Presentation of financial statements Flashcards
What IAS number is used for the (Presentation of Financial Statements)?
ISA 1
The ISA 1 standard requires a complete set of financial statements. What does it comprise of?
ISA 1 requires a complete set of financial statements to comprise of:
- 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
- notes to the accounts
The purpose of financial statements?
The purpose of financial statements is mainly to provide a report
of the financial position (at a specific point in time) and financial performance (over a period) to show how an entity has performed.
The financial information is useful to a wide range of users in making financial decisions.
To meet the objective of financial reporting what must you do?
To meet the objective of general financial reporting, financial statements categorise the information presented into the
following elements:
- assets
- liabilities
- equity
- income (including gains)
- expenses (including losses)
- other changes in equity (contributions from and distributions to owners)
- cash flows
This information is provided in the statement of financial position and the statement(s) of financial performance, as well as in other statements and notes.
Financial statements highlight the strengths and weaknesses of the entity and help users to assess the entity’s liquidity and solvency, plus any needs for additional financing. They are also used to predict future returns.
What are the components of a statement of financial position? also know as balance sheet
What are the components of a statement of financial position? also know as balance sheet.
Assets - liabilities = equity
What are the components of a statement of changes in equity?
What are the components of a statement of changes in equity?
These are transactions with Shareholders, e.g. contributions by and distributions to owners
What are the components of a statement of profit or loss and other comprehensive income?
What are the components of a statement of profit or loss and other comprehensive income?
Revenue - costs = profit.
A fair presentation of financial statements consist of…?
A fair presentation of financial statements requires:
- selection and application of appropriate accounting policies and practices;
2.presentation of information which is relevant, reliable, comparable and understandable; and
- additional disclosures where required to ensure that the financial statements give a fair representation of the results,
financial position and cash flow
What is the ‘accruals’ concept?
What is the ‘accruals’ concept?
The accruals concept is the basis for income, expense, asset and liability recognition that results in accurate reporting of the company’s financial performance and financial position over different periods.
Example:
a typical situation arises around the reporting year end of a company when a customer orders (and receives) goods and pays for them later.
The revenue is recorded at the time it is earned no matter when payment is made:
in this case, when the goods are delivered in November. It would be too late to record the revenue when payment is received in January as it had been earned much earlier.
Cash accounting recognises economic events only when cash
is exchanged, without indicating the true position of the business.
Accruals-based accounting recognises revenue and expenses in the periods in which they are incurred.
See page 42 of book for diagram example.
What is meant by ‘Matching Principle’?
What is meant by ‘Matching Principle’?
The expressions ‘matching principle’ and ‘accruals basis of accounting’ are often used interchangeably. Both require recognition of income and expenses in the accounting periods to which they relate. However, the matching principle is a further refinement of the accruals concept, requiring expenses and the corresponding revenue to be recorded in the same period (whenever it is logical and feasible to do so).
What do we mean by Materiality and aggregation?
The concept of materiality is important.
ISA 1 states that each material class of similar items should be presented separately and items that are dissimilar in terms of nature or function should be presented separately unless they are immaterial.
The concept of materiality is a key feature of financial reporting and its consideration applies to all parts of the financial statements and disclosures.
Materiality depends on the nature or size of the item, or a combination of both and whether the non-disclosure thereof could influence the financial decisions of the users of financial statements.
The decision about whether or not an item is material requires the application of judgement and its relative significance to the user of financial statements.
The most common examples are directors’ remuneration and related party disclosures.
What is meant by ‘Offsetting’?
Offsetting
Assets and liabilities and income and expenses shall not be offset unless required or permitted by a standard or an interpretation.
The netting off of assets and liabilities, or items of income and expense, can disguise both transactions and the financial position and hence may not provide a true picture of the entity’s assets and liabilities, or income and expenses.
They should not be shown on a net basis unless required or permitted by an IFRS.
Common examples of treatments permitted by an IFRS are the netting off of the allowance for receivables from trade
receivables and accumulated depreciation from the cost (or valuation) of non-current assets.
Line items of a statement of financial position for Assets?
Assets
- property, plant and equipment
- investment property
- intangible assets
- financial assets (excluding amounts shown under (5), (8) and (9))
- investments accounted for using the equity method
- biological assets
- inventories
- trade and other receivables
- cash and cash equivalents
- assets held for sale
Line items of a statement of financial position for Liabilities ?
Liabilities
- trade and other payables
- provisions
- financial liabilities
- current tax liabilities
- deferred tax liabilities (or as a deferred tax asset)
- liabilities included in disposal groups classified as held for sale
Line items of a statement of financial position for Equity ?
Equity
- issued share capital and other components of equity (attributable to owners of the parent in a consolidated statement of financial position)
- non-controlling interests (NCI) presented as part of equity (in a consolidated statement of financial position)
- non-controlling interest
