Preparation and Presentation of

Financial Statements

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 Learning Outcomes
At the end of this session, you should be able to:
• Explain the objective of financial statements;
• Describe what constitutes a complete set of financial statements;
• Identify the information to be presented in financial statements;
• Describe the accounting treatment for changes in accounting
policies, accounting estimates and errors; and
• Explain the events after reporting period and their implications to
the financial statements.

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 Lesson Outline
• Objective of Financial Statements - LKAS 1
• Complete Set of Financial Statements - LKAS 1
⁻ Statement of Financial Position
⁻ Statement of Profit or Loss and Other Comprehensive Income
⁻ Statement of Changes in Equity
⁻ Statement of Cash Flows (LKAS 7)
⁻ Notes

• Accounting Policies, Changes in Accounting Estimates and Errors - LKAS 8

• Events After Reporting Period - LKAS 10

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 Presentation of Financial Statements (LKAS 1)

Those intended to meet the

needs of users who are not in a
position to require an entity to
Prepare reports tailored to
their particular information
needs.

It prescribes the basis for presentation of general purpose financial statements

to ensure comparability both with the entity’s financial statements of previous
periods and with the financial statements of other entities.
• Sets out overall requirements for the presentation of financial statements,
guidelines for their structure and minimum requirements for their content.

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 Objective of Financial Statements

• Provide information about the financial position,

financial performance and cash flows of an entity
that is useful to a wide range of users in making
economic decisions.

• Also show the results of the management’s

stewardship of the resources entrusted to it.

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 Complete Set of Financial Statements

• Statement of Financial Position

• Statement of Profit or Loss and Other Comprehensive Income
• Statement of Changes in Equity
• Statement of Cash Flows
• Notes
• Comparative information in respect of the preceding period
• A statement of financial position at the beginning of the
earliest comparative period when an entity applies an
accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements

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 Statement of Financial Position

• Shows the Financial Position of an entity as of a

particular date
– What is meant by Financial Position?

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Information to be presented in the Statement of Financial Position

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Information to be presented in the Statement of Financial Position

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 Current and Non-current Classification of Assets
An entity shall classify an asset as current when:
• It expects to realize the asset, or intends to sell or consume
it, in its normal operating cycle; or
• It holds the asset primarily for the purpose of trading; or
• It expects to realize the asset within 12 months after the
reporting period; or
• The asset is cash or a cash equivalent, unless the asset is
restricted from being exchanged or used to settle a liability
for at least 12 months after the reporting period.

All other assets are classified as non-current assets.

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 Current and Non-current Classification of Liabilities
An entity shall classify a liability as current when:
• It expects to settle the liability in its normal operating cycle;
or
• It holds the liability primarily for the purpose of trading; or
• The liability is due to be settled within 12 months after the
reporting period; or
• The entity does not have an unconditional right to defer
settlement of the liability for at least 12 months after the
reporting period.

All other liabilities are classified as non-current liabilities.

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Statement of Financial Position (Aitken Spence PLC)

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Statement of Financial Position (Aitken Spence PLC)

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Statement of Profit and Loss and Other Comprehensive Income

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Statement of Profit and Loss and Other Comprehensive Income

•Shows the Financial Performance for a period

•Consists income and expenses

Income

Revenue Gains
Income generated
Other income and
through the main
gains
operating activities of
e.g. Gain on sale of
an entity.
PPE
e.g. Sales, Service
income

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 Statement of Profit and Loss and Other Comprehensive
Income

Expenses

Expenses Losses

• Profit/Loss for Period:

Classification of expenses in profit and loss

Based on nature Based on function

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Classification of expenses based on Nature

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Classification of expenses based on Function

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 Statement of Profit and Loss and Other Comprehensive
Income
• What is meant by Total Comprehensive Income?

“The change in equity during a period resulting from transactions and other
events, other than those changes resulting from transactions with owners in
their capacity as owners”

Total Comprehensive Income

Profit/Loss for the Period Other Comprehensive Income (OCI)

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 Recognition of Income and Expenses

• Profit or Loss – Total of income less expenses,

excluding the components of other
comprehensive income.

• Other Comprehensive Income (OCI) - Items of

income and expense that are not recognized
in profit or loss as required or permitted by
other SLFRSs.

