Final Accounts for Publication

Final Accounts for Publication (Published Accounts)

• Public limited companies are legally required to publish their financial statements.
• These statements allow users to review the company's performance and make informed decisions.

Statements to be Prepared

• Statement of Profit or Loss and Other Comprehensive Income
  • Shows the profitability and financial performance of the company.
• Statement of Changes in Equity
  • Illustrates the movement in stockholders' equity over a specific period.
• Statement of Financial Position
  • Reflects the liquidity and overall financial standing of the business.
• Statement of Cash Flows
  • Regulated by International Accounting Standard (IAS) 7.
• Notes to the Financial Statements
  • Provide detailed workings and explanations supporting the figures in the main statements.
  • Considered organized workings for exam purposes

Focus of the Video

• The video will concentrate on the first three statements and the notes to the accounts.
• The goal is to provide formats and explain key concepts for preparing these statements.
• The approach taken will be tailored for exam preparation, but also relevant to real-world application.

Statement of Profit or Loss and Other Comprehensive Income

• This statement has evolved from the traditional trading profit or loss account (or income statement).
• International Financial Reporting Standards (IFRS) require it to be called the Statement of Profit or Loss and Other Comprehensive Income.
• The statement will be highly summarized, necessitating detailed workings in the notes to the financial statements.

Presentation Format

• Use the appropriate currency sign (e.g., dollars).
• Include "Notes" column to reference the corresponding workings in the notes to the financial statements.
• Revenue (or Sales Revenue) is the starting point.

Sales Revenue

• If adjustments or workings were performed on the revenue figure, indicate the relevant note number.
• Example: If the revenue calculation is detailed in note 1, place "1" in the "Notes" column next to the revenue figure.

Cost of Sales

• Cost of Sales is deducted from Revenue.
• All detailed calculations (e.g., opening inventory, purchases, closing inventory) are performed in the notes, not on the face of the statement
• Indicate the relevant note number in the "Notes" column.
• The cost of sales is shown in brackets

Gross Profit or Loss

• Calculated by subtracting Cost of Sales from Revenue.

Other Income

• Only include income that is realized and directly related to the company's core operations.
• Exclude incomes that are not truly realized, are imaginary, or not directly related to the company's primary activities.
• Such incomes are classified as "Other Comprehensive Income".
• Examples of other comprehensive income include
  • Profits on the sale of PPE (Property Plant and Equipment).
  • Gains on revaluation of property.

Profit on Sale of PPE (Example)

• An asset was bought for $400 with a 5-year useful life ($80 annual depreciation).
• After 3 years, accumulated depreciation is $240 ($80 x 3)
• The carrying amount (or net book value) is $160 ($400 - $240).
• If the asset is sold for $200, the apparent "profit" is $40 ($200 - $160).
• It's debatable because you bought it for 400 which means you made a loss of 200 instead

Why Profits on Sale of PPE is Considered Other Comprehensive Income

• The "profit" is subjective and depends on depreciation estimates.
• It is not a reliable indicator of the company's core operating performance.

Gain on Revaluation of Property

• Represents an increase in the value of an asset based on revaluation.
• This gain does not involve actual cash inflow or realized profit.
• Therefore, it is classified as "Other Comprehensive Income".

Impact on Director Bonuses

• Including unrealized income in operating profit can inflate the profit figure.
• Many directors are paid bonuses based on the net operating profit.
• Including items such as gains on revaluation of assets can artificially inflate the director's bonuses.
• This is because those items are not true business profits.
• Classifying these gains as "Other Comprehensive Income" prevents inflated bonus payouts.

Comprehensive Income and Profit Calculation

• Fictional or unrealized profits can deceive a company about its true financial performance.
• Other comprehensive income items are not included in the calculation of gross profit or operating profit.
• Net profit is estimated by adding realized other incomes.
• Other comprehensive income is presented separately on the financial statements.
• Total comprehensive income is the sum of the net profit and other comprehensive income.
• Gains or losses on revaluation of property, sale of PPE, and fair tax adjustments are included in other comprehensive income.
• In exam scenarios without a separate requirement for other comprehensive income, these items may be included in the statement of profit or loss.
• In real-world accounting, other comprehensive income is typically separated from realized incomes.

