0:06 Hello everyone, hope you all are doing
0:09 well. So in today's lecture we will
0:13 start if FRS 18 presentation and
0:16 disclosure in financial statement. It
0:20 replaces IS1. Previously we prepared the
0:24 financial statement as per IS1
0:28 but from the 2027
0:30 we will prepare the statement of
0:34 financial as per FRS8.
0:38 Before starting the IFRS8
0:41 let me tell you about the major changes.
0:44 It changes to statement of profit and
0:47 loss as additional defined totals will
0:50 provide better consistency.
0:52 Also, it is introducing disclosure
0:56 requirement of management performance measurement
0:57 measurement
1:01 that will increase the transparency
1:04 also strengthening the requirement of
1:06 aggregating and disagregating
1:10 information. Once we read the next
1:13 content or slides we will get the better idea
1:15 idea also
1:16 also
1:20 it is about the AS7 cash flows. If you
1:21 remember in the cash flows there are
1:24 three activities operating investing and
1:29 financing activities. Now as per IFRS8
1:32 profit and loss will also be further
1:36 expanded into five categories such as investing,
1:38 investing,
1:41 operating, investing, financing and
1:44 after that we have continued and
1:48 discontinued operations and taxes.
1:52 Now there is one important thing. In the
1:56 AS1 we often use the PBT profit before
1:59 tax. But now from the IFRS8N
2:03 implementation the PBT will change with
2:06 PBIT means profit before interest and taxes.
2:08 taxes.
2:12 Now in the AS7 cash flows if you guys
2:14 have studied IAS7 so you better
2:17 understand this thing. Then all the
2:20 components or balances are classified
2:23 into each of their categories. If any
2:25 amount spent or received with respect to
2:28 operating then the specific amount will
2:30 goes into operating
2:33 activities. It gives the better
2:35 transparency and better idea to the
2:38 users of the financial statement as the
2:40 users does not only relate to
2:42 shareholders. It is also for the
2:46 stakeholders mean general users. So for
2:48 the better understanding and better
2:53 transparency for the users now if 18
2:57 will further divided the profit and loss
3:00 account into five categories so that
3:02 non-financial users or non-financial
3:10 Now there are few students who may
3:13 confuse between IS8,
3:16 IFRS8 and IS1.
3:20 There is a little change in the title as
3:23 the title is rechanged
3:26 basis of financial statement or basis of
3:28 preparation of financial statement. So
3:31 nothing to worry as changes in
3:32 accounting estimates, changes in
3:35 accounting policies and prior period
3:36 error is still the same which you guys
3:41 have covered in the previous lectures.
3:45 Today's lecture is all about IFRS8 and
3:49 IS1. How will further progress in the
3:53 upcoming days or months or year? The
3:56 effective alternative date of the IFRS8
4:06 So before starting the IFRS8
4:09 reading, I would like to show you the
4:13 visuals how IFRS8 and how the statement
4:15 of profit and loss will be prepared as
4:18 per IFRS 18. Okay, there are few visuals
4:23 in the end of this slide. IFRS8 requires
4:27 to improve financial performance. IFRS18
4:30 requires a company or an entity to
4:33 classify income and expenses into
4:38 operating, investing and financing
4:42 which will given in the next visual
4:44 under the dark blue.
4:47 categories in the statement of profit or
4:50 loss plus income taxes and discontinued
4:53 operation. So now it is categorized into
4:58 five things and to present two new
5:00 defined subtotal. This is management
5:03 performance measurement operating profit
5:06 and profit before financing and income
5:09 taxes. AITA earning before interest tax
5:12 amotization and depreciation.
5:15 Now illustrative statement of profit or
5:18 loss income and taxes from company's
5:22 main business activities operations
5:25 income and expenses from additional
5:28 activities. Additional means can anyone
5:35 or also classified in the operating
5:38 category if there is a condition of if
5:41 those income and expenses do not meet
5:44 the requirements to be classified in any
5:47 of the other categories. It means if
5:50 there is any income or expenses which
5:53 category has not yet defined or which is
5:56 not identified then that specific income
5:59 or tax will also be categorized in the
6:02 operating activity head.
