial statements, interim financial reporting, events after the reporting period and revenue, according to the provisions of the various Standards

SOME PROVISIONS OF THE STATEMENT OF ACCOUNTING STANDARD 26: BUSINESS COMBINATIONS

Method of Accounting

All business combinations shall be accounted for by applying the acquisition method.

Identifying the acquirer

An acquirer shall be identified for all business combinations. The acquirer is the combining entity that obtains control of the combining entities or businesses.

Adjustment to the cost of a Business Combination contingent on Future Events

When a business combination agreement provides for an adjustment to the cost of the combination contingent on future events, the acquirer shall include the amount of that adjustment in the cost of the combination at the acquisition date if the adjustment is probable and can be measured reliably.

Goodwill

The acquirer shall, at the acquisition date:

(a) Recognise goodwill acquired in a business combination as an asset; and

(b) The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (i) over (ii) below:

(i) The aggregate of:

  • The consideration transferred, measured in accordance with this standard, which generally requires acquisition date fair value;
  • The amount of any non-controlling interest in the acquire, measured in accordance with this Standard; and
  • In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquire.

(ii) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured, in accordance with this standard.

Measurement Period Adjustments

The acquirer shall account for changes in the fair value of contingent considerations that are not measurement period adjustment as follows:

(a) Contingent consideration classified as equity shall not be re-measured and its subsequent settlement shall be accounted for within equity.

(b) Contingent consideration classified as an asset or a liability is treated, thus:

(i) as a financial instrument, it is measured at fair value, with any resulting gain or loss recognised either in profit or loss or in other comprehensive income; or

(ii) accounted for in accordance with SAS 23 – Provisions, Contingent Liabilities and Contingent Assets or other SASs as appropriate.

Disclosure requirements

An acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that were effected during the period.

An acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of business combinations that were effected after the balance sheet date but before the financial statements are authorized for issue.

To give effect to the principle in paragraph 85, the acquirer shall disclose the following information for each business combination that was effected during the period:

  1. The names and descriptions of the combining entities or business;
  2. The acquisition date;
  3. The percentage of voting equity instruments acquired;
  4. The cost of the combination and a description of the components of that cost; and
  5. Acquisition related costs.

SELF ASSESSMENT EXERCISE

What information is expected to be disclosed by the acquirer for each business combination?

STATEMENT OF ACCOUNTING STANDARD 30: INTERIM FINANCIAL REPORTING

Interim financial reports should be prepared to provide current updates on the financial position, results of operations and changes in cash flows of the financial year, from the beginning of the accounting year to date.

An interim financial report should include, at a minimum, the following components:

(a) Condensed statement of accounting policies;

(b) Condensed balance sheet;

(c) Condensed profit and loss account;

(d) Condensed statement of cash flows; and

(e) Selected notes to the accounts.

The interim financial report should carry a statement indicating whether or not the interim financial statements are audited. Where they are audited, the auditors’ report shall be included.

The set of condensed financial statements which an entity publishes in its interim financial report shall include, at a minimum, each of the headings and sub-totals that were included in its most recent annual financial statements and the selected explanatory notes as required by this Standard.

Additional line items or notes shall be included if their omission would make the condensed interim financial statements misleading.

An entity shall apply the same accounting policies and principles in its interim financial statements as are applied in its annual financial statements, except for accounting policy changes made after the date of the most recent annual financial statements and are to be reflected in the next annual financial statements. However, the frequency of an entity’s reporting (annual, half-yearly or quarterly) shall not affect the measurement of its annual results. To achieve that objective, measurements for interim reporting purposes, shall be made on a year-to-date basis.

Exceptional and extraordinary items shall be recognised and disclosed in the profit and loss account of the interim period in which they occur in accordance with SAS 6- Extraordinary items and prior year adjustments.

Significant movements in key indicators of the entity’s financial position shall be explained by way of notes.

A reconciliation of net income to net cash provided by operating activities shall be given in sufficient detail for users to appreciate its main components.

