Other Contents and Features of Published Financial Statements

Question 1

What are the primary uses of published accounts?

Answer 1

Published accounts provide info about the company’s activities and financial performance throughout the preceding year. To some extent, they indicate the future prospects of the business.

Published accounts are a key element of communication with shareholders, the market and other interested parties, such as bank lenders or suppliers. The published accounts are used by investors and other parties to examine:

• profitability: investors and shareholders will be interested in the profitability ratios and financial numbers, such as dividends and retained profits;
• sources or nature of profit: e.g., whether the profit generated is from the sales of assets or normal trading;
• balance sheet strength: by looking at liquidity, insolvency and gearing positions;
• trends: e.g., looking for revenue and profit trends to identify strengths or any potential risks

Question 2

What are the objectives of the strategic report?

Answer 2

Detailed report within the annual report and accounts, written in non-financial language. It provides clear and coherent info about the company’s activities (such as what it does and why), performance, position, the strategic position of the business and probable risks attached with the business. It ensures information is accessible by a broad range of users, not just analysts and accountants who have sophisticated knowledge.

The purpose of the strategic report is to provide information to the members of the company and help them assess how the directors have performed their duties and functions. The strategic report must contain and provide the following info:

• fair review of company’s business
• description of principal risks and uncertainties the company faces
• any change in the going concern assessment
• references to the annual accounts

Quoted company must also include info on strategy, business model and disclosures about environmental, employee and social issues (including human rights and gender diversity).

Question 3

Discuss the purpose of notes to the accounts in a published annual report

Answer 3

Provide info not presented elsewhere in the report, including:
- more detailed analysis of figures in the statements
- narrative info explaining figures in statements
- additional info, such as contingent liabilities and commitments

IAS 1 requires the notes to the accounts in the annual report to disclose the following info:
- the basis for the prep of the financial statements that includes specific accounting policies chosen and applied to significant transactions/events
- info which is required by IFRS but not presented elsewhere in the annual report;
- any additional info that is relevant to understanding which is not shown elsewhere in the annual report

Question 4

A plc sold a property to B plc on terms that the property will be leased back to A plc under a lease agreement and A plc continues to occupy the property. How will this transaction be recorded in the financial statements of A plc?

Answer 4

Substance over form concept will be applied.

• Determine whether transfer qualifies as a sale based on requirements for satisfying a performance obligation in IFRS 15 ‘Revenue from Contracts with Customers’. Under IFRS 15, transfer of goods and services is based upon the transfer of control - the ability to direct the use of and obtain substantially all of the remaining benefits from, the asset. In view of this, the transaction will not be recorded as a sale transaction in the books of A; instead, it will be treated as a lease and accounted for as per IAS 17.
• IAS 17 provides a single lessee accounting model, requiring lessees to recognise assets (representing its right to use the assets) and liabilities (representing its obligation to make lease payments). The asset will remain in the books of A and the money received from B by A will be recorded as a secured loan.

Question 5

Outline the reasons why managers may engage in earnings management or creative accounting.

Answer 5

Creative accounting arises when managers user their knowledge of accounting choices available to them to manipulate the figures reported in the accounts of a business. They may resort to such practices due to any of the following reasons:

• manager may be attempting to secure performance bonuses
• to minimise tax liability
• increase share values, especially if directors are shareholders
• disguise the fact that the business is close to insolvency
• use as a bargaining tool in negotiations with suppliers, customers and employees

Question 6

What are the key limitations of historical cost as a basis for measurement of assets?

Answer 6

Historical cost most widely used basis of measurement of assets. Use of historical cost presents various problems for users, as it fails to account for change in price levels of assets over a period of time.

This not only reduces the relevance of accounting info by presenting assets at amounts that may be far less than their realisable value but also fails to account for the opportunity cost of using those assets.

The published accounts neither represent the value for which fixed assets can be sold nor the amount which will be required to replace these assets.