6:06 Now categories operating investing
6:08 financing then income tax then
6:12 discontinued operations. So now we have
6:14 covered the operating link. Now in the
6:16 operating let's see which items come
6:19 revenue cost of sales gross profit other
6:22 operating income
6:25 selling expenses research and
6:27 development expenses general and
6:30 administrative expenses goodwill
6:34 impairment loss other operating expenses
6:37 and the accumulate is operating profit
6:39 starting point for reporting cash flows
6:44 from operating activities I7 Seven.
6:47 Now in the investing we have share of
6:50 profit and gains on disposal of
6:53 associates and joint venture AS28 and
6:58 IFRS11. This is how you have to prepare
7:01 the statement of profit and loss as per
7:05 IFS 18. The required subtotals profit
7:08 before financing and income taxes. Now
7:11 in the financing we have interest
7:14 expense on borrowings and lease liabilities.
7:15 liabilities.
7:18 Interest expense on pension liabilities
7:24 and provision. Look how iff category
7:26 discloses all the particular information
7:29 into the relevant head. If you remember
7:32 in the previous IAS1 the all interest
7:35 club into the finance cost. Then in the
7:37 finance cost breakup you have to
7:39 identify either the interest come from
7:41 the bank charges or from the markup
7:45 approved markup or other ECL charges.
7:48 But from the IFRS implementation it's
7:51 very easy to understand for the users of
7:52 the financial statement that this
7:55 particular interest is from this and
7:58 that particular head.
8:01 Now PBIT profit before income and taxes
8:03 these are the main categories. Then we
8:06 have income taxes.
8:08 After that we have profit from
8:10 continuing operations, loss from
8:12 discontinued operations. It could be any
8:15 depend on the condition. Now for the
8:19 financing we have income and expenses on
8:21 liabilities such as bank loans,
8:25 overdrafts and bonds and interest
8:28 expenses on any other liability. For
8:31 example, lease and pension liabilities
8:34 means any income or expense on the
8:37 liabilities or on the debts will come
8:40 under the financing.
8:43 Income and expenses from assets that
8:47 generate returns separately from a
8:49 company's business activity. There is a
8:52 word separately from a that generate
8:55 returns separately from a company's
8:58 business activities and from cash and
9:02 cash equivalents and investments in
9:06 associates and JVS will become under the
9:09 investing activities.
9:14 Now there is a sample of profit and loss
9:18 versus FRS8. This is Colgate Palm Molive
9:20 Pakistan Limited statement of profit and
9:24 loss for financial year 23 presentation
9:27 under IAS1.
9:29 These visuals have been taken from the
9:34 PSX site. Now in the AAS1 we have
9:36 revenue, sales tax, trade and other
9:39 discount. Then we have net turn over
9:41 cost of sales. If we minus cost of sales
9:43 from the revenue we will get gross
9:46 profit. Let's see in the category as per
9:50 IFRS 18 same revenue sales tax same
9:52 trade net turnover but there is a
9:55 category of operating all these things
9:57 are categorized under the operating
10:00 activity head now we have cost of sales
10:02 if we less cost of sales from the
10:05 revenue we will have gross profit now
10:08 selling and distribution here we have
10:10 selling and distribution administrative
10:14 administrative other expenses other
10:18 Operating expenses. Please pay attention
10:22 and identify the keywordings. Other
10:25 expenses. Now we have other operating
10:29 expenses. Other income. Other operating
10:32 income. In the previous IAS1 the other
10:34 income cover any kind of income means
10:44 Now in the end we have operating profit
10:47 as per I FRS 18 but as per IAS when we
10:50 have profit from operations. Now finance
10:53 cost and bank charges look the thing
10:56 which I have discussed earlier but now
11:00 as per if the category is investing in
11:05 which income from financial assets. If
11:07 there is an income from the financial
11:09 asset then we have to categorize it
11:13 first before the financing
11:16 then we have taxation in the IAS1 in the
11:19 FRST and we have financing in finance
11:22 cost 150682.
11:25 Now we have PBT profit before taxation
11:28 income taxes taxation profit after tax.
