ACC803 Advanced Financial

Reporting

Week 2: Financial Statement Preparation and Presentation

2.1 Financial Statements

2.2 Preparation and Presentation of financial statements
 Presentation and Preparation of
Financial Statements

Introduction

IAS 1 provides guidelines on the preparation of the general Purpose financial

Statements, thereby ensuring comparability both with the entitys financial statements
of previous periods and with those of other entities.

It provides overall requirements for the preparation of financial statements, guidance on

their structure and minimum requirements for their content.

It also prescribe the components of the financial statements that together would be
considered a complete set of financial statements.
 General Purpose financial Statements
Are those intended to meet the needs of users
who are not in a position to demand reports
that are tailored according to their information
needs.

IAS1 are to be applied to all GPFS that have

been prepared and presented in accordance
with IFRS.
 Purpose of financial statements
Financial statements provide stakeholders with information about the entity's financial position,
financial performance, and cash flows by providing information about its assets, liabilities, equity,
income and expense, other changes in equity and cash flows.

Component of a complete set of financial statements.

i) A statement of financial position as at end of the period.

ii) A statement of comprehensive income for the period ( presented as either a single statement or
an Income statement with a statement of recognized gains and losses)
iii) A statement of change in equity for the period.
iv) A statement of cashflow for the period.
v) Notes, comprising a summary of significant accounting policies and other explanatory
information.
vi) A statement of financial position as at the beginning of the earliest comparative period when an
entity applies
- an accounting policy is applied retrospectively (past)
- Items in the financial statements are retrospectively restated or
- Items in the financial statements are reclassified.
 Overall Considerations
Fair Presentation
Financial statements shall present fairly the financial position, financial performance and cash
flows of an entity. ( True and Fair view)

Fair presentation requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses laid down in the IASBs framework.

The application of the IFRS for SMEs, with additional disclosure when necessary, is presumed
to result in financial statements that achieve a fair presentation of the financial position,
financial performance and cash flows of SMEs.

For example, where an entity makes most of its sales to a single customer or, in the absence
of segment reporting(1), in a single geographical location or industry sector, disclosure of
those concentrations of sales is necessary to achieve a fair presentation. That information can
reasonably be expected to affect a financial statement users decision-making.
 Compliance with the IFRS for SMEs
Paragraph 16 of IAS1 requires entities to disclose that financial statements are prepared in accordance with
IFRS.

Unless entities prepare statements in accordance with all IFRSs, their financial statements should not be
describe as IFRS compliant.

In the extremely rare circumstance where compliance with an IFRS would not result in a fair presentation,
departure from that IFRS is permitted provided:
i) The regulatory framework permits such departure and
ii) The entity discloses detailed information about the departure.

This information includes:

- a statement that management believes that the departure provides financial statements that present fairly,
- Details of the departure,
- Reason why IFRS treatment is considered misleading and
- The financial impacts of the departure on the entity's profit, financial position and cash flows.

Note:
Departure from IFRS is only permitted when compliance with the IFRS results in an unfair presentation.
 Other General Features
In addition to financial statements being presented fairly, IAS 1 specifies a number of other general features that
must be complied with when preparing and presenting general purpose financial statements.

These include:
going concern
i)ability to continue as going concern
ii) If entity is not going concern, this must be disclosed together with the reasons why the entity is
not considered a going concern and the basis on which financial statement are prepared.
Accrual basis
Excluding the CFS, all other F/S must be prepared on accrual basis.

Materiality and aggregation

Materiality of an item is determined by reference to both the size and nature of the item.
Offsetting
Offsetting of assets and liabilities or Income and expenses may result in the loss of relevant
information for f/s users.
IAS1 prohibits offsetting except where a particular standards requires or permits offsetting.
Comparative information and
Each period should report comparative information from the previous period for all items in the GPFS

Normally comparative figures will involve disclosing two of each of the f/s.
Incase there is a change in the presentation or classification of items in the f/s , the comparative
information needs to be appropriately reclassified, unless it is impracticable to do so.
Consistency.
Entities are required to retain their presentation and classification of items in successive periods
unless an alternative would be more appropriate or if so required by a standard.
 Practical Insight
Materiality as a concept has been the subject of debate for years, yet
there are no clear cut parameters to compute materiality.

