Part 2. Understanding and interpreting financial statements and reports. 3. Presentation of single entity published financial statements Flashcards
What is the key objective of financial statements?
To provide useful information about the financial position, financial performance and cash flows of an entity to a wide range of users who are making economic decisions.
The objective of IAS 1 is to ensure comparability of financial statements with
the entity’s financial statements of previous periods and with the financial
statements of other entities. Under IAS 1 an entity must present a complete set
of financial statements (including prior period comparative information) on at
least an annual basis.
What are the components of a complete set of financial statements as required by IAS 1?
A complete set of financial statements comprises:
a statement of financial position (also called a balance sheet)
a statement of profit or loss and other comprehensive income
a statement of changes in equity
a statement of cash flows
notes to the financial statements (comprising a summary of significant
accounting policies and other explanatory notes).
What is a current asset, non-current asset, a current liability and a non-current liability?
Current assets are assets (such as inventories and trade receivables) that are
sold, consumed or realised as part of the normal operating cycle even when
they are not expected to be realised within 12 months after the reporting
period. They also include assets held primarily for the purpose of trading and the
current portion of non-current financial assets. The normal operating cycle is the
cash conversion cycle an entity takes to realise its purchases into cash or cash
equivalents from customers. It is normally assumed to be 12 months when it is
not clearly identifiable.
All other assets should be classified as non-current assets. Non-current assets
include tangible, intangible and financial assets of a long-term nature.
A liability is classified as current by IAS 1 when it is:
expected to be settled in the entity’s normal operating cycle;
held primarily for the purpose of trading;
due to be settled within 12 months after the reporting period; or
it does not have an unconditional right to defer settlement of the liability.
Liabilities not falling within the definitions of ‘current’ are classified as
non-current.
How does having an agreement to refinance and
an unconditional right to defer settlement of the liability impact on an entity’s current/non-current classification.
Debt under an existing loan facility which is due to expire within 12 months of the year end is treated as current.
However, the debt becomes non-current if there is an agreement to refinance and if the lender has agreed, on or before the balance sheet date, to provide a period of grace lasting 12 months or more from the end of the reporting period, during which the lender is unable to enforce repayment of the loan.
What is the key difference between “profit or loss” and other comprehensive income (in a statement of profit or loss and other comprehensive income)?
The statement of profit or loss includes all items of income or expense (including reclassification adjustments) except those items of income or expense that are recognised in OCI as required by IFRS. IAS 1 lists the following as the minimum
items to be presented in the profit or loss section:
1. revenue
2. finance costs
3. share of profits and losses of associates and joint ventures accounted for using the equity method
4. a single amount for the total of discontinued operations
5. tax expense
6. a total for profit and loss
7. gains and losses from the de-recognition of financial assets measured at amortised cost
Other comprehensive income includes all of the items that cannot be included in the statement of profit and loss. These include the change in a company’s net assets from non-owner sources, including all income and expenses that bypass the income statement because they have not yet been realised. Examples of the types of changes captured by other comprehensive income include:
1. changes in the revaluation surplus on long-term assets
2. actuarial gains and losses on re-measurement of defined benefit plans
3. exchange differences (gains and losses) arising from the translation of the financial statements of a foreign operation
4. certain gains and losses relating to financial instruments, including on certain instruments used for hedging
5. correction of prior period errors and the effect of changes in accounting policies
What is the primary purpose of the statement of cash flows?
The primary purpose of the statement of cash flows is to provide information about a company’s gross receipts and gross payments for a specified period of time. As per IAS 7, cash flows are classified under operating, investing and
financing activities. The statement of cash flows shows movement of money into or out of a business. It highlights the activities that directly and indirectly affect a company’s overall cash balance.
Chapter summary
Chapter summary
International Accounting Standard 1 governs the preparation and
presentation of single entity financial statements. This includes structure,
content and overriding concepts such as going concern, the accruals basis
of accounting and the current/non-current distinction.
The key objective of the financial statements is to provide and fairly
represent the financial position, performance and cash flows of an entity in
a way that is useful to a wide range of users in making financial decisions.
A complete set of financial statements comprises:
– a statement of financial position
– a statement of profit or loss and other comprehensive income
– a statement of changes in equity
– a statement of cash flows
It also includes narratives or notes to the financial statements which help to
further explain numbers on the financial statements.
International Accounting Standard 1 lays out the basic format of the
statements and prescribes some basic information that should be disclosed
about the reporting entity.
Some overriding concepts applied in the preparation and presentation of
financial statements include:
– presentation (components, comparative and consistency)
– fair presentation and compliance with IFRS
– going concern
– accruals basis
– materiality and aggregation
– reporting period
– offsetting
The statement of financial position, previously known as the balance
sheet, presents the financial position of an entity at a given date. It is
comprised of three main components: assets, liabilities and equity. It
provides a snapshot or record of resources owned or controlled (assets)
and obligations owed (liabilities) at a specific point in time (the end of the
reporting period). A statement of financial position must normally present
separate classifications separating current and non-current assets and
current and non-current liabilities, unless presentation based on liquidity
provides information that is reliable and more relevant. It also contains
disclosures regarding issued share capital and other components of equity,
either on the face of the statement of financial position or in the notes.
The statement of profit or loss and OCI provides a review of overall
performance as a result of the financial transactions that took place
during the accounting period. It summarises revenues generated and costs
incurred as a result of undertaking business activity.
Total comprehensive income is defined as the change in equity during a
period resulting from transactions and other events, other than those
changes resulting from transactions with owners in their capacity as
owners.
In order to give a fair presentation of results, IAS 1 requires items of
income and expense of such size, nature or incidence that are considered
material to be disclosed separately either in the statement of profit or loss
and other comprehensive income or in the notes.
IFRS 5 requires the result of any discontinued operation(s) to be disclosed
separately from the results of continuing operations so that the users’
view of the financial statements is not skewed by results which will not
be present in future years. Assets held for sale as a consequence of a
discontinued operation should be shown on the statement of financial
position below current assets.
The statement of changes in equity provides an analysis of the changes in
shareholders’ equity over an accounting period. The key components of
equity include share capital or funds contributed by shareholders, retained
earnings and other components such as the revaluation surplus.
International Accounting Standard 7 governs the preparation and
presentation of statements of cash flows. The statement of cash flows
supplements the primary financial statements by showing changes in cash
and cash equivalents over the accounting period. It helps users to see the
amount of cash generated and used during the period and to understand:
– how much of the profits earned have been converted into cash
– how much cash has been reinvested
– how much cash has been used to service finance or has been paid out
to shareholders
Under IAS 7, cash flows are classified under operating, investing and
financing activities. IAS 7 permits cash flows from operating activities to be
shown on a direct or indirect basis. The presentation only differs in their
reporting of cash generated from operating activities.
