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Selected topics on a IFRS compliant chart

Items of internal business settlement

It’s especially important to consider separate items within the legal structure for tracking business between entities (Consolidation Units). This comes to light when items are reported with incomplete detail, so it is beneficial to set the Partner Unit as a required value. One application is to track internal sales transactions.

In the past, internal sales were tracked as separate (internal sales) items. Whenever within the same Consolidation Group the task of eliminating internal sales is executed, the balance of internal sales to an affiliate is debited. The sales to affiliates outside of the Consolidation Group is considered as external until the elimination is executed at the higher group, above the immediate group level. As an alternative, an item can be used track both internal and external sales.

With selection of a Consolidation Group, the sales are reported as external. Is such a case, the item subassignment should have the option of allowing initial values for Partner Units. The similar approach is valid for other areas in which internal business is tracked and settled, such as costs, or due to and due from intercompany payables and receivables.

Reporting of minority (non-controlling) interests

When consolidating investment capital according to purchase method, the newly valuated assets and liabilities of the investee are completely consolidated into the parent balances. Whenever there are other owners of a subsidiary subsequent to the date of reporting, a portion of the investment includes their net assets. For that portion, a settlement balance is created during the first consolidation process. This balance is rolled forward to include their portion of the earnings and losses as well as changes in their ownership structure. Originally, the reporting of minority interests was classified according to IAS 27 (2000) as well as US GAAP, not exclusively in the equity section, but between equity and liabilities sections of Balance Sheet.

With introduction of IAS 27.27 (2003) this treatment has been changed. The minority interest is now being shown as a subsection of the equity section. The IASB is clear in stating that no current claim against the third entities exists from the point of view of the reporting entity, so there is no requirement for a liability reporting. According to IAS 1.106 the annual Financial Statements need to be complemented with changes in the equity capital in which are reflected transactions with owners, especially dividends payouts. The required format for the capital changes is not prescribed in detail and can be prepared to a large extent by the registrants themselves.

When minority interest is interpreted as a portion of the equity changes, those accounts are to be presented in either owner’s equity section or in their own section. In applying the company theory, minority interest can be reported either in net income (loss) or in dividends payouts. In the first case, parent’s income portion is charged to net income as an expense and loss portion is credited as additional income. The net income (loss) of the enterprise shows thus only the parent company’s portion of overall income (loss).

In applying the entity theory, all entities are treated equally and all Consolidation Units, including the minority interest, and share all in the final net income (loss). Only for dividends payouts are shown portions separately for the parent from those of the minority shareholders. According to IAS 27 (2000), the minority interest was treated as an overall portion of the profits and losses; the final result showed only the parent portion of the profit or loss. Conforming with IAS 27.109 (2003) net income portions are now shown as dividends payable. This change in approach should be considered in the chart of financial statement items. With regards to conversion there are basically two variants, for both we show the dividends payout items of the Balance Sheet statement.

Variant 1: Balance Sheet item balance includes both parent and minority interest

When the minority interest dividends are not distributed during the regular course of business as a result of normal profit and loss distribution, they are shown in their entirety in the Balance Sheet All items like 37000000 (profit and loss), counter item 39000000, and 25712000 display balance before a deduction is taken for minority interest. Dividend distributions take place through the normal payout accounting in which specific capital additions and distributions of minority interest net profit (loss) are reconciled through item 25724000. That item’s balance is subsequently carried forward similarly from item 25712000 to item 25711000 (retained earnings – prior years), so that the ending balance in the totals item 25710000 – retained earnings shows only the parent portion.

When there is a net profit the minority interest portion is shown as a deduction from the item balance and result in a Balance Sheet only balancing entry to increase the minority interest portion of enterprise equity (item 24171200). It should be emphasized that in this variant of minority interest conversion there is no Income Statement item showing a balance for minority interests as was the case in the prior treatment of including it in net income (loss) item 37000000. In order to satisfy the requirements of IAS 1.82 disclosing the breakdown of enterprise and minority portions an entry is made into the item 25724000 – additions and deductions of minority interest participation at net income (loss).

Variant 1

Variant 2 Balance Sheet item balance includes only the enterprise portion of net income (loss)

As an alternative, the original treatment under IAS 27 (2000) and the relevant Consolidation Unit customization can still be preserved. The net profit (loss) totals item 37000000 and the counter item 39000000 as well as the Balance Sheet item 25712000 report only the enterprise portions after deduction for minority interests are taken. In order to fulfill the requirements of IAS 27 (2003) a separate totals Income Statement item needs to be designated in which net income (loss) needs to include minority interests. The minority interest is calculated during execution of process of subsequent consolidation in which minority interest is accumulating in Income Statement item 37010000 and in Balance Sheet item 24171200. Since calculation of minority interests has an impact on final net income (loss) a complementing Balance Sheet item has a balance for the parent portion only.

