bg financial accounting 2 chapter 12 5715

CHAPTER 12 FINANCIAL STATEMENTS 12 1 Overview of financial statements 12 2 Accounting asssumptions and principle for financial reporting 12 3 Statement of financial position 12 4 Statement of comprehe[.]

CHAPTER 12: FINANCIAL STATEMENTS

12.1 Overview of financial statements

12.2 Accounting asssumptions and principle for financial reporting 12.3 Statement of financial position

12.4 Statement of comprehensive income

12.5 Statement of Cash Flows

12.6 Statement of changes in equity

12.7 Notes to Financial statements

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CHAPTER 12: FINANCIAL STATEMENTS

OBJECTIVE: After studying this chapter, you should be able to:

 Identify the main financial statements and their purpose

 Understand how to prepare Statement of financial position, Statement

of comprehensive income, Statement of Cash Flows, Statement of changes in equity and Notes to Financial statements

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12.1.Overview of financial statements 12.1.1.Definition of financial statements 12.1.2.Types of financial statements

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• The financial statements provide information about an entity's

assets, liabilities, equity, income and expenses that is useful tofinancial statements users in assessing the prospects for futurenet cash inflows to the entity and in assessing management'sstewardship of the entity's resources

• The financial statements of limited liability companies areusually governed by national legislation and accountingstandards

• From an international standpoint, however, the general content

of financial statements is governed by IAS 1 Presentation offinancial statements

12.1.1.DEFINITION OF FINANCIAL STATEMENTS

• The primary users of general purpose financial reporting are

present and potential investors, lenders and other creditors, whouse that information to make decisions about buying, selling orholding equity or debt instruments, providing or settling loans orother forms of credit, or exercising rights to vote on, orotherwise influence, management’s actions that affect the use ofthe entity’s economic resources

12.1.1.DEFINITION OF FINANCIAL STATEMENTS

The entity should identify each component of the financial statements very clearly IAS 1also requires disclosure of the following information in a prominent position.

• Name of the reporting entity (or other means of identification)

• Whether the accounts cover the single entity only or a group of entities

• The reporting date or the period covered by the financial statements (as appropriate)

• The reporting currency used in presenting the figures in the financial statements

• Reporting period: Entities normally present financial statements annually IAS 1 statesthat they should be prepared at least as often as this

12.1.1.DEFINITION OF FINANCIAL STATEMENTS

A complete set of financial statements includes the following.

• Statement of financial position

• Statement of profit or loss and other comprehensive income(either as a single statement or as two separate statements: thestatement of profit or loss and the statement of othercomprehensive income)

• Statement of changes in equity

• Statement of cash flows

• Notes, including a summary of significant accounting policiesand other explanatory information

12.1.2.TYPES OF FINANCIAL STATEMENTS

12.2.Accounting asssumptions and principle for financial reporting 12.2.1.Accounting assumptions

12.2.2.Accounting principles

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Thus, the financial statements presume that an entity willcontinue in operation indefinitely or, if that presumption is notvalid, disclosure and a different basis of reporting are required

Note: they may require valuation of assets on a break-up basis ifthe company will cease trading

12.2.1.ACCOUNTING ASSUMPTIONS

Financial statements prepared on the accrual basis inform usersnot only to past transactions when cash was paid or received butalso of obligations to pay cash in the future and of cash or itsequivalents to be received in the future

12.2.1.ACCOUNTING ASSUMPTIONS

12.2.2.ACCOUNTING PRINCIPLES

Accounting principles

• Fair presentation

• Consistency of presentation

• Business entity concept

• Materiality and aggregation

• Offsetting

• Cost concept

12.3 Statement of financial position

12.3.1 Overview of the statement of financial position 12.3.2 Preparation of the statement of financial position

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• A list of all the assets controlled and all the liabilities owed by a business as at a particular date: it is snapshot of the financial position of the business at a particular moment Monetary amounts are attributed to assets and liabilities It also quantifies the amount of the owners’

interest in the company: equity.

Statement of financial position

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12.3.1 OVERVIEW OF STATEMENT OF FINANCIAL POSITION

 property, plant and equipment

 trade and other receivables

 cash and cash equivalents

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SOFP

• assets held for sale

• trade and other payables

• provisions

• financial liabilities

• current tax amounts

• deferred tax amounts

• liabilities held for sale

• non-controlling interests

• issued capital and reserves.

Certain line items MUST be presented in the statement of financial position.

12.3.1 OVERVIEW OF STATEMENT OF FINANCIAL POSITION

• CONCEPT:The statement of financial position makes use of the accounting equation concept that:ASSETS = CAPITAL + LIABILITIESThe statement of

financial position is also prepared according to the business entity convention, that a business is separate from its owners

Statement of financial position

12.3.1 OVERVIEW OF STATEMENT OF FINANCIAL POSITION

Some definitions

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• is a resource controlled by the entity as a result

of past events and from which future economic benefits are expected to flow to the entity.

Equity 12.3.1 OVERVIEW OF STATEMENT OF FINANCIAL POSITION

Some definitions

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12.4 Statement of comprehensive income

12.4.1 Overview of the statement of comprehensive income 12.4.2 Preparation of the statement of comprehensive income

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• A statement displaying items of

income and expense in a reporting period as components of profit or loss for the period.

• The statement shows whether the business has had more income than expense (a profit for the period) or vice versa (a loss for the period)

Statement of of comprehensive

Information about the business's financial is needed by users.

• To understand the return that the entity has produced on itseconomic resources

• To assess how well management has discharged itsresponsibilities to make efficient and effective use of thereporting entity’s resources

• To help predict the business's future returns on its economicresources

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12.4.1 OVERVIEW OF THE STATEMENT OF COMPREHENSIVE INCOME

 Statement of profit or loss and other comprehensive income (SPLOCI)

 Other comprehensive income (OCI) is items of income and expense that are not recognised in profit or loss, for example a

revaluation surplus on a non-current asset In accordance with other IFRS Standard this may or may not be reclassified to profit

or loss at a later date.