Format of the Statement of Profit or Loss and Other Comprehensive Income

• After gross profit or loss, other realized income is added.
• This other income could include investment income and other company-specific realized incomes.
• Operating expenses are grouped into administrative and general expenses and selling and distribution expenses.
• Administrative and general expenses and selling and distribution costs are subtracted from the sum of gross profit and other income.
• The resulting figure is the operating profit.
• Operating profit represents profit from operations, excluding other comprehensive income.
• Operating profit can also be referred to as net profit before interest and tax.
• Interest expense is then subtracted from the operating profit.
• The resulting figure is the net profit before tax.
• Net profit before tax less tax expense for the year results in net profit after tax.
• Tax expense for the year is calculated, considering current tax, prior adjustments, and movement in deferred tax.
• After net profit after tax, other comprehensive income is added.
• Common other comprehensive income items include profit or loss on the sale of PPE and gain or loss on revaluation of property.
• Deferred tax implications may also be considered.
• The final figure after adding other comprehensive income to net profit after tax is the total comprehensive income.
• The statement of profit or loss and other comprehensive income is presented in two parts: the statement of profit or loss and other comprehensive income.

Format of the Statement of Changes in Equity

• The statement of changes in equity shows the changes in equity items over a period.
• Components of equity include share capital (stated capital), retained earnings (income surplus), share deals, revaluation or capital surplus, and reserves like general reserve.
• The format includes columns for each equity item, narration, and a total column.
• The statement begins with the balance brought forward for each equity item.
• Changes in each equity item are then analyzed and recorded.
• Changes in stated capital may result from issuing new shares.
• The item that will change the most is the income surplus or the retained earnings
• Net profit after tax is added back to the income surplus.
• Dividend payments are subtracted from the income surplus.
• Transfers can occur between income surplus and other reserves.
• Transfers do not affect the total.
• Capital surplus changes are due to revaluations.
• Transfers primarily affect the general reserve.
• The total of each equity item is then calculated.
• Closing balances for the items of equity are used to prepare the statement of financial position.

Statement of Financial Position

• The statement of financial position is a reflection of the accounting equation: Assets = Equity + Liabilities.
• Assets = Non-current assets + Current assets
• Liabilities = Long-term liability + Current liability
• The statement begins with non-current assets, followed by current assets, to arrive at the total assets.
• Equity and liabilities are presented next.
• Under non-current assets is property plant and equipment (PPE)
• These notes detail how to present a statement of financial position, including assets, liabilities, and equity.
• The process involves summarizing items.

Assets

• Assets are classified into non-current and current.
• Non-current assets are listed first, including property, plant, and equipment (PPE), investment property, and intangible assets.
• Intangible non-current assets are covered under IAS 38.
• A total for non-current assets is calculated (single underline).
• Current assets are then listed in order of liquidity:
• Inventories
• Trade receivables
• Other receivables (including prepayments and accruals)
• Cash and cash equivalents
• Short-term investments may also be included.
• A total for current assets is calculated.
• The total assets (BBB) is the sum of total non-current assets and total current assets.

Equity and Liabilities

• The other side of the accounting equation is equity and liabilities.
• Equity items are presented first, mirroring the statement of changes in equity.
• Stated Capital (closing balance)
• Income Surplus
• Capital Surplus
• General Reserve
• A total for equity is calculated.
• Long-term (non-current) liabilities are listed next.
• Loans
• Preferences
• Debentures
• Bonds
• Deferred tax liability is included.
• A total for non-current liabilities is calculated (single underline).
• Current liabilities are then listed.
• Trade and other payables
• Trade payables
• Other payables
• Prepayments
• Other current liabilities:
• Income tax (tax payable)
• Interest payable
• Dividend payable
• After listing all current liabilities, a total is calculated.
• The total equity and liabilities (also BBB) is the sum of total equity, total non-current liabilities, and total current liabilities.
• The statement of financial position is then complete.