Variant 2

Conclusion

Both variants of accounting for minority interest can be included in IFRS compliant financial statements. It should be ensured, however, that both minority and parent portions are disclosed in the final balance. Whether the totals item retained earnings shows 100% of net profit (loss) first and subsequently gets adjusted via an addition and a deduction item or according to the accepted practice shows only the parent entity’s portion is inconsequential in the final preparation of the Balance Sheet. Please note, however, that the adopted approach is reflected accordingly in the COI (capital equity) changes.

We follow the second variant and configure the step of distribution of dividends with item 37010000 which is used for accounting for minority interest in the profit and loss statement.

 

Profit calculation according to IFRS

Income according to IFRS accounting is an increase in economic utility within a reporting period in the form of inflows and augmentation of wealth or in the form of outflows of debt which lead to an increase in equity without a corresponding contribution of assets from capital owners. The equivalent expense is defined as reduction of economic utility within a reporting period in form of outflows or diminution of wealth or in the form of inflows of debt by which the equity is reduced without the distribution of assets by capital owners. The extent of the profits and losses influence is dependent on how much is actually realized. The results of extraordinary income and expense is interpreted as having no influence on profit and loss and is reflected directly in equity. The outcome of profit and loss is not the only factor of enterprise’s result in financial statements according to IFRS. The information about the total recognized income and expense for the period is addressed to report readers only in connection with so called Other Comprehensive Income. In that last category, profit and loss balances that have no impact on final outcome are rolled forward. The notion of other comprehensive income originates in US GAAP and is specified in SFAS 130.

Accordingly, the concept is also used in IFRS and includes the following components:

• Foreign currency translation differences of foreign subsidiaries IAS 21.23

• Unrealized gains and losses from fair value accounting of assets available for sale IAS 39

• Market value changes of derivative instruments IAS 39.95A

• Outcome neutral calculations of actuarial gains IAS 19.93A

In addition, IFRS also includes the following outcome neutral representations in the equity section. These representations result from differences in their technical accounting transaction closeouts of historical balances and the fair current value to the extent required for separate reporting.

• Changes of value of fixed assets according to IAS 16.31 as compared with IAS 16.39

• Changes of value of intangible property assets according to IAS 38.75 as compared with IAS 38.85

• Deferred income tax assets and liabilities.

The result of profit and loss calculation is reported in the retained earnings section of Balance Sheet. This balance includes the current and prior years’ profits and its components are prior years’ profits plus net profit (loss) of the current period less distributed dividends. The rollforward of retained earnings is the basis for the statement of changes in equity section.

Particulars of cost of sales chart of accounts

According to IAS 1 profit and loss statement includes both cost of sales and total costs. Both approaches are appropriate and equally applicable. Enterprises favor cost of sales, however. The breakdown of costs is only minimally set forth in IAS 1.81 as compared with IAS 1.92.

Cost of sales is different from total costs with respect to the expense structure. The former follows functional areas and the latter follows the cost element groups. In the total cost, also called manufacturing cost, accounting are included direct costs of the reporting period showing the cost structure. This approach applies notwithstanding unsold goods and services. To account for the unsold goods and services an item for inventory changes is provided. In cost of sales accounting, the sales of goods and services are offset with manufacturing cost of the goods and services notwithstanding the actual period when those costs were incurred. Furthermore, the cost breakdown follows the functional area breakdown: manufacturing, marketing, and administration.

In the total costs accounting, chart of accounts follows the breakdown of cost element groups material, labor, depreciation, etc IAS 1.91. Those costs include all expenses of the period notwithstanding their source in production, administration, or marketing. Should these expense items be attributed to functional areas, they need to have the relevant subitem attribute value provided. Via this breakdown category cost of sales accounting cannot be used directly for obtaining the profit and loss statement… Initially, functional areas can be used for breaking down direct costs through the attributes. The real problems result, however, from different unit counts since total cost expenses are incurred for all manufacturing and cost of sales expenses only for the goods and services actually sold. The inventoriable costs of production in cost of sales accounting are accrued in the Balance Sheet inventory section. Only a portion of manufacturing cost that is allocated to sales is shown as cost of sales. In practice, this breakdown is regularly processed in upstream systems and reported in Consolidation alongside Consolidation Units as cost of sales value item.

Production Cost

To depict the cost of sales a totals item 30310000 is defined. Rolled into it is value item for cost of sales (item 30311000) which reports the unconsolidated value for the period being closed. To execute the internal sales elimination we define the items 30110000 and 30311000 with subassignment breakdown category Consolidation Unit Partner – optional. The offsetting item for internal sales elimination is item 30313000 that is also used for adjustments of interim period eliminations. Its subassignment does not require breakdown category for Partner (unit). In case of deferred income tax assets related to manufacturing process, we also include amortization, positive or negative, in cost of sales. For that we define items 30314000 and 30315000.

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