11:30 If there is discontinued and continued
11:32 operation then you should have also
11:35 incorporated it. So this is the
11:37 structure and the visuals which I have
11:41 show you and I have explained you why 18
11:44 is better than IS1.
11:46 Let's start reading these slides then we
11:50 will get better and clear understanding.
11:53 Okay these are the detailed slides for
11:56 your better understanding.
12:04 read with you few content but
12:06 you have to read the remaining for your
12:08 own understanding.
12:12 In this slide I have also explained the
12:15 real life scenario example. So after
12:17 reading those case studies you will get
12:21 the better clarity how IFRS8 is
12:25 implemented as against the IAS1.
12:30 IFRS8 replaces IAS1. The summary IFRS8
12:33 is the new global presentation and
12:38 disclosure standard. It replaces IAS1.
12:41 It standardize the income statement
12:44 means it structure the income statement
12:46 into five categories which we have just
12:49 covered and requires new subtotals like operating
12:52 operating
12:54 profit and profit before financing and
12:58 income taxes. It introduced management
13:02 defined performance measurements such as
13:07 AITA recurring such kind of items will
13:09 strict note disclosures and reconciliations.
13:11 reconciliations.
13:13 Cash flow classification for interest
13:16 dividend is tightened and must align
13:19 with how related income expense is
13:23 classified in profit and lo. Now for the
13:25 each item there should be linking there
13:28 should be logical reasoning
13:31 effective annual periods beginning on
13:34 after 1st Jan 2027
13:37 early adoption allowed comparative must
13:45 Now after that we have why I1 was
13:48 replaced problem with IAS1 too much
13:52 flexibility how inconsistency subtotals
13:55 but now from the IFRS8 implementation
13:58 the subtotal should be consistent
14:00 everyone defined operating profit
14:04 differently yes it was the case nonFRS
14:07 measures like adjusted aa earning before
14:10 interest tax depreciation and amotization
14:11 amotization
14:14 were outside the audited financial
14:16 statement. Of course, hard for the
14:20 investors to compare means non-financial
14:23 persons, non-financial users.
14:26 Aggregation heavy set of other lines
14:30 limited guidance on what to split out.
14:34 Now we have scope or and effective date
14:36 applies to all entities reporting under
14:40 IFRS accounting standards. Effective for
14:42 annual periods beginning on or after 1st
14:45 Jan 27 early adoption permitted.
14:48 Retrospective means prior year comparatives.
14:50 comparatives.
14:52 Retrospective application with restated
14:55 comparatives provide a reconciliation
14:57 from previously reported comparative to
15:00 restated the amounts. Why it is
15:01 important? Because it gives you the
15:04 better understanding and the better
15:07 clarity of the previous year's balances
15:10 as well. Third statement of financial
15:11 position required only a
15:14 reclassification restatement has a
15:16 material effect on the opening balance
15:19 sheet because opening balances are very
15:21 very important.
15:24 Now the new statement of profit or loss
15:26 which we have covered individuals. Let's
15:29 go through this one as well. Categories
15:33 top to bottom order T
15:35 operating investing financing two
15:38 buckets from financing activities and
15:40 from cash and cash equivalents income
15:44 taxes discontinued operations with these
15:47 cases A to E which we will cover in the
15:49 later slide. You will get a practical
15:53 360 walk through of IFRS 18 changes
15:55 covering profit or loss subtotals,
15:58 expense presentation, cash flows,
16:01 goodwill and MPM all with relatable
16:05 examples. Foreign exchange differences,
16:07 foreign currency retransation or
16:09 differences are presented in the same
16:12 category as the items that generated
16:15 them. Means if it's from the revenue
16:17 sorry if it's from the assets or from the
16:19 the
16:22 non-current assets or from the liability
16:26 then the treatment would be as per them.
16:28 Now required subtotals on the phase
16:31 operating profit profit before financing
16:34 and income taxes profit or loss.
16:37 Entities can relable
16:41 total subtotals. Example use net income
16:45 instead of profit or loss. This is how
16:49 the structure will work as per IFRSC.
16:52 As long as labels are faithful and not
16:54 misleading means it will give the
17:03 Now classifying income and expenses rule
17:07 of thumb operating your core business
17:10 results excluding financing and
17:13 investing. Investing return from
17:15 investment generating a return
17:18 individually and largely independent of
17:22 other resources such as additional to
17:27 any new assets or disposal of an asset
17:29 or dividend
17:31 from associate.