Interim financial reports shall include interim financial statements (condensed or complete) for periods as follows:

(a) Balance sheet as of the end of the current interim period and a comparative balance sheet as of the end of the immediately preceding financial year;

(b) Profit and loss account for the current interim period and cumulatively for the current financial year to date, with comparative profit and loss account for the immediately preceding financial year; and

(c) Cash flow statement cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial  year.

Disclosure requirements

Subject to the few exceptions noted in this statement, disclosures required by Statements of

Accounting Standards are not generally required in the presentation of interim financial reports.

However, other disclosure specific to interim financial reports that are helpful to users in assessing the relevance and reliability with which the reports might be used, and which shall be disclosed are:

(a) The period covered by the report;

(b) The date on which it is approved by the Board of Directors;

(c) The extent to which the information it contains has been audited or reviewed; and

(d) The frequency with which the organization presents interim reports.

(e) Interim financial reports should be prepared to provide current updates on the financial position, results of operations and changes in cash flows of the financial year, from the beginning of the accounting year to date.

If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the financial year but a separate financial report is not published for that final interim period, the nature and amount of that change in estimate shall be disclosed in a note to the annual financial statements for the financial year.

INTERNATIONAL ACCOUNTING STATEMENT 1: PRESENTATION OF FINANCIAL STATEMENTS

A revised IAS 1 was issued in September 2007 by the IASB. Since this Standard deals with the form and contents of financial statements, aspects of the basic requirements are already addressed by SAS 1, Disclosure of Accounting Policies and SAS 2, Information to be disclosed in the Financial Statements. However, there are some financial statements introduced by this standard that professional accounting students should be familiar with. These financial statements are:

(a) Statement of financial position, and

(b) Statement of comprehensive income

The formats of the two statements are presented below:

FORMAT OF STATEMENT OF FINANCIAL POSITION

 XYZ GROUP STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER

 20082007

mas

mas01

FORMAT OF STATEMENT OF COMPREHENSIVE INCOME

 XYZ GROUP- STATEMENT OF COMPREHENSIVE INCOME

 FOR THE YEAR ENDED 31 DECEMBER

mas02

mas03

As can be readily seen from the formats, a statement of financial position is the equivalent of balance sheet. The format of this statement is, however, slightly different from the two balance formats in the second schedule of the Companies and Allied Matters Act, CAP C20, LFN 2004. The statement of financial position observes the current assets in the asset side of the balance sheet, and non-current liabilities is similarly presented before current liabilities in the other side of the balance sheet.

The statement of comprehensive income is the equivalent of profit and loss account or income statement as it is sometimes called. IAS 1 allows a reporting entity to present the income statement either in a single statement of comprehensive income as shown above, or in two separate statements: one statement displaying components of profit or loss and the other statement beginning with profit or loss and displaying components of other comprehensive income.

SELF ASSESSMENT EXERCISE

What are the two financial statements introduced by IAS 1 that professional accounting students should be familiar with?

3.4 INTERNATIONAL ACCOUNTING STANDARD 10: EVENTS AFTER THE REPORTING PERIOD

Categorization of events: events after the balance sheet date are broadly categorized into two: adjusting events and non-adjusting events.

Adjusting event is an event after the reporting period that provides further evidence of conditions that existed at the end of the reporting period, including an event that indicates that the going concern assumption in relation to the whole or part of the enterprise is no longer appropriate.

Example of adjusting event is the bankruptcy of a customer a few weeks after the balance sheet date.

Non-adjusting event is an event after the reporting period that is indicative of a condition that arose after the end of the reporting period. Suppose the factory of a manufacturing company was destroyed by fire on 13th February 20X7. If the reporting date of the company is 31 st December, and the financial statements were authorized for issue on 10th April 20X8, the destruction of the factory on 13th February 20X7, is a non-adjusting event.

Accounting treatment of adjusting events

The financial statements of a reporting entity should be adjusted when an adjusting event occurs. If a debtor who owed N15m was declared bankrupt, adequate provisions should be made for bad debts by reducing the trade debtors as well as the retained profit figure.

