1 processing, reporting and auditing financial accounts components of financial statements week 1

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Processing, Reporting and Auditing Financial

Accounts

Components of Financial Statements

Week 1

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Textbook B & J Elliott – Financial Accounting and Reporting 12th EditionPearson Education ISBN 9780273712312

12th Edition

11th Edition

10th Edition

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Welcome to the parallel universe

Try to imagine a world where… Cider costs 2p a pint Fulham win the Double Balance sheets & P&Ls are based on

the same rules and yet are strangely different

A world called International Accounting Standards

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IAS 1 – Presentation of Financial Statements

Published financial statements must present information in suitable form

Specifications for all “general purpose” financial statements

Covers consolidated accounts and single companies

Objective of general purpose financial statements Consistent with IASB Framework Provides information on Financial position of company Financial performance and cash flows That are useful to various user groups in making

decisions

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IAS 1 covers… Balance sheet Income statement Statement in changes in equity

showing All changes in equity Changes in equity other than those arising

from transactions with other shareholders Cash flow statement Notes to the accounts

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Additional statements

Financial review by management

Environmental statement

Value added statement

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Fair presentation Financial statements must present financial

principles fairly Applying IAS/IFRS = fair presentation If company complies with IAS – it must say so Fair override If complying does not lead to fair presentation Then entity may depart from compliance But must disclose that Financial statements do fairly present company’s

financial position It has departed from particular standard

Details of departure Effect of departure for each item affected

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Accounting policies Specific principles

Bases Conventions Rules Practices

Adopted by entity in preparing financial statements

Management to select accounting policies so financial statements comply with IFRS

When items not covered by IFRS should use judgement

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Going concern

Financial statements to be prepared on going concern basis unless Management intends to liquidate

business Cease trading Sees no other alternative

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Accruals & Consistency

Accruals basis Except for cash flow statement all

statements to be on accruals basis Consistency of presentation Consistent unless Change in circumstances Requirements of new IFRS

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Materiality & aggregation

Each material class of similar items to be shown separately

Items of dissimilar nature shown separately, unless immaterial

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Offsetting Cannot offset assets against liabilities Cannot offset income against expenditure

unless Reporting net of valuation allowance Debtors (receivables) net of provision for

doubtful debts is ok Expenses incidental to revenue generating

activities Show income net of related expenses Gains/losses on groups of similar activities (FX gains/losses)

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Other presentational details

Comparative information Should show comparative information for

previous period Identification of financial statements & reporting

period Each component of financial statements to be

properly identified For single companies show

Name of company Balance sheet date Currency Level of rounding

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Structure & content of balance sheet

Usual to show current & non-current items separately

IAS 1 suggests showing in order of liquidity Current assets Asset classified as current asset if: Part of operating cycle of business Held for trading purposes Expected to be realised within 12 months of the

balance sheet date Cash or cash equivalent All other assets are non-current assets Inventory or receivables qualify even if realised

+12 months as part of operating cycle

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Current Liabilities Liability classified as current liability if: Expected to be settled in normal course of operating cycle Primary purpose is to be traded Due to be settled within 12 months of BS date Entity does not have unconditional right to defer settlement

to at least BS date +12 months All tradable payables are current liabilities even if settlement

is +12months Non-current liabilities must continue to be treated as such

even if Due to be settled in less than 12 months If all 3 following conditions apply: Original term was <12 months Liability is to be refinanced on long-term basis Intention to refinance is supported by agreement completed

before financial statements appeared

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Minimum items on face of Balance Sheet

(a) property, plant and equipment (b) investment property (c) intangible assets (d) financial assets (excluding amounts

shown under (e), (h) and (i)) (e) investments accounted for using the

equity method (f) biological assets (g) inventories (h) trade and other receivables (i) cash and cash equivalents

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Minimum items on face of Balance Sheet

(j) trade and other payables (k) provisions (l) financial liabilities (excluding amounts

shown under (j) and (k)) (m) liabilities and assets for current tax, as

defined in IAS 12 (n) deferred tax liabilities and deferred tax

assets, as defined in IAS 12 (o) minority interest, presented within equity

and (p) issued capital and reserves attributable

to equity holders of the parent

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Additional items

Can introduce additional lines if it would improve understandability

Sub classifications Eg lines in BS adding up to total

amount of main line Notes in BS

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Format of BS IAS 1 does not prescribe the layout of the balance sheet

Non-current Assets Current Assets = Total Assets Equity and Liabilities Capital and Reserves

=Total Equity Non-current Liabilities Current Liabilities

=Total Liabilities =Total Equity and Liabilities

Accounting Equation: Assets = Capital + Liabilities

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Disclosures of capital and reserves Need to be shown on BS in notes Number of authorised shares Number of shares issued Par value of each share Reconciliation of shares in issues at

start and end of year Rights and restrictions attached to each

class Description and nature of each reserve Dividends proposed after BS date

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Dividends IAS 1 & IAS 10 do not allow proposed

dividends to be included as liability in BS UNLESS dividends proposed before BS date

ONLY dividends actually paid during the year reduce equity

2 cases: Proposed final dividend of previous year

paid this year Interim dividends

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Income Statement Minimum items per IAS 1 Revenue Finance costs Tax expenses Amount related to P&L from discontinued

operations Profit or loss Add other line items if relevant to

understanding

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Discontinued operations Carried on at start of year but discontinued sometime

during the year Profit/Loss from discontinued operations includes: P or L after tax made in year up to time of

discontinuation Gain or Loss after tax on disposal of assets in

discontinued operation There are to be no extraordinary items to be shown on

income statements or in the notes What may be shown: Material items of income and expense Analysis of expenses Material items should be Disclosed separately showing their nature and amount

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Examples of material items

Write down of inventories to NRV Write down of plant or property to

recoverable amount Costs of restructuring Disposals of property, plant & equipment Disposals of investments Discontinued operations Income/expenses on settlement of

litigation Reductions in provisions

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Income statements may be analysed by:

Nature of expense or

Function of entity

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Expenses analysed by NATURE

Expenses vary according to the nature of the business

Manufacturing business expenses may be classified by

Raw materials Staff costs Depreciation Items that are material on their own are

shown as “other” WIP adjustment Finished goods adjustment

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By Nature example Revenue   X       Other operating income  X       Changes in inventories of finished goods and work in progress X   Raw materials and consumables used X   Staff costs X   Depreciation and amortisation expense X   Other operating expenses X         Total operating expenses   (X) Profit from operating activities   X

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Income statement analysed by FUNCTION

Expenses analysed by function eg Cost of sales Distribution costs Administration expenses Other expenses

This is the most commonly used method But Classification often arbitrary Doesn’t show the amount of some important expenses Must include additional information in notes to the

accounts Eg Depreciation/staff costs

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By Function example Revenue   X       Cost of sales   (X)       Gross profit   X Other operating income  X Distribution costs   (X) Administrative expenses   (X) Other operating expenses   (X)       Profit from operating activities X