17:34 Now financing effect of financing
17:36 activities interest on borrowing
17:39 dividend to NCI dividend by parent
17:42 company. Unwinding of discount and from
17:44 cash and cash equivalent.
17:47 If providing financing to customers or
17:50 investing in assets is a main business
17:52 activity. Some items otherwise in
17:55 investing financing move to operating
17:59 which I explained in the start. Share of
18:01 profit, loss of associates and JV's
18:04 equity method. We all know if there is a
18:07 joint venture then we will use equity
18:10 method is outside operating in
18:13 investing. The old integral non-
18:16 integral split is removed. Now
18:19 presenting operating expenses you can
18:21 present by nature by function or a mixed
18:23 approach choosing what gives the most
18:27 useful structured summary. If any
18:30 operating expenses are by function such
18:33 as cost of sales, admin and selling,
18:36 provide a single note disclosing totals
18:40 for five specified expenses by nature,
18:42 depreciation, amotization.
18:46 Employee benefit AS19 impairment losses
18:49 AS36 and write downs reversal of
18:52 inventories AS2.
18:55 Explain the nature of expenses included
18:58 in each function life qualitative. If
19:00 you present cost of sales, it must
19:03 include total inventory expenses as per IS2.
19:05 IS2.
19:08 Now management defined performance
19:12 measures. What is an MPM? Might be this
19:15 time the examiner asked these things. A
19:19 subtotal of income expenses used in
19:22 public communication means outside the
19:26 scope of IFS that supplements IFRS total
19:29 subtotal examples AITA adjusted
19:32 operating profit adjusted AITA core
19:35 profit etc.
19:39 Okay. Now can anyone tell me why the
19:42 IFRS8 presentation and structure is more
19:47 similar to the IAS saving cash flows
19:49 because I don't know if you guys have
19:52 talked about any non-financial
19:54 background person such as from the IT
19:58 person or from any engineer or a doctor
20:02 that non-financial background person can
20:05 easily understand and prepare a basic
20:09 cash flow statement. You know, if you
20:12 don't know, just try to communicate this
20:14 thing with any non-financial background
20:17 person. Why? Because everything is
20:21 aligned within their specified category.
20:24 So, it's very easy and very
20:27 understandable for them to identify and
20:31 pick all the information or transactions
20:34 according to their specified category.
20:37 That's why for the better presentation,
20:42 faithful representation, consistency and
20:45 more objectivity, the IFRS8 is implemented.
20:48 implemented.
20:51 Where and how to present MPM in a single
20:54 note to the financial statement not as a
20:57 free form column with undue prominence
21:00 for each MPM. disclosed definition why
21:03 it's useful reconciliation to the most
21:06 directly comparable IFRS subtotal
21:09 operating profit or profit before
21:12 financing and income taxes PBIT
21:14 PBIT
21:17 tax and non-controlling interest effects
21:19 of each reconciling item or how you
21:22 computed them consistency over time
21:24 explain any changes in defining
21:28 calculation or discontinuations
21:30 EPS If you present additional earning
21:33 per share amounts based on IFRS subtotal
21:35 or MPM, they must be in the notes and
21:39 follow IAS33 rules. Now statement of
21:41 cash flows what's different? Indirect
21:43 method must start from operating profit. Yes.
21:45 Yes.
21:47 Remove old options for classifying
21:50 interest and dividends. Dividend trade
21:53 financing for all entities for entities
21:56 without a main business of investing in
21:58 assets or providing financing to
22:01 customers. Interest paid financing
22:03 interest and dividends received investing
22:04 investing
22:06 for entities with a main business of
22:10 investing in assets means additional of
22:14 PPE or providing financing to customer.
