CP 3 : Financial Statements and Reporting Entity

Question 1

Chapter 3 of the Framework deals with two questions:
• what are financial statements ;
• what is the ‘reporting entity’ which prepares financial statements?

Answer 1

Chapter 3 of the Framework deals with two questions:
• what are financial statements ;
• what is the ‘reporting entity’ which prepares financial statements?

Question 2

Financial statements

Financial statements provide information about economic resources of the reporting entity, claims against the entity, and changes in those resources and claims, that meet the definitions of the elements of financial statements

Answer 2

Financial statements provide information about economic resources of the reporting entity, claims against the entity, and changes in those resources and claims, that meet the definitions of the elements of financial statements

Question 3

Financial statements - Objective and scope of financial statements 1

The objective of financial statements is to provide financial information about the reporting entity’s assets, liabilities, equity, income and expenses that is useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting entity and in assessing management’s stewardship of the entity’s economic resources

Answer 3

The objective of financial statements is to provide financial information about the reporting entity’s assets, liabilities, equity, income and expenses that is useful to users of financial statements in assessing the prospects for future net cash inflows to the reporting entity and in assessing management’s stewardship of the entity’s economic resources

Question 4

Financial statements - Objective and scope of financial statements 2a

That information is provided:
• in the statement of financial position, by recognising assets, liabilities and equity;
• in the statement(s) of financial performance, by recognising income and expenses; and

Answer 4

That information is provided:
• in the statement of financial position, by recognising assets, liabilities and equity;
• in the statement(s) of financial performance, by recognising income and expenses; and

Question 5

Financial statements - Objective and scope of financial statements 2b

• in other statements and notes, by presenting and disclosing information about:

• recognised assets, liabilities, equity, income and expenses, including information about their nature and about the risks arising from those recognised assets and liabilities;
• assets and liabilities that have not been recognised, including information about their nature and about the risks arising from them;
• cash flows;
• contributions from holders of equity claims and distributions to them; and
• the methods, assumptions and judgements used in estimating the amounts presented or disclosed, and changes in those methods, assumptions and judgements

Answer 5

• in other statements and notes, by presenting and disclosing information about:

• recognised assets, liabilities, equity, income and expenses, including information about their nature and about the risks arising from those recognised assets and liabilities;
• assets and liabilities that have not been recognised, including information about their nature and about the risks arising from them;
• cash flows;
• contributions from holders of equity claims and distributions to them; and
• the methods, assumptions and judgements used in estimating the amounts presented or disclosed, and changes in those methods, assumptions and judgements

Question 6

Financial statements - Reporting period and comparative information 1

Financial statements are prepared for a specified period of time (reporting period) and provide information about:

• assets and liabilities (including unrecognised assets and liabilities) and equity that existed at the end of the reporting period, or during the reporting period; and
• income and expenses for the reporting period

Answer 6

Financial statements are prepared for a specified period of time (reporting period) and provide information about:

• assets and liabilities (including unrecognised assets and liabilities) and equity that existed at the end of the reporting period, or during the reporting period; and
• income and expenses for the reporting period

Question 7

Financial statements - Reporting period and comparative information 2

To help users of financial statements to identify and assess changes and trends, financial statements also provide comparative information for at least one preceding reporting period

Answer 7

To help users of financial statements to identify and assess changes and trends, financial statements also provide comparative information for at least one preceding reporting period

Question 8

Financial statements - Reporting period and comparative information 3

Information about possible future transactions and other possible future events (forward-looking information) is included in financial statements if it:

• relates to the entity’s assets or liabilities (including unrecognised assets or liabilities) or equity that existed at the end of the reporting period, or during the reporting period, or to income or expenses for the reporting period; and
• is useful to users of financial statements.

Answer 8

Information about possible future transactions and other possible future events (forward-looking information) is included in financial statements if it:

• relates to the entity’s assets or liabilities (including unrecognised assets or liabilities) or equity that existed at the end of the reporting period, or during the reporting period, or to income or expenses for the reporting period; and
• is useful to users of financial statements.

