TOPIC 7: IAS 1 PRESENTATION OF FINANCIAL STATEMENTS Presentation of Financial Statements Objective of IAS 1 To prescribe the basis for presentation of general purpose financial statements in order to ensure (a) comparability with the entity's financial statements of previous periods and (b) comparability with the financial statements of other entities. Scope IAS 1 applies to all general purpose financial statements prepared and presented in accordance with IFRS. General Purpose Those intended to meet the needs of users who are not in a position to demand reports tailored to their specific needs. Purpose of Financial Statements To 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. 1
Financial statements must provide information about an entity's (a) (b) (c) assets liabilities equity (d) (e) (f) income and epenses including gains and losses other changes in equity cash flows Components of Financial Statements a statement of financial position as at the reporting date a statement of profit or loss and other comprehensive income for the period ended a statement of changes in equity a cash flow statement notes including a summary of accounting policies Note: Accrual basis of accounting An entity shall prepare its financial statements, ecept for cash flow information, using the accrual basis of accounting. When the accrual basis of accounting is used, an entity recognises items as assets, liabilities, equity, income and epenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the Framework.* The Statement of Financial Position (1) All assets should be classified as either non-current or current on the face of the Statement of financial position. (2) All liabilities should be classified under either current or non-current. 2
(3) Current Assets satisfy any 1 of the following 4 criteria: epected to be realised or intended for sale or consumption in the normal operating cycle held primarily for the purpose of being traded epected to be realised within 12 months after the Statement of financial position date qualify as cash or cash equivalent (IAS 7) The operating cycle is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. (4) All other assets should be classified as non-current. (5) Current Liabilities are those which satisfy any one of the following 4 criteria: epected to be settled in the normal operating cycle; held primarily for the purpose of being traded; due to be settled within 12 months after the Statement of financial position date; the entity does not have the right to defer settlement for at least 12 months after the Statement of financial position date. (6) All other liabilities should be classified as non-current. (7) As a minimum the face of the statement of financial position must include line items that present: Assets (a) (b) (c) (d) property, plant and equipment; investment property; intangible assets; financial assets (non-current) 3
(e) investments accounted for using equity accounting; (f) (g) (h) (i) biological assets; inventories; trade and other receivables; cash and cash equivalents; (j) Non Current Assets Held For Sale (IFRS 5) Liabilities (k) (l) (m) (n) (o) trade and other payables; provisions; financial liabilities; current ta assets/liabilities; deferred ta assets/liabilities Equity (p) (q) issued capital and reserves attributable to the Owners of the Entity Non Controlling Interests NOTE Deferred ta assets/liabilities must be classified as non current assets/liabilities (IAS 12). (8) Details of share capital can be shown either on face of the statement of financial position or in the notes e.g. The number of shares authorised The number of shares issued and fully paid nominal value per share 4
the rights and restrictions attached to each class of shares (9) A description of the nature and purpose of each reserve can be shown either on the Statement of financial position or in the notes. 5
PRO-FORMA STATEMENT OF FINANCIAL POSITION Assets Non current assets Property, plant and equipment Goodwill Other Intangible assets Investments in associates Financial Investments Current assets Inventories Trade receivables Other current assets Cash and cash equivalents Non Current Assets Held for Sale Total assets Equity and Liabilities Equity Equity attributable to equity holders of the parent Issued share capital Reserves Retained earnings Non Controlling Interests Total equity Non current liabilities Long term borrowings Deferred ta Long term provisions Total non current liabilities Current liabilities: Overdraft Trade and other payables Short-term borrowings Current portion of long-term borrowings Ta payable Total current liabilities Total equity and liabilities 6
NB: Property, plant and equipment and capital and reserves require disclosure notes to show details and movement in the period. 11) Note on the Presentation of Dividends Dividend payments are a distribution of profits Dividend Payments Where a dividend is paid during the period, it must not be shown in the STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME. Dividends paid during the financial year are shown as o As a deduction in Retained Earnings (Statement of Financial position) o The statement of changes in equity and o Statement of cashflows (Financing Activities) Any dividend payable at year end should be shown in a note and not shown in the statement of financial position (unless the dividend payable has been approved by the shareholders before the directors sign the financial Statements) 7
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Statement of profit or loss General Principle All items of income and epense recognised in a period must be included in profit or loss unless a standard or interpretation allows or requires otherwise. Eamples of Eceptions (Reported in Other Comprehensive Income See Below) revaluation surpluses on non current assets; Echange Gains/Losses on Foreign Subs (IAS 21) Strategic equity - gains on financial assets held at FVTOCI (IFRS 9) (1) As a minimum the face of statement of profit or loss should include line items for the following (a) (b) (c) (d) (e) (f) revenue finance costs share of profits/losses of associates ta epense post-ta profit/loss of discontinued operations the profit or loss for the period. (2) The following must be disclosed on the face of statement of profit or loss as allocations of profit: profit attributable to non controlling interests profit attributable to equity holders of the parent. (3) A reporting entity cannot present any epense or income as etraordinary items either on the face of statement of profit or loss or in the notes. (4) When an item of epense or income is material its nature and amount should be 10