Accounting treatment of non-adjusting events

The financial statements of the reporting entity should not be adjusted for non-adjusted for non-adjusting events.

Treatment of proposed dividends

Under IAS 10, if a dividend is declared after the reporting period, it should not be recognised as a liability at the end of the reporting period. It is an adjusting event.

 

Disclosure

Non-adjusting events should be disclosed if they are material. The disclosure should include the nature of the event and an estimate of its financial effect. If a reasonable estimate cannot be obtained, that fact must be stated. Examples of a material non-adjusting event are: (a) a major business combination after the reporting date (b) abnormal fluctuation in exchange rates, and (c) issue of shares or debentures after the reporting date.

SELF ASSESSMENT EXERCISE

What is adjusting invent and non-adjusting invent?

3.5 INTERNATIONAL ACCOUNTING STANDARD 18: REVENUE

Definition of revenue

Revenue is the gross inflows of economic benefits during the period, arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity and not contribution from equity participants.

Measurement of revenue

Revenue should be measured at the fair value of the consideration receivable. When goods or services are exchanged for other goods or services of a similar nature and value, the transaction is not recognised as revenue under IAS. But when dissimilar items are exchanged, the transaction is regarded as generating revenue.

Recognition of revenue from sale of goods

Revenue from sale of goods should be recognised only when all the following conditions are met:

(a) The seller has transferred to the buyer the significant risk and reward of ownership;

(b) The seller retains no continuing managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;

(c) The amount of revenue can be measured reliably;

(d) It is probable that economic benefits associated with the transaction will flow to the seller; and

(e) The cost incurred in respecting the transaction can be measured reliably.

Recognition of revenue from rendering services

Revenue from rendering of services should be recognised when all of the following conditions are met:

(a) The amount of revenue can be measured reliably;

(b) It is probable that the economic benefits associated with the transaction will flow to the seller;

(c) The stage of completion at the balance sheet date can be measured reliably; and

(d) The costs incurred, and cost to complete the transaction can be measured reliably.

Recognition of revenue from interest, royalties and dividends

Revenue from interest, royalties and dividends should be recognised when it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably.

The following additional conditions apply:

(a) Interest is recognised on a time proportion basis that takes into account the effective yield on the asset.

(b) Royalties are recognized on an accrual basis in accordance with the substance of the relevant agreement.

(c) Dividends are recognised when the shareholder’s right to receive payment is established.

Disclosure

The following items should be recognised:

(a) Accounting policies adopted for the recognition of revenue and the methods adopted to determine the stage of completion of transactions involving the rendering services;

(b) The amount of each significant category of revenue recognised during the period, including revenue arising from;

(i) the sale of goods;

(ii) the rendering of services;

(iii) interests on loans;

(iv) royalties; and

(v) dividends

(c) The amount of revenue arising from exchanges of goods or services included in each significant category of revenue.

SELF ASSESSMENT EXERCISE

What are the conditions to be met before the recognition of revenue from sale of goods?

4.0 CONCLUSION

In conclusion, it should be noted that a business combination is the bringing together of separate entities or businesses into one reporting entity. The result of nearly all business combinations is that one entity, the acquirer, obtains control of one or more other businesses, the acquiree. If an entity obtains control of one or more other entities that are not businesses, the bringing together of those entities is not a business combination.

Statement issued for an accounting period of less than one year, such as quarterly or monthly.

Interim financial statements should be based on the accounting principles employed in the previous year’s annual report unless a change has been adopted in the current year. Interim financial statements are typically unaudited. Footnote disclosure is given of seasonality effects. If a fourth quarter is not presented, any significant adjustments to it must be commented upon in the annual report.

The objective of the financial statement presentation project is to establish a global standard that will guide the organisation and presentation of information in the financial statements. The boards’ goal is to improve the usefulness of the financial information provided in an entity’s financial statements to assist management to better communicate its financial information to the users of its financial statements, and to help users in their decision-making.

The Standard also requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate.

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