What would normally be expected to influence one persons viewpoint

may not necessarily influence another persons economic decisions based
on the financial statements.

Materiality is not only qualitative (i.e. measured in terms of numbers) but

also quantitative ( because it depends not only on the size of the item
but also on the nature of the item).

e.g. in some cases, transactions with related parties, although not

material when the size of the transactions is considered, may ne
considered material because they are with related parties. Materiality is
therefore a very subjective concept.
 Accounting policies (IAS8)
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and
presenting financial statements.

Selection and application of accounting policies

When management are selecting appropriate accounting policies, they should first determine the applicability of IFRSs.
In addition, the accounting policy should take into account any implementation guidance associated with a relevant IFRS where
it is mandatory.

Consistency of accounting policies

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions,
unless a Standard or an Interpretation specifically requires or permits categorization of items for which different policies may be
appropriate.

Changes in accounting policies

An entity is permitted to change an accounting policy only if the change:
is required by a standard or interpretation; or
results in the financial statements providing reliable and more relevant information about the effects of transactions, other
events or conditions on the entity's financial position, financial performance, or cash flows. [IAS 8.14]

Disclosures relating to changes in accounting policies

Disclosures relating to changes in accounting policy caused by a new standard or interpretation include:
the title of the standard or interpretation causing the change
the nature of the change in accounting policy
the amount of the adjustment for each financial statement items and
The adjustment relating to prior period.
 Revision of accounting estimates and
correction of errors
Disclosures relating to changes in accounting estimates
the nature and amount of a change in an accounting estimate that has an effect in
the current period or is expected to have an effect in future periods
if the amount of the effect in future periods is not disclosed because estimating it
is impracticable, an entity shall disclose that fact.

Disclosures relating to prior period errors

the nature of the prior period error
for each prior period presented, to the extent practicable, the amount of the
correction:
for each financial statement line item affected, and
for basic and diluted earnings per share (only if the entity is applying IAS 33)
the amount of the correction at the beginning of the earliest prior period
presented
if retrospective restatement is impracticable, an explanation and description of
how the error has been corrected.
 Event after the reporting period- IAS 10

An event, which could be favorable or unfavorable, that occurs between the end of the reporting period and the
date that the financial statements are authorized for issue.

Two types of events can be identified:

Adjusting event: An event after the reporting period that provides further evidence of conditions that existed
at the end of the reporting period, including an event that indicates that the going concern assumption in
relation to the whole or part of the enterprise is not appropriate.
entities to adjust the amounts recognized in its financial statements for adjusting events before statements are
issued.

Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the
end of the reporting period.
No adjustment should be made to financial statements. Only disclosure is needed.

affect the ability of users to make proper evaluations and decisions.

e.g. If an entity declares dividends after the reporting period, the entity shall not recognize those dividends as a
liability at the end of the reporting period.

Non-adjusting event disclosure requirements:

(a) the nature of the event and
(b) an estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made.
 Statement of Financial Position
Presentation of assets and Liabilities
IAS 1 does not require that statement of financial position to be
presented using a single format.

Rather it permits two basis for presentation of assets and liabilities.

i)Traditional Current and Non Current categories can be used

OR
ii) All the assets and liabilities can be presented in order of liquidity.

