Chapter 2 Format of financial statements Flashcards
1.1 Objective of IAS 1 Presentation of Financial statements
The basis for presentation of financial statements in order to ensure comparability with the entity’s previous period financial statements and to ensure comparability with other entities’ financial statements.
2.1 Fair presentation
IAS 1 requires the fair presentation of financial position, financial performance, and cash flows. Under Companies Act 2006 financial statements should give a true and fair view.
2.2 Going concern
Statements prepared on going concern basis if the company is expected to continue in operation for the foreseeable future. IAS 1 requires that management look at least 12 months into future, uncertainties regarding going concern is disclosed and if the going concern assumption is not following, that should be disclosed with the basis of accounting used and the reasons. When prepared on a going concern basis we see treatments such as:
- Recording PPE at cost and writing it off over its useful life
- A distinction between current and non-current assets and liabilities
If a company is not a going concern, the statements should be prepared on a break-up basis where assets are recorded at recoverable amount (value can be sold at) and all assets and liabilities classified as current.
2.3 Accruals concept
All transactions and events recognised when they occur, not when cash is received or paid. All expenses are recognised in statement of profit or loss on basis of direct association between cost incurred and the earning of the related income. Alternative basis is the cash basis, which is recorded when cash is received.
2.4 Materiality and aggregation
Each material class if item must be shown separately in the statements. Immaterial items can be aggregated with other items. Information is material if omitting, misstating, or obscuring it could influence decisions that the primary users make.
2.5 Off-setting
IAS 1 does not allow off-setting against one another unless required/permitted by another IFRS standard, this is consistent with conceptual framework. Income and expenses only allowed to off-set by IAS 1 if another IFRS standard permits and the gains/losses/expenses on similar items are immaterial.
2.6 Comparatives
IAS 1 requires comparative information to be given for all numerical information and for narrative information, if necessary, for an understanding. Comparative are reclassified when presentation or classification of items is amended.
Accounting policies (therefore presentation) are normally kept the same from period to period to ensure comparability of statements over time.
3.1 Statement of profit or loss
IAS 1 provides two formats for statement of profit or loss:
- Classification of expenses by function (more common practice in UK includes gross profit, administrative expenses etc)
- Classification of expenses by nature (includes different categories of expense lines depreciation, raw materials etc)
4.1 Statement of comprehensive income
IAS 1 requires a statement of other comprehensive income. Total comprehensive income is the realised profit or loss for the period, plus other comprehensive income, which is income and expenses not recognised in the profit or loss (for example income arising from revaluation of non-current assets).
4.2 Revaluations
Per IAS 16 (PPE) companies can hold their PPE at historic cost or at fair value. The steps to perform a revaluation are:
- Increase cost to market value: Dr Cost
- Remove all accumulated depreciation recognised to date: Dr Accumulated depreciation
- Create a revaluation surplus which sits in equity in the SFP: Cr Revaluation surplus
The amount credited to revaluation surplus is the difference between the carrying value and the fair value. This is an unreleased gains and will be in other comprehensive income.
5.1 Statement of changes in equity
Provides a comprehensive summary of all movements in share capital, share premium and reserves including revaluation surplus and retained earnings during the year.
6.1 Current or non-current assets and liabilities: SFP
IAS 1 requires an asset to be classified as current if it is settled within 12 months of the reporting date or is part of the entity’s normal operating cycle, all other are non-current. A liability is current when it is expected to be settled in the normal course of the operating cycle or held primarily for trading purposes or due to be settled within 12 months of the reporting date. All other liabilities are non-current.
7.1 Share capital and dividend payments
The statement of financial position may show preference share capital as well as ordinary share capital.
Ordinary shares: own a % of the share capital plus the reserves, voting rights attached, ordinary dividends proposed or declared in the period do not create a liability as directors can revoke the dividend before its paid, a contractual obligation to pay the dividend arises once approved by the shareholders at a general meeting, usually post-year end. You usually account for ordinary dividends when paid Dr Retained earnings Cr Cash
Preference shares: own a % of the preference share capital, no voting rights. Dividends on redeemable and irredeemable preference shares with mandatory/cumulative dividends accounts for on an accruals basis and recognised as interest in the P+L account: Dr Finance cost (P+L) Cr Dividend payable/cash.
Dividends on irredeemable preference shares without mandatory/cumulative dividends are treated like ordinary dividends: Dr Retained earnings Cr Cash
8.1 Benefit of a statement of cash flows
Cash flows are factual and easily understood. They provide extra information on business activities and allow users to assess future prospects of a business. It shows how adaptable a company is, whether a payment can pay liabilities as they fall due and facilitate comparison between companies.
- Cash flows from operating activities: principal revenue producing activities of the business, including day-to-day trading
- Cash flows from investing activities: cash flows associated with purchase and sale of non-current assets and income from investments held
- Cash flows from financing activities: cash flows associated with long-term financing of a company such as share capital and loan stock
9.3 Cash and cash equivalents
Short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. This means investments with a maturity date of three months or less. Statement of cash flows reconciles the different between the brought forward and carried forward statement of financial position figures for cash and cash equivalents.