disclosed separately either on the face of statement of profit or loss or in the notes. See eamples below Eamples i. write downs of inventories to NRV; ii. iii. iv. write downs of property, plant and equipment to recoverable amount; restructuring costs; disposals of plant, property and equipment; v. discontinued operations IFRS 5 vi. vii. litigation settlements a reversal of a provision; 5) IAS 1 requires an entity to present all items of income and epense during a period in either A single STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME, or In 2 statements as follows: (a) An statement of profit or loss (Revenue to Profit/Loss recognised through profit or loss ) (b) Other Comprehensive Income To remember items which are accounted for through Other Comprehensive Income, think of the mnemonic EPS E: Echange Gains/Losses on Foreign Subs (IAS 21) P: Property, Plant & Equipment Revaluation gains under IAS 16 S: Strategic equity - gains on financial assets held at FVTOCI (IFRS 9) (A single statement of profit or loss and other comprehensive income simply combines these two statements into one.) If an eamination question asks you to prepare a STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME, you should prepare 11
a single statement combining statement of profit or loss + other comprehensive income If an eamination question asks you to prepare an statement of profit or loss, this will mean just a statement of profit or loss - Income to Profit after ta (6) A reporting entity should analyse epenses either (a) based on the nature of epenses or (b) based on their function within the entity which one should be adopted? whichever provides information which is more relevant and more reliable. (For eam purposes, the functional method is widely used) This gives rise to 2 presentations of statement of profit or loss. Layout 1 (nature of epense method) Revenue Other income Change in inventories of finished goods and work in progress Raw materials and consumables used Employee benefit costs Depreciation and amortisation Other epenses Finance costs Total epenses Profit before ta Income ta epense Profit after ta () () Epenses are aggregated according to their nature and are not reallocated across the functions of an entity. Layout 2 (function of epense method) Revenue Cost of sales Gross profit Other income Distribution costs Administrative epenses () () () 12
Other epenses Finance costs Profit before ta Income ta epense Profit after ta () () () N.B. when this method is used there must be additional disclosures on the nature of the epenses e.g. depreciation and amortisation, employee benefit costs. EAMPLE An etract of balances in the accounts of Hawsker Feeds and Fertilisers' a limited company at 31 st December 2009 whose accounts are subject to international standards, is provided below to illustrate the two different formats. m Cost of sales 4.6 Sales revenue 10.1 Distribution costs 1.3 Loan note interest 1.4 Admin epenses 2.1 An analysis of the costs other than interest i.e. $8.0m (4.6 + 1.3 + 2.1) showed the following: m Raw materials and consumables 3.1 Increase in inventories finished goods and work in progress (0.2) Depreciation 1.8 Staff costs 2.9 Other operating epenses 0.4 8.0m The provision for income ta epense had been agreed at 0.2m. From this information we can now produce statement of profit or loss s in both formats. 1. By Function Format 13
Hawsker Feeds and Fertilisers Statement of profit or loss for Year Ended 31 st December 2009 m m Revenue 10.1 Cost of sales 4.6 Gross profit 5.5 Distribution costs 1.3 Administration epenses 2.1 3.4 Profit from operations 2.1 Interest payable 1.4 Profit before ta 0.7 Income ta epense 0.2 Net profit for period 0.5 By Nature Format m m Revenue 10.1 Increase in inventories of finished goods and work in progress 0.2 10.3 Raw materials and consumables 3.1 Staff costs 2.9 Depreciation 1.8 Other operating epenses 0.4 8.2 Profit from operations 2.1 Interest payable 1.4 Profit before ta 0.7 Income ta epense 0.2 Net profit for period 0.5 Memory Aid: Nature N = NO The functional method is the most common method of presentation. Statement of Changes in Equity (1) This is the 3 rd component of a set of financial statements. (2) How is the statement structured? The following must be shown on the face of the statement: profit/loss for the period; 14
any item of income or epense that has bypassed statement of profit or loss and is recognised directly in equity e.g. revaluation surplus on property, plant and equipment; the total income and epenses for the period. This total must be analysed in the case of groups o attributable to equity holders of the parent; o attributable to minority interest; the effects of changes in accounting policies and correction of errors on each component of equity; The following must be shown either on the face of the statement or in the notes: transactions with equity holders including distributions to them; the balance of retained earnings at start and end of year and the changes during the year; for each class of contributed equity and each reserve - the opening balance - movements during the year - the closing balance 15
Eample - Statement of Changes in Equity for the year ended 31 December 2014 Balance at 31 December 2013 brought forward Change in Accounting Policy Restated Balance Share Capital Share Premium Revaluation Reserve Retained Earnings Total - - - - - Changes in Equity for 2014 Total Comprehensive Income - Dividends - - - () () Issue of Share - - Capital Balance at 31 December 2014 16
Statement of Cash Flow - (the 4 th component of financial statements) See IAS 7. Notes to the Financial Statements - (the 5 th component of financial statements) They must (i) (ii) (iii) present information about the basis of preparation of the financial statements and the accounting policies used; disclose information required by any IFRS/IAS which has not been shown on the face of the accounts; disclose any information (not on face of accounts) which is relevant to their understanding. Other issues concerning Financial Statements (1) Fairness Financial statements must present fairly financial position, financial performance and cash flows. (2) Departure from any accounting standard only allowed in eceptional circumstances i.e. for fairer presentation. Disclosure must be given of: reason for departure title of standard involved financial effect of departure (3) Going Concern a. The going concern basis must be used unless management intends to liquidate or cease trading or has no alternative. 17
b. when the going concern basis is not used, this must be disclosed and justified along with the basis used. (4) Accruals Basis Must be used ecept in cash flow information. (5) Consistency The presentation and classification of items in financial statements should be retained from one period to another unless change is made for fairer presentations or an accounting standard requires change (6) Materiality Each material class of material items must be presented separately. Omissions or misstatements are material if they could influence the economic decisions of users. (7) Offsetting Income and epenses should not be offset unless required by IFRS. (8) Comparatives a. comparative information for the previous period must be disclosed for all amounts reported. b. when presentation or classification of items is changed in the reporting period, the comparative items must be changed also. Past Eam Questions Q3 (1) April 15 Q3 (4) (8) Aug 11 18