Regardless of which approach is adopted,

paragraph 61 of IAS1 requires all entities to disclose separately
amounts due to be settled or recovered in less than 12 months and
after 12 months if an item combines such amount due or receivable.
 Statement of Financial Position cont
The minimum lines that should be included in the statement of financial position are:

1. Property, plant and equipment

2. Investment property
3. Intangible assets
4. Financial assets ( excluding amounts shown under 5,8 and 9)
5. Investments accounted for using the equity method
6. Biological assets
7. Inventories
8. Trade and other receivables
9. Cash and cash equivalents
10. Trade and other payables
11. Provisions
12. Financial liabilities (excluding amounts shown under 10 and 11).
13. Liabilities and assets for current tax
14. Deferred tax liabilities and Deferred tax assets
15. Minority interest, presented within equity
16. Issued capital and reserves attributable to equity holders of the parent.
 Illustrative Question
Financial information provided for XYZ as at December 2014 2015
Amount due to bankers and short term loan 2022 2036
Assets held for sale 0 1
Cash and cash equivalent 0 1
Deferred tax assets (non current) 65 15
Intangible assets 22 23
Interest- Bearing (long term) 3578 2775
Long-term financial assets 13561 8837
Other noninterest -bearing (long term) 1 0
Other reserves 160 149
Property, plant and equipment 449 267
Provision 2 8
Provisions (long term) 3 8
Retained Income 8232 4117
Share capital (beginning) 49 40
Trade and other payables 54 51
Trade and other receivables 4 40

Required:
Prepare XYZs statement of financial position for the year ended 2014 and 2015
 Extracts from Publised financial statements
XYZ Financal position As At December
2014 2015
Assets $ $
Current Assets
Trade and other receivables 4 40
Cash and cash equivalent 0 1
Assets held for sale 0 1
4 42
Non Current Assets
Property, plant and equipment 449 267
Intangible assets 22 23
Long-term financial assets 13561 8837
deferred tax assets 65 15
14097 9142
Total Assets 14101 9184
Equity and Liabilities
Current Liabilities
Trade and other payables 54 51
Provision 2 8
Amount due to bankers and short term loan 2022 2036
2078 2095
Non Current Liabilities
Interest- Bearing 3578 2775
Provisions 3 8
Other noninterest -bearing 1 0
3582 2783
Capital and reserves
Share capital 49 40
Other reserves 160 149
Retained Income 8232 4117
Interest of shareholders of XYZ 8441 4306
Total Equity and Liabilities 14101 9184
 Statement of Comprehensive Income
IAS1 offers the choice of presenting all items of income and expense
recognized in the period

Either

i) A single statement of comprehensive income

or

i) In two statement i.e. a statement displaying components of profit

or loss, together with another statement beginning with profit or
loss and displaying component of other comprehensive income.
 Statement of Comprehensive Income
cont
The standard prescribe as a minimum, the following line items to be
presented in a statement of comprehensive income.
Revenue, finance cost, share of profit or loss from associate and joint
ventures, tax expense.
Profit or loss for the reporting period
Each component of other comprehensive income classified by Nature.
Share of OCI of associates and joint venture accounted for using the equity
method.
Total Comprehensive Income.

Since the standard prescribes minimum line item disclosure, an entity is

permitted to present additional line items, headings and subtotal in the
statement of comprehensive income and the separate income statement.

Such additional disclosures are allowed when such presentation is relevant to

an understanding of the entity's financial performance.
An entity shall recognize all items of income and expense in a period in profit and
loss unless an IFRS permits otherwise.

An entity shall present an analysis of expense recognized in P&L using a

classification based on either Nature or their Function within the entity, which
ever provides information that is reliable and more relevant.

An example of a classification using the

Nature of expense method is as follows:
Revenue X
Other Income X
Changes in Inventories of finished goods and WIP X
Raw Material and consumables used X
Employee benefits expenses X
Depreciation and amortisation expense X
Other expenses X
Total expenses (X)
Profit before tax X
An example of a classification using the
Function of expense method is as follows:
Revenue X
Cost of sale (X)
Gross Profits X
Other Income X
Distributable costs (X)
Administrative expenses (X)
Other expenses (X)
Profit before tax X

Note:
An entity classifying expense by functions of expense, method shall disclose additional
information on the nature of expenses including depreciation and amortization
expense and employee benefits expense.
 Readings
Week 2 Reading 1 Revisiting the Fundamental
Concepts of IFRS

Week 2 Reading 2 The Value Relevance of

Direct Cash Flows under IFRS