Question 9

Financial statements - Reporting period and comparative information 4

For example, if an asset or liability is measured by estimating future cash flows, information about those estimated future cash flows may help users of financial statements to understand the reported measures.

Financial statements do not typically provide other types of forward-looking information, for example, explanatory material about management’s expectations and strategies for the reporting entity

Answer 9

For example, if an asset or liability is measured by estimating future cash flows, information about those estimated future cash flows may help users of financial statements to understand the reported measures.

Financial statements do not typically provide other types of forward-looking information, for example, explanatory material about management’s expectations and strategies for the reporting entity

Question 10

Financial statements - Reporting period and comparative information 5

Financial statements include information about transactions and other events that have occurred after the end of the reporting period if providing that information is necessary to meet the objective of financial statements

Answer 10

Financial statements include information about transactions and other events that have occurred after the end of the reporting period if providing that information is necessary to meet the objective of financial statements

Question 11

Financial statements - Perspective adopted in financial statements

Financial statements provide information about transactions and other events viewed from the perspective of the reporting entity as a whole, not from the perspective of any particular group of the entity’s existing or potential investors, lenders or other creditors.

Answer 11

Financial statements provide information about transactions and other events viewed from the perspective of the reporting entity as a whole, not from the perspective of any particular group of the entity’s existing or potential investors, lenders or other creditors.

Question 12

Financial statements - Going concern assumption

Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future.

Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading. If such an intention or need exists, the financial statements may have to be prepared on a different basis. If so, the financial statements describe the basis used.

Answer 12

Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future.

Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading. If such an intention or need exists, the financial statements may have to be prepared on a different basis. If so, the financial statements describe the basis used.

Question 13

The reporting entity 1

A reporting entity is an entity that is required, or chooses, to prepare financial statements. A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity

Answer 13

A reporting entity is an entity that is required, or chooses, to prepare financial statements. A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity

Question 14

The reporting entity 2

Sometimes one entity (parent) has control over another entity (subsidiary).

If a reporting entity comprises both the parent and its subsidiaries, the reporting entity’s financial statements are referred to as ‘consolidated financial statements’. If a reporting entity is the parent alone, the reporting entity’s financial statements are referred to as ‘unconsolidated financial statements’

Answer 14

Sometimes one entity (parent) has control over another entity (subsidiary).

If a reporting entity comprises both the parent and its subsidiaries, the reporting entity’s financial statements are referred to as ‘consolidated financial statements’. If a reporting entity is the parent alone, the reporting entity’s financial statements are referred to as ‘unconsolidated financial statements’

Question 15

The reporting entity 3

If a reporting entity comprises two or more entities that are not all linked by a parentsubsidiary relationship, the reporting entity’s financial statements are referred to as ‘combined financial statements’.

Answer 15

If a reporting entity comprises two or more entities that are not all linked by a parentsubsidiary relationship, the reporting entity’s financial statements are referred to as
‘combined financial statements’.

Question 16

The reporting entity 4

Determining the appropriate boundary of a reporting entity can be difficult if the reporting entity:
• is not a legal entity; and
• does not comprise only legal entities linked by a parent-subsidiary relationship.

Answer 16

Determining the appropriate boundary of a reporting entity can be difficult if the reporting entity:
• is not a legal entity; and
• does not comprise only legal entities linked by a parent-subsidiary relationship.

Question 17

The reporting entity 5

In such cases, determining the boundary of the reporting entity is driven by the information needs of the primary users of the reporting entity’s financial statements. Those users need relevant information that faithfully represents what it purports to represent. Faithful representation requires that:

• the boundary of the reporting entity does not contain an arbitrary (random choice) or incomplete set of economic activities;
• including that set of economic activities within the boundary of the reporting entity results in neutral information; and
• a description is provided of how the boundary of the reporting entity was determined and of what constitutes the reporting entity.

