Fundamentals of International

Financial Reporting
Department for Financial Reporting and Audit
Introduction
CONTENTS
1 Introduction to IFRS in Europe and IFRS financial statements

2 Business combinations

3 Selected issues in reporting for non-current assets

4 Accounting for financial debt and equity

5 KPIs & financial communication

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Introduction
REFERENCES – International Financial Reporting
 Students have unlimited access to some online textbooks at
http://www.vlebooks.com/vleweb/product/openreader?id=ESCP&accId=8767056&isbn=9781119391586
(“sign in” via “Google” with your ESCP info)

 Weygandt/Kimmel/Kieso: Financial and Managerial Accounting, 3rd edition, Wiley 2018

 Weetman: Financial and Management Accounting: An Introduction, 7th edition, Pearson 2017
 Elliott/Elliott: Financial Accounting and Reporting, 19th edition, Pearson 2019: ch. 3, 5, 6, 7

 Videos on https://www.principlesofaccounting.com/ and on youtube: IFRSbox

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Introduction
REFERENCES – Reminder Accounting
 Readings
http://www.vlebooks.com/vleweb/product/openreader?id=ESCP&accId=8767056&isbn=9781119391586
(“sign in” via “Google” with your ESCP info)

 Weygandt/Kimmel/Kieso: Financial and Managerial Accounting, 3rd edition, Wiley 2018: ch. 1
 Weetman: Financial and Management Accounting: An Introduction, 7th edition, Pearson 2017: ch. 2, 3

 EXERCISES WITH SOLUTIONS ON BB: exercise n°1

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Fundamentals of International
Financial Reporting
Topic 1: Introduction to IFRS in Europe
and IFRS financial statements
1. Introduction to IFRS in Europe and IFRS financial statements
CONTENTS & READINGS

 Contents *IFRS: International Financial Reporting Standards

IASB: International Accounting Standards Board
1. Introduction to IFRS in Europe*
2. The IASB*’s Conceptual Framework
3. The IFRS Financial Statements: context and presentation

 READINGS
 Elliott/Elliott: Financial Accounting and Reporting, 19th edition, Pearson 2019: ch. 3, 5, 6, 7
 Videos on https://www.principlesofaccounting.com/ (Chapter 15)
 Videos on youtube/IFRSbox
 Conceptual Framework for Financial Reporting 2018 (IFRS FW) https://www.youtube.com/watch?v=v56_VJkjAX4
 IAS 1 Presentation of Financial Statements – summary https://www.youtube.com/watch?v=DlfQWi9T264
 IAS 7 Statement of Cash Flows https://www.youtube.com/watch?v=NMubNKCQV0A

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1. Introduction to IFRS in Europe and IFRS financial statements
OBJECTIVES

By the end of this chapter you should be able to

 Understand the context of the use of IFRS in Europe
 Understand the main features of the IASBs Conceptual framework
 Describe the main elements of IFRS financial statements
 Understand the presentation issues of these different elements
 Understand the concept of Other comprehensive income

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1. Introduction to IFRS in Europe and IFRS financial statements
INTRODUCTION TO IFRS

 Despite decades of accounting harmonization in the EU, financial

statements were/are not comparable
 Therefore, the EU decided to make IFRS mandatory for certain
financial statements (« IFRS Regulation »)
 Why IFRS?
IFRS are issued by a private institution (IASB) and recognized/adopted
by “local” regulators of more than 144 countries (except USA)

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IFRS in the World: countries that do not accept
IFRS

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1. Introduction to IFRS in Europe and IFRS financial statements
IFRS-REGULATION IN EUROPE
Consolidated FS Individual FS

French GAAP
– France
Companies
LISTED

IFRS UK GAAP or IFRS

MANDATORY German GAAP – United Kingdom
since 2005 w/exceptions
– Germany
IFRS MANDATORY
– Italy
NON-LISTED

IFRS or French French GAAP

Companies

GAAP
UK GAAP or IFRS UK GAAP or IFRS
German GAAP or German GAAP
IFRSor IFRS
Italian GAAP Italian GAAP or IFRS *GAAP:
Generally Accepted Accounting Principles
w /exceptions w /exceptions
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1. Introduction to IFRS in Europe and IFRS financial statements
IFRS CONTENTS