 The statement of profit or loss and other comprehensive income may be presented as one single statement or two separate statements (a statement of profit or loss and a statement

disclosing OCI and total comprehensive income).

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P/L and OCI

12.4.1 OVERVIEW OF THE STATEMENT OF COMPREHENSIVE INCOME

 Profit or loss and total comprehensive income must be allocated between amounts attributable to:

 the non-controlling interest, and

 owners of the parent (see module 6)

 Minimum disclosure requirements in the profit or loss are as follows:

 Revenue

 Gains / losses on derecognition of financial assets measured at amortised cost

 Finance costs

 Impairment losses (and reversals)

 Share of profit or loss of associates/joint ventures

 Gains/losses on reclassification of financial assets

 Items in OCI are split between those that can be reclassified to profit or loss and those that cannot be reclassified.

 Sometimes, items of OCI that are not currently recognised in profit or loss may be recognised there at a later date They should be analysed as follows:

 OCI that will not be reclassified subsequently to profit or loss

 OCI that may be reclassified to profit or loss

 Share of OCI of associate/JV that will not be reclassified to profit or loss

 Share of OCI of associate/JV that may be reclassified to profit

 Sometimes, items of OCI that are not currently recognised in profit or loss may be recognised there at a later date They should

12.5 Statement of Cash Flows 12.5.1 Overview of the statement of Cash Flows 12.5.2 Preparation of the statement of Cash Flows

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 Statement of cash flows is the statement of information about the

historical changes in cash and cash equivalents of an entity.

 This information shall be provided in the statement of cash flows which classifies cash flows during the period from operating, investing and financing activities

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12.5.1 OVERVIEW OF THE STATEMENT OF CASH FLOWS

Three main headings

• Receipts from sales

• Receipts from royalties, fees, commissions etc

• Payments to suppliers and employees

• Tax payments or refunds

Operating activities

• Payments to acquire non-current assets

• Proceeds of sale of non-current assets

• Cash flows associated with loans made to other parties

Investing activities

• The proceeds of share issues

• The proceeds of loan stock issues

• Repayments of amounts borrowed Payments to reduce a lease obligation

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12.5.2 PREPARATION OF THE STATEMENT OF CASH FLOWS

12.6 Notes to Financial statements

12.6.1 Overview of the statement of changes in equity 12.6.2 Preparation of the statement of changes in equity

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Statement of changing equity

 Total comprehensive income for the period

 For each component of equity the effects of changes

in accounting policies and corrections of errorsrecognised in accordance with IAS 8

 For each component of equity, a reconciliationbetween the carrying amount at the beginning andend of the period resulting from:

 profit or loss

 other comprehensive income

 transactions with owners in their capacity asowners" (e.g share issues and dividends paid)

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12.6.1 Overview of the statement of changes in equity

Statement of changing equity

 Total comprehensive income for the period

 For each component of equity the effects of changes

in accounting policies and corrections of errorsrecognised in accordance with IAS 8

 For each component of equity, a reconciliationbetween the carrying amount at the beginning andend of the period resulting from:

 profit or loss

 other comprehensive income

 transactions with owners in their capacity asowners" (e.g share issues and dividends paid)

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12.7 Notes to Financial statements

12.7.1 Overview of Notes to Financial statements 12.7.2 Preparation of Notes to Financial statements

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12.7.1 OVERVIEW OF NOTES TO FINANCIAL STATEMENTS

Notes to the financial statements provide more detail for the users of the accounts about the information in the statement of profit or loss and other comprehensive income, the statement of financial position, the statement of cash flows and the statement of changes in equity

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12.7.2 PREPARATION OF NOTES TO FINANCIAL STATEMENTS

The notes to the financial statements then break down this total into the different categories of assets, the

accumulated depreciation and the depreciation charge for the year

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12.7.2 PREPARATION OF NOTES TO FINANCIAL STATEMENTS

 An accounting policy note should disclose the measurement bases used for

determining the amounts at which depreciable assets are stated, along with

the other accounting

policies.

 For each class of property, plant and equipment:

 Depreciation methods used

 Useful lives or the depreciation rates used

 Total depreciation allocated for the period

 Gross amount of depreciable assets and the related accumulated

depreciation at the beginning and end of the period

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12.7.2 PREPARATION OF NOTES TO FINANCIAL STATEMENTS

 The accounting policies for intangible assets that have been adopted

 For each class of intangible assets (including development costs), disclosure is

required of

the following.

 The method of amortisation used

 The useful life of the assets or the amortisation rate used

 The gross carrying amount, the accumulated amortisation and the

accumulated

 impairment losses as at the beginning and end of the period

 The carrying amount of internally generated intangible assets

 The line item(s) of the statement of profit or loss in which any amortisation of

 intangible assets is included

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12.7.2 PREPARATION OF NOTES TO FINANCIAL STATEMENTS

Disclosures required in the financial statements for provisions fall into two parts.

 (a) Disclosure of details of the change in carrying amount of a provision from

the beginning to the end of the year, including additional provisions made,

amounts used and other movements

 For each class of provision, disclosure of the background to the making of the

provision and the uncertainties affecting its outcome, including:

 (i) A brief description of the nature of the provision and the expected timing

of any resulting outflows relating to the provision

 (ii) An indication of the uncertainties about the amount or timing of those

outflows and, where necessary to provide adequate information, the major

assumptions made concerning future events.

 (iii) The amount of any expected reimbursement relating to the provision and

whether any asset has been recognised for that expected reimbursement

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