3 Preparation and Regulation of Financial Statements Flashcards
Annual Report | Definition and Aim
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- with the annual report, financial accounting information is communicated
- aka: the accounts / the financial statements
- contains more than just the stamenents, also interim information (semi annual reports)
Narrative Material of the Annual report - what does it consist of?
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- “highlights”
- chairmans statement, chief executives review, strategy and board overview
- directors report *
- renumeration report *
- corporate governance report *
- auditors report *
- statement of directors responsibilities *
- content regulated
Whats the content of the business review? (narrative material)
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contains operating review, corporate responsibility review, financial review
What do forward looking statements of the narrative material contain?
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- prognosis eg directors expect sales to increase in current financiak year, provided no unforeseen events occur
- corporate strategy, eg how to deal with any low profitability segments or possible divestments or acquisitions
What are some required items in the directors report?
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- principal activities
- business review
- furutre developments
- R&D activities
- post balance sheet events
- value of land and building
- nr of employees with disabilities
- info about idrectors
- donations to charities
What are criteria for information in published accounts (Annual Report)?
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- compliance in format with IAS 1 and statue
- fin. statements should present a fair view of profits and assets and liabiliies
- accounting policies comply with IFRSs/statue
- IAS 1 requires compliance with fundamental accounting principles: accruals, materiality, aggregation, going concern, consistency
- IAS 1 requires to disclose accounting policies adopted in determining the amounts shown in financial statements and apply them consistently
Comprehensive income….
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- recognises the gains and losses (realized and unrealized)
- that have increased or decreased the owners equity in the business
The gains and losses from the comprehensive income arise from…
… the revaluation of non current assets and from other items (eg financial instruments, employee benefits) -> OTHER COMPREHENSIVE INCOME
IAS 1 allows a choice of (?) formats for detailling income and expenditure.
- two
Format 1: vertical costs analyzed according to FUNCTION, eg cost of sales, distribution costs and administrative expenses
Format 2: vertical costs analyzed according to NATURE, eg raw materials, employee benefits expenses, operating expenses and depreciation
(we do format 1)
-> basically so we have sufficient detail for users without having a huge number of seperate expenses
Why might cost of sales not be comparable?
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- between companies or between the same company over years
- potential of different treatment of choice of depreciation method, carrying values, how inventory is valued (FIFO LIFO weighted average)
- management attitude to estimates
- capabiliy of system to produce information
IAS 7 reuires….
- the provision of information about the historical changes
in cash and cash equivalents
by means of a cash flow statement which classifies cash flow during the period from operating, investing and financing activities
(SoCF tha shows historical changes in cash (equivalents). it should classify the cash flow in the period in O, I and F activities)
Cash: in hand and available on demand from eg a bank
Cash Equivalents: short term highly liquid investments readily convertible to cash
Cash Equivalent | Definiton
– short term highly liquid investments
readily convertible to known amounts of cash and
subject to an insignificant risk of changes in value
What can be said about the Notes to the Financial Statements; What does it entail?
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- notes about srtting out accounting policies
- gives greater detail of the make up of B/S items (eg inventory, non current asset make up)
- gives additional information to assist the prediction of future cash flows (eg capital commitments, future commitments, contingent liabilities)
- related party transactions (direct or indreict)
- other information interesting for shareholders (eg staff costs and nr)
What are the IAS 24 requirements?
disclosure of the relationship and of the nature of any transactions
What is the progressive step-wise approach to the preparation of published accounts?
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- Step 1: Internal Income Statement from the trial balance data
- Step 2: Statement of Comprehensive Income (with
costs analysed by function – Format 1) - Step 3 (if required): Statement of changes in Equity
- Step 4: Statement of Financial Position