IFRS consists of…

IAS IFRS SIC IFRIC

 IAS: International Accounting Standards: “old standards” (IAS 1 to IAS 41, 25 still active),
issued before 2001
 IFRS: International Financial Reporting Standards (IFRS 1 - IFRS 17, 16 active),
issued since 2001
 SIC: Standing Interpretations Committee: “old interpretations” (5 still active),
issued before 2001
 IFRIC: International Financial Reporting Interpretations Committee (IFRIC 1 - IFRIC 23, 15 active),
issued since 2001

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1. Introduction to IFRS in Europe and IFRS financial statements
THE IASB’S CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING
Objective is to provide decision-useful information to users.
Fundamental
Enhancing qualitative
qualitative Other elements
characteristics
characteristics
Relevance (incl. Comparability Cost constraint (balance
materiality) Verifiability between benefits and cost)
Faithful representation Going concern assumption
Timeliness
(incl. substance over Definitions (assets,
form) Understandability
liabilities etc.)
Measurement bases
…..

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1. Introduction to IFRS in Europe and IFRS financial statements
THE IASB’S CONCEPTUAL FRAMEWORK:
THE IFRS HIERARCHY

SIC
IFRIC
IAS
IFRS

The Conceptual “Overriding principle”!

Individual IFRS override
Framework for the Framework

Financial Reporting

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1. Introduction to IFRS in Europe and IFRS financial statements
THE IFRS FINANICAL STATEMENT (IAS 1)
 Required
 Statement of financial position as at the end of a period (balance sheet)
 Statement of comprehensive income for the period (income statement and OCI)
 Statement of cash flows for the period (IAS 7)
 Statement of changes in equity for the period
 Notes
 In addition for listed companies: Segment reporting (IFRS 8), Earnings per share (IAS 33)

 NOT REQUIRED BY IFRS BUT OFTEN BY NATIONAL REGULATION

 Management report
 Environmental reports, e.g. Corporate social responsibility (CSR) report

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1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF FINANCIAL POSITION/
BALANCE SHEET
 No specific format is mandatory, but IAS 1 requires to distinguish
current assets and liabilities from non-current ones
 Current assets: Assets a company expects to realise, sell, or consume either
within one year or in its operating cycle, or the asset is primarily held for trading
(cash, inventory, accounts receivable etc.)
 Non-current assets: Assets that are not current (property, plant and equipment,
intangible assets etc.)
 Current liabilities: Obligations that a company expects to settle within one year
or in its operating cycle (accounts payable etc.)
 Non-current liabilities: Obligations that are not current (long term debt, long
term provisions etc.)

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1. Introduction to IFRS in Europe and IFRS financial statements

BALANCE SHEET
EXAMPLE 1

Air France-KLM,
Annual Report 2021

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BALANCE SHEET
EXAMPLE 1

Air France-KLM,
Annual Report 2021

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1. Introduction to IFRS in Europe and IFRS financial statements
BALANCE SHEET EXAMPLE 2

easyJet,
Annual Report 202118
1. Introduction to IFRS in Europe and IFRS financial statements
BALANCE SHEET EXAMPLE 2 (cont.)

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easyJet,
Annual Report 202119
1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF CONPREHENSIVE INCOME

 Statement of comprehensive income can be presented

 Either as a single statement
 Or as two statements:
Statement of profit or loss (Income statement) +
Statement of other comprehensive income (OCI)

 Format and Presentation

 No mandatory format; the income statement is presented by nature or by
function
 Very little information is required on the face of the statement of comprehensive
income/income statement according to IAS 1
 Operating profit or other indicators not defined
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1. Introduction to IFRS in Europe and IFRS financial statements
« TRADITIONAL » INCOME
REVENUE STATEMENT OF
CONPREHENSIVE
GAINS AND LOSSES ARISING FROM THE DERECOGNITION OF
FINANCIAL ASSETS MEASURED AT AMORTISED COST
FINANCE COSTS
INCOME (cont.)
STATEMENT
IAS 1.82

SHARE OF THE PROFIT OR LOSS OF ASSOCIATES AND JOINT-

VENTURES
TAX EXPENSE
POST-TAX PROFIT OR LOSS OF DISCONTINUED OPERATIONS
= PROFIT OR LOSS:
Minimum requirements of the
- Profit or loss attributable to non-controlling interest statement of comprehensive
- Profit or loss attributable to the owners of the parent company income according to IAS 1.81 et seq.
+
EACH COMPONENT OF OTHER COMPREHENSIVE INCOME
(OCI)
IAS 1.82A