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 Other Comprehensive Income (OCI)
 Gains and losses arising from translating the Financial Statements
of a foreign operation.

 Gains or losses on re-measuring available-for-sale financial assets.

 The effective portion of gains and losses on hedging instruments

in a cash flow hedges.

 Changes in revaluation surplus.

 Actuarial gains and losses on defined benefit plans.

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The Statement of Profit and Loss and Other Comprehensive
Income

How to adjust taxes on Other Comprehensive

Income?
(a) Net of related tax effects, or

(b) Before related tax effects and with one amount

shown for the aggregate amount of income tax
relating to those components.

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 Statement of Profit and Loss and Other
Comprehensive Income (Aitken Spence PLC)

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 Statement of Profit and Loss and Other
Comprehensive Income (Aitken Spence PLC)

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 Activity 1
The following information relates to Final PLC for the year ending 31.03.2018.
Rs.
Revenue 600,000
Cost of sales 220,000
Distribution costs 55,000
Administration expenses 40,000
Other expenses 5,000
Finance costs 10,000
Income tax expense 50,000
Other information:
• The revaluation surplus of land Rs. 80,000
• Gains arose from translating the financial statements of a foreign operation Rs. 21,000
• Loss on re-measuring financial assets at fair value through OCI Rs, 19,000

Required: The Statement of Profit or Loss and Other Comprehensive Income for the year
ending 31.03.2018
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The Statement of Profit or Loss and Other Comprehensive Income
Sales Revenue 600,000
Cost of Sales (220,000)
Gross Profit 380,000
Distribution Cost (55,000)
Administration Expenses (40,000)
Finance Cost (10,000)
Other Expense (5,000) (110,000)
Profit before Tax 270,000
Income Tax (50,000)
Profit for the year 220,000
Other Comprehensive Income
Revaluation Surplus of Lands 80,000
Gains on translating the financial statements of
foreign operations 21,000
Loss on re-measuring financial assets at fair value
through OCI (19,000) 82,000
Total Comprehensive Income 302,000

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 Statement of Changes in Equity

Shows the change in the equity during a period

How to present Total Comprehensive Income in

the Statement of Changes in Equity? (See the
next slide)

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Statement of Changes in Equity - Aitken Spence PLC

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 Statement of Cash Flows

Shows the inflows and outflows of cash and cash

equivalents by category (operating, investing, and
financing activities) over a period of time.

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Statement of Cash Flows (Aitken Spence PLC)

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Statement of Cash Flows (Aitken Spence PLC)

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 The Notes
• Provides basis of preparation of the Financial
Statements and the specific and other accounting
policies.

• Provide details about items presented in other

components of the Financial Statements.

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Notes (Aitken Spence PLC)

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Notes (Aitken Spence PLC)

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Notes (Aitken Spence PLC)

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 General Requirements of LKAS 1

• Fair presentation and compliance with SLFRSs

• Going Concern
• Accrual Basis of Accounting

• Materiality and Aggregation

• Offsetting
• Comparative Information

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 Accounting Policies (LKAS 8)

 Accounting policies are the specific principles, bases,

conventions, rules, and practices applied by an entity
in preparing and presenting financial statements.

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Accounting Policies -
Examples

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 Accounting Policies (LKAS 8) - How to decide the Accounting Policies
of an entity?

 When an accounting standard specifically applies to a transaction or an

event, the accounting policy or policies applied to that item shall be
determined by the applying the relevant standard.

 In the absence a recommended accounting policy, management should use

its judgment in developing and applying an accounting policy.

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 Accounting Policies (LKAS 8) – Changing Accounting Policies

• An entity should select and apply its accounting policies

consistently for similar transactions, other events and
conditions.
• However, an entity can change an accounting policy only if the
change:
– is required by SLFRSs
OR
– Results in financial statements providing reliable and more
relevant information about entity’s financial position,
financial performance or cash flows.
• Change in recognition, measurement base or/ and presentation

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Accounting Policies (LKAS 8) - How to account
for changes in Accounting Policies?

If an accounting
Should account for the change in
●
standard specifically
accordance with the specific transitional
requires changing provisions of the relevant standard
the accounting policy

If the change is Retrospective application (the application of a

●

made by an new accounting policy to transactions and other

events as if that policy had always been applied)
entity voluntarily

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The initial application of a policy to revalue
assets in accordance with LKAS 16 Property,
Plant and Equipment or LKAS 38 Intangible
Assets is a change in an accounting policy to be
dealt with as a revaluation in accordance with
LKAS 16 or LKAS 38, rather than in accordance
with LKAS 8.

