Dear reader,

have you ever tried "dry," "no buy," or "new resolution" January? I'd be curious to hear from you.

This month I am on the "no buy" team, and I'm failing. Those boots (which I don't actually need) are 70% off. Limited edition ski goggles perfectly matching my ski helmet will not be around in February. This turns out to be "buy-plenty-of-stuff-January".

I know the principle but I do not behave accordingly.

Information in financial statements is based on principles, numbers, and facts. But it is equally shaped by behavior, preferences, assumptions, and the exercise of judgment.

Entities preparing for IFRS 18 will need to deploy fact-based judgment in the following areas:

in determination of main business activity (activities) of an entity, in both consolidated and separate financial statements (paragraphs 49-51 and B30-B41); for aggregation and disaggregation of line items (paragraphs 78-84 and B16-B23); concerning management-defined performance measures (paragraphs 117-125 and from paragraph B113).

Quick tip on IFRS 18: You only need to test the main business activity criteria for expenses and income that fall into either the investing category (paragraphs 53-58) or the financing category (paragraphs 59-66). The test of main business activity is the final pass-through for both categories.

Categories of income and expenses in accordance with IFRS 18 were also covered in my Quiz on Sunday. I used an example of a nuclear waste storage company investing in land. What are the appropriate categories for expenses and income - for example location search, realtor fees, maintenance, and income from usage - related to the land?

Let me show you the options:

A. If the primary objective for acquisition and usage of the land is storage of nuclear waste, entity would classify expenses and income as operating. Entity's investment in land doesn't generate resources largely independently from other resources of the entity (IFRS 18, 53 c)) and thus cannot be classified as investing.

B. However, if land is acquired specifically for a distinctively different purpose, such as capital appreciation or rental income, expenses and income fall into investing category.

Spot the difference: IAS 29 vs IAS 21.

This can be confusing! Both IFRS accounting standards have "something to do with currency".

IAS 29 Financial Reporting in Hyperinflationary Economies is applicable for financial statements of companies operating in economies in which rate of inflation increases at more than 50% a month, resulting into a hyperinflationary currency (currently Argentina, Lebanon, Malawi, Turkey, Zimbabwe and others).

Accounting principles of foreign currency transactions, balances and translation principles (including translation rules concerning hyperinflationary currencies) are covered by IAS 21 The Effects of Changes in Foreign Exchange Rates.

The link between the two standards has been highlighted by this clarification of the IASB on IAS 21:

When an entity's presentation currency is the currency of a hyperinflationary economy but its functional currency is the currency of a non-hyperinflationary economy all amounts (i.e. assets, liabilities, equity items, income and expenses, including comparatives) are translated into presentation currency at the closing rate at the date of the most recent statement of financial position.

A great tool for year-end closing is this PWC podcast on classification of cash flows.

Year-end toolkit: Cash flow classification

Time invest: Shy of 40 minutes.

Framework: US GAAP but useful for IFRS preparers too!

Topics:

practical tips on how to present a roll-over of debt or partial settlement of debt with a different or the same lender in the statement of cash flows; presentation of cash collections from customers as financing cash flows; classification of acquisition cash payments in business combinations; repayment of seller's debt by acquiree; contingent and delayed consideration in business combinations.

Your takeaway: It is essential to understand accounting for a transaction to determine correct classification of cash flows.

Regardless of whether you are doing a "special" January or just enjoying your days, have a great accounting week.

Best,

Barbora