SHARE OF THE PROFIT OR LOSS OF ASSOCIATES AND JOINT-

VENTURES
OCI

= TOTAL COMPREHENSIVE INCOME

- Comprehensive income attributable to non-controlling interest
- Comprehensive income attributable to the owners of the parent
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1. Introduction to IFRS in Europe and IFRS financial statements
INCOME STATEMENT & OCI
 Income Statement
 An entity shall recognize any items of income or expense in a period in profit or
loss (P/L) (mind exceptions), IAS 1.88
 Presentation of the analysis of expenses recognized in P/L based on (IAS 1.99):

‘nature of expense’ method ‘function of expense’ method

 Other comprehensive income (OCI)

 Certain gains and losses that are not accounted for (as usual) in the (traditional)
income statement but in OCI (example: fair value gains and losses of certain
financial instruments)
 Consequence of OCI presentation: Gains/losses in OCI do NOT impact net income
(not part of dividend calculation; depending on national tax rules potentially not
part of current income tax calculation)
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1. Introduction to IFRS in Europe and IFRS financial statements
OTHER COMPREHENSIVE INCOME: EXAMPLE
A company buys a financial asset for 100. At the end of the year the value of the asset
has (a) decreased to 80 OR (b) increased to 110

H1: gains and losses are recognised in net income H2: gains and losses are recognised in OCI
Balance sheet Balance sheet

FA # 100 FA # 100
(a) – 20 = 80 (a) – 20 = 80
(b) + 10 = 110 (b) + 10 = 110

Statement of comprehensive Income Statement of comprehensive Income

(a) Expense (loss) 20 Net income: YYY

(b) Revenue (gain) 10 (a) OCI loss 20
Net income: XXXXX (b) OCI gain 10
OCI: - Total comprehensive
Total comprehensive income: YYY+/-OCI
income: XXXXX Department for Financial Reporting and Audit
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1. Introduction to IFRS in Europe and IFRS financial statements
INCOME STATEMENT EXAMPLE 1
“nature of expense“ method:
expenses are classified according to
their nature, IAS 1. 102
(e.g. salaries, raw materials, restructu-
ring, depreciation etc.)

Department for Financial Reporting and Audit

Orange,
Annual Report 202124
1. Introduction to IFRS in Europe and IFRS financial statements
INCOME STATEMENT EXAMPLE 2
“function of expense”
method:
expenses are classified
according to their function
as part of cost of sales,
IAS 1.103
(e.g. selling and distribution,
administrative expense)

Vodafone,
Annual Report
2021 25
1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF COMPREHENSIVE INCOME: EXAMPLE 2 STATEMENTS
APPROACH

Orange, annual
Report 2021 26
1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF COMPREHENSIVE INCOME: EXAMPLE 1 STATEMENT
APPROACH

Turkish airlines
Annual Report 2021

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Statement of comprehensive income
Revenue Recognition
Cut-off issues

• Revenue recognised in the statement of comprehensive income only

includes realized revenue (IFRS 15)
• Consequently, services invoiced to customers in year X that will be
rendered to customers later must not been included in the income
statement for year X.
• When the service is rendered to the customer over several years,
revenue is recognised over the years according to the percentage of
completion (example: Publicis 2021)

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Revenue Recognition: Example

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Revenue Recognition: Example

2 706 millions of revenue included in Trade

Receivables and in Revenue in the income
statement have not been invoiced yet
(Total revenue in the income statement: 10,487
millions)

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Revenue Recognition: Example (Nueva diapo)

Services invoiced to customers in 2021 but not included

in the 2021 Revenue (income statement) since
the services have not been rendered to customers so far.

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1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF CASH FLOWS (IAS 7)
 Cash flow statements shall provide a basis to assess the ability of the
entity to generate cash (equivalents) and how the entity uses those
cash flows.
 Cash flows are classified in:
Operating CF Investing CF Financing CF
Cash inflows and Cash inflows and Cash inflows and
outflows from outflows from outflows from
operations. non-current financial liabilities and *direct method:
(cash related to the assets. equity. shows every cash inflow
day-to-day activities) and outflow
(cash related to buying/ (cash related to debt and indirect method:
selling non-current cash contributions by starts with the net
assets) and distributions to owners) income and makes
adjustments for items
that are not cash

direct or indirect method* direct method* direct method*

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1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF CASH FLOWS EXAMPLE

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Schneider,
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Annual Report 2021
1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF CASH FLOWS EXAMPLE (cont.)