22:16 Classify interest, dividend received and
22:18 interest paid by reference to their
22:20 classification in profit or loss. But
22:23 present the total of each in one cash
22:26 flow category policy choice may be
22:28 needed. Then you have to think their
22:30 specified head. Apply the same
22:33 aggregation, disagregation and labeling
22:37 principles. Now this standard is
22:44 statement of FP financial position at
22:46 goodwill as a separate line item. Third
22:47 statement of financial position is
22:49 presented only when a retrospective
22:51 restatement reclassification as a
22:54 material effect on opening balances. Now
22:57 title structure and move requirements.
22:59 You can use alternative titles like
23:02 balance sheet or net income. Some IAS1
23:06 requirements were moved to IAS8 retitle.
23:09 Look it just retitle basis of
23:11 preparation of financial statement fair
23:13 presentation going concern accural
23:16 matching accounting policy to FRS7
23:18 portable instrument which I have
23:22 discussed in the IFRS9 lecture. Now real
23:24 life style case studies end to end. Case
23:28 A auto manufacturer no customer
23:32 financing business. Okay. No customer
23:35 financing business. Facts. Alpha Motors
23:38 makes car means manufactured car. Has
23:40 bank loans
23:44 cash on deposit. Some FX means foreign
23:48 gains on USD raw material payables. No
23:51 associates jeries
23:54 means alpha company manufacturers car.
23:56 They have a loan. They have no cash
23:58 deposits. Also they have foreign gain on
24:02 USD raw material no associates or joint
24:05 ventures. Now PL classification
24:09 operating revenue cost of sales R&D
24:12 selling admin FX differences on trade payables.
24:13 payables.
24:15 We covered this line regarding the
24:17 foreign exchange
24:19 and inventory purchase impairment of
24:22 PPE, inventory write down, depreciation,
24:25 amortization, employee benefit if any,
24:27 investing interest and dividends
24:31 received on term deposits and investment
24:34 securities, gain losses on sale of
24:38 surplus land if any. Financing, interest
24:41 expense on bank loans, unwinding of
24:43 discount on provision, interest on
24:46 lease, liabilities, FX differences
24:49 related to borrowings from cash and cash
24:51 equivalents, interest income on
24:53 overnight cash balances presented here
24:57 if required by the standards split
25:00 between from financing activities and
25:04 from cash and cash EQ validates
25:07 subtotals operating ing profit before
25:11 financing and income taxes profit.
25:14 So this is how you have to do the PNL
25:17 classification if the case related to
25:20 like this. Now operating expense
25:22 presentation by function disclosure in
25:24 one note totals for depreciation
25:27 amotization employee benefit impairment
25:30 and reversals inventory written down and
25:33 a qualitative description of what each
25:35 function includes. Cost of sales
25:38 includes the total inventory expense per IAS2.
25:40 IAS2.
25:43 Cash flows starting point operating
25:45 profit interest paid financing interest
25:48 and dividend receive interest investing
25:50 dividends paid financing
25:53 NPM example in the notes adjusted
25:57 operating profit excludes restructuring
26:00 cost and a oneoff environmental fine one
26:04 of event provide for reconciliation plus
26:07 tax and CI effects if any impact more
26:09 comparable operating profit cleaner
26:12 Separation of financing effects.
26:15 Investors see precisely how you adjusted
26:18 performance and tax effect of each
26:21 adjustment. Now there are three more
26:24 cases for your reading. After that we
26:27 have a project sorry we have a FAQ and
26:32 tricky areas like what
26:34 are the questions? Maybe you guys have
26:36 some questions in your mind. So for that
26:38 you can read it. Now we have a
26:40 conclusion again. we have a visual. Okay
26:45 guys, this slide contain 9 to
26:50 10 slides. So it's not necessary that
26:52 you can complete read and understand
26:55 each and everything. Look, the examiner
26:58 will not go into much detail for this
27:01 time. But maybe once we move to the next
27:03 stage or the next year, then the
27:06 examiner might get into more detail. But
27:07 for the time being you don't need to
27:10 worry at all. Most of these students
27:14 were just overwhelmed why how if FRS8
27:17 will be tested. Still if you guys facing
27:21 any issues in understanding the IFRS8
27:25 content or if you want me to upload or
27:29 explain questions on the IFR8
27:31 then what you have to do you just have
27:36 to comment down our question. I will
27:38 record a separate video on the questions
27:41 which might be tested in the
27:45 SPR and F7.
