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Financial Reporting Assignment

The document outlines the requirements and implications of IFRS 5 and IFRS 7 for financial reporting. IFRS 5 focuses on the classification and measurement of non-current assets held for sale, while IFRS 7 emphasizes the disclosure of financial instruments, their risks, and management strategies. Both standards aim to provide a true and fair view of an entity's financial position and performance.

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3 views

Financial Reporting Assignment

The document outlines the requirements and implications of IFRS 5 and IFRS 7 for financial reporting. IFRS 5 focuses on the classification and measurement of non-current assets held for sale, while IFRS 7 emphasizes the disclosure of financial instruments, their risks, and management strategies. Both standards aim to provide a true and fair view of an entity's financial position and performance.

Uploaded by

g7cw8nht2f
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Group members:

• DEJON TCHOUTOUO Daryl


• Pedro Simeon ONDO ESENG
• NDZIE BAKARI Alan Marco
• KAMDEU KAMINA Shaïna Leonella
• TIYON KASSE Rosalex Corneille

FINANCIAL REPORTING ASSIGNMENT: IFRS 5 & 7

IFRS 5: Non-current Assets Held for Sale and Discontinued Operations

What are non-current Assets Held for Sale and Discontinued Operations?

According to IFRS 5, a non-current asset is one that is not classified as a current asset.
Non-current assets are typically used for the long term and include items like property,
machinery, intangible assets (such as patents and software), and long-term investments.

IFRS 5 focuses on non-current assets that are held for sale. To qualify for this category, a
non-current asset must meet these criteria:

1. Ready for Sale: The asset should be in a condition that allows it to be sold
immediately.
2. High Probability of Sale: There should be a strong likelihood of sale, usually
shown by a commitment to find a buyer and a realistic sales plan.
3. Sale Timing: The sale is expected to happen within one year from when it was
classified as held for sale.

Once a non-current asset is classified as "held for sale," it must be valued at the lower
amount between its book value and its fair value minus selling costs. Additionally, the
asset will no longer be subject to amortization.

In summary, a non-current asset under IFRS 5 is a long-term asset that can be classified
as held for sale under certain conditions, which affects how it is recognized and
measured.

What are the implications of the IFRS 5 on the balanced sheet, income statement,
cash flow statement and the notes to the financial statements?

1. Balance Sheet

- Reclassification: The non-current asset held for sale is removed from its original
category (e.g. property, plant, and equipment) and presented separately in the balance
sheet under a new line item titled "non-current assets held for sale".

- Measurement: The asset is measured at the lower of its carrying amount and fair value
less costs to sell. If the fair value less costs to sell is lower than the carrying amount, an
impairment loss is recognized.

- Cessation of depreciation: The asset is no longer depreciated from the point it is


classified as held for sale.
2. Income Statement

- Impairment: If the fair value less costs to sell is lower than the carrying amount, an
impairment loss is recorded in the profit and loss statement. This loss is typically
presented in a specific line item, often referred to as "Results from assets held for sale".

- Gain or loss on disposal: When the asset is sold, the gain or loss arising from the sale
is recognized in the profit and loss statement. This gain or loss is calculated as the
difference between the proceeds from the sale and the carrying amount of the asset.

3. Cash Flow Statement

- Cash flows from the sale: The proceeds from the sale of the asset are presented in
the cash flows from investing activities section.

- Impairment: The impairment loss recorded in the profit and loss statement is a non-
cash item. It is therefore added back to the net profit in the cash flows from operating
activities section (if the indirect method is used).

4. Notes to the Financial Statements

- Disclosures: The notes to the financial statements must include detailed information
about the assets held for sale, such as:

• A description of the asset or group of items held for sale.


• The circumstances leading to the decision to sell.
• The fair value less costs to sell and the methods used to determine it.
• Impairment losses recognised.
• Subsequent gains or losses related to the sale.

- Discontinued operations: If the asset is part of a discontinued operation (a group of


items to be disposed of), the notes must also include information on the revenues,
expenses, and cash flows related to that operation.

These treatments ensure a true and fair view of the financial position and performance of
the entity, considering assets intended for disposal.

IFRS 7: Financial instruments

What is a financial instrument according to IFRS 7?

According to IFRS 7, a financial instrument is defined as any contract that gives rise to a
financial asset for one entity and a financial liability or equity instrument for another
entity. Financial instruments include:

- Financial assets: Such as cash, receivables, investments in equity or debt instruments,


and derivatives.
- Financial liabilities: Such as payables, borrowings, and derivatives.
- Equity instruments: Such as ordinary shares or other instruments representing
ownership interests.

IFRS 7 requires entities to provide disclosures about financial instruments to help users
of financial statements understand their significance, the risks associated with them,
and how those risks are managed.

What are the implications of IFRS 7 on the income statement, balance sheet, cash
flow statement, and notes to the financial statements?

IFRS 7 primarily focuses on disclosures rather than recognition or measurement, which


are covered by other standards like IFRS 9. However, it has significant implications for the
presentation and disclosure of financial instruments in the financial statements:

1. Balance Sheet

- Classification: Financial instruments must be clearly classified as either financial


assets, financial liabilities, or equity instruments.
- Measurement categories: Disclosures must indicate whether financial instruments
are measured at amortised cost, fair value through other comprehensive income (FVOCI),
or fair value through profit or loss (FVTPL).
- OXsetting: Disclosures are required about any ocsetting of financial assets and
liabilities, such as when a right of set-oc exists.

2. Profit and Loss Statement

- Gains and losses: Disclosures must be provided about gains and losses arising from
financial instruments, including:
• Interest income and expense.
• Gains or losses from changes in fair value.
• Impairment losses on financial assets.
- Income and expenses by category: Entities must disclose income and expenses
related to financial instruments by measurement category (e.g. amortised cost, FVOCI,
FVTPL).

3. Cash Flow Statement

- Cash flows from financial instruments: Cash flows related to financial instruments
(e.g. interest received, dividends paid, repayments of borrowings) are presented in the
relevant sections of the cash flow statement (operating, investing, or financing activities).
- Disclosures: Additional information about cash flows from financial instruments may
be required in the notes, particularly if they are significant or unusual.

4. Notes to the Financial Statements

IFRS 7 requires extensive disclosures in the notes, including:


- Significance of financial instruments: Information about the role of financial
instruments in the entity’s financial position and performance.
- Risk management: Disclosures about the risks associated with financial instruments
(e.g., credit risk, liquidity risk, market risk) and how these risks are managed.
- Fair value: For financial instruments measured at fair value, entities must disclose the
valuation techniques and inputs used.
- Hedge accounting: If hedge accounting is applied, detailed disclosures about hedging
relationships, ecectiveness, and the impact on financial statements are required.
-Defaults and breaches: Disclosures about any defaults or breaches of loan
agreements or other financial covenants.

These disclosures ensure that users of financial statements have a comprehensive


understanding of the entity’s exposure to financial instruments and the associated risks.

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