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Schneider,
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Annual Report 2021
1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF CHANGES IN EQUITY

 A statement of changes in equity shall present (IAS 1.106):

 Total comprehensive income for the period
(distinction between amounts attributable to owners and amounts attributable to non-
controlling interests)
 For each component of equity, separately the changes resulting from:
 profit or loss,
 other comprehensive income, and
 the amounts of transactions with owners, showing separately contributions and
distributions and changes in ownership interests in subsidiaries
 For each component of equity, the effects of retrospective application in
accordance with IAS 8

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1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF CHANGES IN EQUITY EXAMPLE

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Schneider,
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Annual Report 2021
1. Introduction to IFRS in Europe and IFRS financial statements
STATEMENT OF CHANGES IN EQUITY QUESTIONS

 In which other financial statement can the items of OCI be found?

 What are treasury stocks? Explain the movement in treasury stocks in
2021?
 An increase in capital is shown in the statement of changes in equity:
were new shares issued against cash?

Department for Financial Reporting and Audit

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Annual Report 2021
1. Introduction to IFRS in Europe and IFRS financial statements
NOTES TO THE ACCOUNTS

 The notes shall (IAS 1.112):

 Present information about the basis of preparation of the financial statements
 Disclose the information required by the IFRSs that is not presented elsewhere in
the financial statements
 Provide any other relevant information (to an understanding of the financial
statements)

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1. Introduction to IFRS in Europe and IFRS financial statements
European Single Electronic Format (ESEF)
 ESEF is the new single electronic reporting format for the preparation of annual
financial reports to be published by listed companies in the EU from 2021 onwards.
This format provides for one single file that will include the financial statements, the
management report and the responsibility statements of the persons responsible
within the company.

 The file is formatted using eXtensible Hyper-Text Markup Language (XHTML):

Allowing to combine an HTML file (which can be viewed with standard web
browsers) with XML tags, readable by dedicated computer programs

 Objectives:
 to improve the accessibility, the analysis and the comparability of the consolidated financial
statements
 to allow analysts and investors to make better use of the information provided by
companies,
 to enhance the transparency of the European Union's capital markets.

Example: Financial statements under ESEF Format Air France KLM 2021 39
1. Introduction to IFRS in Europe and IFRS financial statements
QUIZ (1/2)
1. In 2022, the EU is the only jurisdiction in the world
that requires IFRS for the consolidated financial F
statements of listed companies
2. In case of conflict between an IFRS and the Conceptual
Framework, the IFRS overrides the Conceptual T
Framework
3. According to the Conceptual Framework, the objective
of financial reporting is to provide useful information to F
all users
4. Accounts receivables maturing in more than one year
have to be presented as non-current assets F
5. Operating expenses can be disclosed either by nature
or by function in the statement of comprehensive income T
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1. Introduction to IFRS in Europe and IFRS financial statements
QUIZ (2/2)
6. Operating profit is precisely defined under IFRS
F
7. Comprehensive income is equal to net income plus
other comprehensive income T
8. Operating cash flows have to be presented according
to the direct method in the statement of cash flows
F

9. The statement of changes in equity shows purchases

and sales of treasury stock T

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1. Introduction to IFRS in Europe and IFRS financial statements
FURTHER READGINGS
 Aledo Martínez, J., Abellán Martínez, D. and Lin, H. (2014), The Value Relevance of Accounting Numbers
Under International Financial Reporting Standards, Australian Accounting Review, 24 (3), 237–254
 Aledo Martínez, J., García Martínez, F. and Marín Diazaraque, J. M. (2011), Opcionalidad contable bajo las
NIIFs y características corporativas: evidencia española, Revista de Contabilidad, 14 (1), 59–85
 Biondi, Y. and Suzuki, T. (2007), Socio-economic impacts of international accounting standards: an
introduction, Socio-Economic Review, 5 (4), 585–602
 Delvaille, P., Ebbers, G. and Saccon C. (2005), International Financial Reporting Convergence: Evidence
from Three Continental European Countries, Accounting in Europe, 2 (1), 137–164
 Demerens, F., Hossfeld, C., Le Manh, A. and Bonnier, C. (2013), A French Experience of an IFRS transition,
Issues In Accounting Education, 28 (2), 221–234
 Le Manh, A. (2012), Une analyse du due process dans le cadre de la normalisation comptable: Le cas du
projet de comprehensive income par l'IASB, Comptabilite Controle Audit, 18 (1), 93–120
 Le Manh, A. (2017), The Role and Current Status of IFRS in the Completion of National Accounting Rules
– Evidence from France, Accounting in Europe, 14 (1/2), 94–101
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