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 Activity 2
ABC PLC changed its accounting policy relating to valuation of inventories from weighted-average
cost method to first-in, first-out (FIFO) method during the year ended 31.3.2018. This was changed
to reflect accurately the usage and flow of inventories in the economic cycle. The impact on the
inventory valuation was determined due to this accounting policy change as follows:
March 31, 2016 an increase of Rs. 30,000
March 31, 2017 a decrease of Rs. 5,000
March 31, 2018 an increase of Rs. 50,000
The statements of profit or loss prior to change the policy were:
2017/18 (Rs.) 2016/17 (Rs.)
Revenue 350,000 300,000
Cost of sales (150,000) (140,000)
Gross profit 200,000 160,000
Distribution costs (35,000) (25,000)
Administration expenses (70,000) (60,000)
Finance costs (12,000) (9,000)
Profit for the year 83,000 66,000
Retained earnings balance as at 01.04.2016 was Rs. 300,000.
Required: Show how this policy change should be adjusted in the Statement of Profit or Loss and
Other Comprehensive Income and the Statement of Changes in Equity for the year ended
31.03.2018.
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Extracts- Statement of Profit or Loss and OCI 2017/18 2016/17 (Restated)
Revenue 350,000 300,000
Cost of sales (95,000) (175,000)
Gross profit 255,000 125,000
Administration Expenses (70,000) (60,000)
Distribution costs (35,000) (25,000)
Finance costs (12,000) (9,000)
Profit for the period 138,000 31,000

Extracts -The Statement of Changes in Equity

Retained Earnings
As at 01/04/2016 originally stated 300,000
Change in accounting policy for valuation of inventory 30,000
As at 01/04/2016 as restated 330,000
Profit for the year ending 31/03/2017 as restated 31,000
As at 01/04/2017 as restated 361,000
Profit for the year ending 31/03/2017 138,000
As at 31/03/2018 499,000

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 Accounting Estimates (LKAS 8)

• Why accounting estimates?

– Inherent uncertainties in business activities.
– Many items in the financial statements are to be estimated
since they cannot be measured exactly.
• E.g. Useful life, residual value of PPE, Depreciations method, Warranty
obligations

• Accounting estimates may change when business environment

changes or the management gains more experience.

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 Accounting Estimates (LKAS 8)
What is a change in accounting estimates?

Change in accounting estimate is an adjustment of the

carrying amount of an asset or a liability, or the amount of
the periodic consumption of an asset, which results from
the assessment of the present status of, and expected
future benefits and obligations associated with, assets and
liabilities.

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 Accounting Estimates (LKAS 8) - How to account for changes in
accounting estimates?

• The effect of a change in accounting estimate should be

recognized prospectively by including it in profit or loss in;

– The period of change if the change affects that period only; or

– The period of the change and future periods, if the change

affects both.

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 Activity 3
The following balances were extracted from Heavy PLC on 01.04.2017.
Rs.
Provision for law suits 300,000
Motor vehicle at cost 2,900,000
Accumulated depreciation - motor vehicle 600,000
 The motor vehicle was acquired on 01.04.2015 and on that date following estimations were
made.
Useful life – 8 years; Residual value – Rs. 500,000
Motor vehicles are depreciated on straight line method.
On 31.03.2018, the estimated useful life of the motor vehicle was changed to 6 years
from the initial estimation of 8 years which was made at the acquisition of the asset. On
this date, the residual value was estimated to Rs. 300,000.
A former employee of the company had filled a lawsuit requesting a compensation due to a
damaged caused during work. Accordingly, the company had made a provision of Rs. 300,000
as at 31.03.2017. However, on 01.03.2018, the court ordered the company to pay only Rs.
250,000 to the employee. The company paid this amount to the employee on 05.04.2018.
Required: Show the extracts of financial statements for the year ended 31.03.2018
(Comparative information is not required).