Answer 17

In such cases, determining the boundary of the reporting entity is driven by the information needs of the primary users of the reporting entity’s financial statements. Those users need relevant information that faithfully represents what it purports to represent. Faithful representation requires that:

• the boundary of the reporting entity does not contain an arbitrary (random choice) or incomplete set of economic activities;
• including that set of economic activities within the boundary of the reporting entity results in neutral information; and
• a description is provided of how the boundary of the reporting entity was determined and of what constitutes the reporting entity.

Question 18

The reporting entity - Consolidated and unconsolidated financial statements 1

Consolidated financial statements provide information about the assets, liabilities, equity, income and expenses of both the parent and its subsidiaries as a single reporting entity. That information is useful for existing and potential investors, lenders and other creditors of the parent in their assessment of the prospects for future net cash inflows to the parent. This is because net cash inflows to the parent include distributions to the parent from its subsidiaries, and those distributions depend on net cash inflows to the subsidiaries

Answer 18

Consolidated financial statements provide information about the assets, liabilities, equity, income and expenses of both the parent and its subsidiaries as a single reporting entity. That information is useful for existing and potential investors, lenders and other creditors of the parent in their assessment of the prospects for future net cash inflows to the parent. This is because net cash inflows to the parent include distributions to the parent from its subsidiaries, and those distributions depend on net cash inflows to the subsidiaries

Question 19

The reporting entity - Consolidated and unconsolidated financial statements 2

Consolidated financial statements are not designed to provide separate information about the assets, liabilities, equity, income and expenses of any particular subsidiary. A subsidiary’s own financial statements are designed to provide that information.

Answer 19

Consolidated financial statements are not designed to provide separate information about the assets, liabilities, equity, income and expenses of any particular subsidiary. A subsidiary’s own financial statements are designed to provide that information.

Question 20

The reporting entity - Consolidated and unconsolidated financial statements 3

Unconsolidated financial statements are designed to provide information about the parent’s assets, liabilities, equity, income and expenses, and not about those of its subsidiaries. That information can be useful to existing and potential investors, lenders and other creditors of the parent because:

• a claim against the parent typically does not give the holder of that claim a claim against subsidiaries; and
• in some jurisdictions, the amounts that can be legally distributed to holders of equity claims against the parent depend on the distributable reserves of the parent.

Answer 20

Unconsolidated financial statements are designed to provide information about the parent’s assets, liabilities, equity, income and expenses, and not about those of its subsidiaries. That information can be useful to existing and potential investors, lenders and other creditors of the parent because:

• a claim against the parent typically does not give the holder of that claim a claim against subsidiaries; and
• in some jurisdictions, the amounts that can be legally distributed to holders of equity claims against the parent depend on the distributable reserves of the parent.

Question 21

The reporting entity - Consolidated and unconsolidated financial statements 4

Another way to provide information about some or all assets, liabilities, equity, income and expenses of the parent alone is in consolidated financial statements, in the notes.

Answer 21

Another way to provide information about some or all assets, liabilities, equity, income and expenses of the parent alone is in consolidated financial statements, in the notes.

Question 22

The reporting entity - Consolidated and unconsolidated financial statements 5

Information provided in unconsolidated financial statements is typically not sufficient to meet the information needs of existing and potential investors, lenders and other creditors of the parent.

Accordingly, when consolidated financial statements are required, unconsolidated financial statements cannot serve as a substitute for consolidated financial statements. Nevertheless, a parent may be required, or choose, to prepare unconsolidated financial statements in addition to consolidated financial statements.

Answer 22

Information provided in unconsolidated financial statements is typically not sufficient to meet the information needs of existing and potential investors, lenders and other creditors of the parent.

Accordingly, when consolidated financial statements are required, unconsolidated financial statements cannot serve as a substitute for consolidated financial statements. Nevertheless, a parent may be required, or choose, to prepare unconsolidated financial statements in addition to consolidated financial statements.