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Statement of Profit or Loss and OCI for the Year ended 31st March 2018

Distribution costs
Motor vehicle depreciation 500,000

Other Expenses
Over provision for lawsuit (50,000)

Notes:
PPE Motor vehicle
Cost/ Revalued amount:
Balance as at 01/04/2017 2,900,000
Additions -
Disposals -
Balance as at 31/03/2018 2,900,000

Accumulated depreciation:
Balance as at 01/04/2017 600,000
Depreciation for the year 500,000
Removals -
Balance as at 31/03/2018 1,100,000
Carrying amount as at 31/03/2018 1,800,000

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Provision for lawsuit
Balance as at 01/04/2017 300,000
Less: Over provision (50,000)
Balance as at 31/03/2018 250,000

Workings:
MV Depreciation for the year ended 31st March 2018
(2,900,000 - 600,000 - 300,000)/4 500, 000

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 Errors LKAS 8 - How to account for the prior period errors?

• Errors in financial statements can arise on account of

incorrect recognition, measurement, presentation, or
disclosure of items in financial statements

• The entity should correct material errors relating to prior

periods retrospectively in the first set of financial
statements authorized for issue after their discovery.
(Retrospective restatement)

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 Activity 4
While carrying out the audit of Rainbow PLC during the year ended 31.03.2018, it was noticed that the
salaries and wages for the year ended 31.03.2017 was incorrectly recorded in the books of account at
Rs.30,000 instead of Rs.50,000. The extracts of the Statement of Profit or Loss and Other Comprehensive
Income for the years ending March 31, 2018 and 2017, before correction of this error were as follows:
2017/18 2016/17
Revenue 900,000 800,000
Cost of sales (500,000) (450,000)
Gross profit 400,000 350,000
Administrative expenses (130,000) (120,000)
Distribution Costs (40,000) (13,000)
Finance costs (10,000) (7,000)
Profit before taxes 220,000 210,000
Income taxes (44,000) (42,000)
Profit for the year 176,000 168,000
 The retained earnings reported for the year ended 31.03.2017 was as follows;
Balance as at 01.04.2016 50,000
Profit for the year 168,000
Balance as at 31.03.2017 218,000
Rainbow PLC’s income tax rate is 20%.
Required: Prepare the restated financial statements of Rainbow PLC for the year ended 31.03.2018 with
comparatives.
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 Statement of Profit or Loss and OCI for the year ended 31st March 2018
2017/18 2016/17 (Restated)
Revenue 900,000 800,000
Cost of sales (500,000) (450,000)
Gross profit 400,000 350,000
Administrative expenses (130,000) (140,000)
Distribution costs (40,000) (13,000)
Finance costs (10,000) (7,000)
Profit before tax 220,000 190,000
Income taxe (44,000) (38,000)
Profit for the period 176,000 152,000

The Statement of Changes in Equity

Retained Earnings
Balance as at 1/4/2016 50,000
Profit for the year ending 31/03/2017 as restated (Note 01) 152,000
As at 01/04/2017 as restated 202,000
Profit for the year ending 31/03/2018 176,000
As at 01/04/2018 378,000

(Note 01)
The company has understated the salary to the extent of Rs.20,000 in year ending 31st March 2017.
To correct this error, the net of income taxes of Rs. 16,000 has been adjusted to the financial statements for year ending 31.03.2018.
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Events After Reporting Period – LKAS 10
Date when the
financial
statements are
Reporting
authorized to
date
publish
31/03/2019
30/06/2019

X X X X

Events after Reporting period

Adjusting Events Non-adjusting Events

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 Events After Reporting Period
Examples for adjusting events Examples for non-adjusting events

The settlement of a court case that existed during the The decline of market value of
reporting period (any new provisions must also be investments
recognized)

The finalization of the purchase/sale price of an asset The destruction of a factory building by
that has been purchased/sold during the reporting a fire after the reporting date
period

The discovery of an error that has an impact on the Major business combination after the
financial position or financial results of the entity for reporting period
the reporting period
The bankruptcy of a customer, that existed in the Major ordinary share transaction
trade receivables at the reporting date Dividend declaration after the reporting
period

Net realizable value of inventories that existed at the Major purchase of assets and
reporting date is decided after the reporting date classification of assets as held for sale

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 Dividend Declared and Going
Concern
• Dividend declared • When going concern
assumption is no longer
• Not recognized in the FS valid due to events after
the reporting date

• Change the
fundamental basis of
accounting

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