Financial Statements: Presentation & Components

PAS 1: Presentation of Financial Statements

• Financial statements accumulate and process information in financial accounting, communicating it regularly to users.
• It presents the financial position and performance of an entity in a structured way.
• General purpose financial statements aim to meet the needs of users who cannot require tailored reports.
• These statements are directed at all common users.

Components of Financial Statements

• Statement of Financial Position
• Statement of Financial Performance (Income Statement)
• Statement of Comprehensive Income
• Statement of Changes in Equity
• Statement of Cash Flows
• Notes

Objective of Financial Statements

• Offers insight into an entity's financial standing, performance, and cash flow for a diverse user base to make economic decisions.
• Shows how management has stewarded the resources entrusted to them.
• Furnishes details on assets, liabilities, equities, income, expenses, gains, losses, contributions, distributions to and from owners, and cash flows.

Frequency of Financial Reporting

• Reporting must occur annually, at minimum.
• If the reporting period spans more or less than one year, an entity must disclose the period covered, reasons for the variance, and that amounts may not be comparable.

Statement of Financial Position

• A formal statement showcasing three elements being assets, liabilities, and owner's equity.
• Useful for investors, creditors, and others to assess liquidity, solvency, and financing needs.

Elements of Financial Position: Assets

• Current Assets: Cash or cash equivalent (unless restricted for liability settlement more than 12 months post-reporting), assets held for trading, assets expected to be realized within 12 months, or assets intended to be sold or consumed within the normal operating cycle.
• Noncurrent Assets: Include Property, Plant, and Equipment (PPE) at cost less accumulated depreciation. These are assets used for production, rental, or administrative purposes expected to last more than one period. Also includes long-term investments, intangible assets (like patents and goodwill), deferred tax assets, and long-term advances to officers.

Elements of Financial Position: Liabilities

• Current Liabilities: Liabilities expected to be settled within the normal operating cycle, held for trading, or due within 12 months after the reporting period. This includes liabilities with original terms longer than 12 months and those with refinancing agreements made post-reporting period but pre-FS issue.
• Noncurrent Liabilities: Noncurrent portions of long-term debt, finance lease liabilities, deferred tax liabilities, long-term obligations to company officers, and long-term deferred revenue.

Elements of Financial Position: Equity

• Equity is the residual interest in an entity's assets after deducting all liabilities.
• Holders of instruments classified as equity are known as owners.
• Covenants are restrictions to prevent further borrowings or dividend payments.
• Shareholder's equity is the residual interest of owners in a corporation's net assets, measured by the excess of assets over liabilities.

Notes to Financial Statements

• These provide narrative descriptions or breakdowns of items in the financial statements.
• Used to report information that doesn't fit in the body of the FS and provide necessary disclosures required by PFRS.
• Statement of Financial Position can be presented in report form (three sections) or account form.

Line Items Needed on the Financial Statements

• Minimum items needed on the FS include cash and cash equivalents, financial assets, trade and other receivables, inventories, PPE, investment in associates, intangible assets, investment property, biological assets, total assets held for sale, trade and other payables, tax liabilities, provisions, financial liabilities, liabilities in disposal groups, noncontrolling interest, and share capital and reserves.

Statement of Financial performance

• Shows financial performance of an entity for a given period, measured by income earned, and helps predict future performance and cash flows.
• Income can come from the sale of merchandise, rendering of services, use of entity resources, and disposal of resources.
• Expenses include COGS/COS, distribution costs, administrative expenses, and income tax expense.

Statement of Profit/Loss or other Comprehensive Income

• Comprises profit or loss for a period and other comprehensive income recognized in that period.
• Items must be recognized unless standards require otherwise.
• Components include changes in revaluation surplus, actuarial gains/losses, gains/losses from translating foreign statements, remeasuring assets, and hedging instruments.
• An entity can present a single statement or two separate statements.
• No items may be presented as extraordinary items.
• Expenses must be analyzed by nature or function.

Statement of Cash Flows

• Refer to IAS 7 for guidance.

Statement of Changes in Equity

• Shows total comprehensive income, effects of retrospective application, reconciliations between carrying amounts, and owner transactions.

Notes to the Financial Statements

Ordered as follows:

• Statement of compliance with IFRSs
• Summary of accounting policies applied
• Supporting information for items
• Contingent liabilities
• Non-financial disclosures.

Additional Notes to the Financial Statements

• Must disclose key assumptions and sources of estimation uncertainty.
• Does not involve disclosure of budgets or forecasts.
• Discloses amount of dividends proposed or declared.

PAS 8: Accounting Policies, Changes in Accounting Estimates, and Errors

• Establishes criteria for selecting and applying accounting policies.
• Offers guidance on distinguishing between changes in policies, estimates, and errors.
• Prescribes treatment of policy changes, estimate changes, error corrections, and required disclosures.
• It applies to all financial statements prepared under PFRS.
• Definition of Accounting Policies: Specific principles, rules, and practices applied in preparing and presenting financial statements.

Changes in Accounting Policy

• Must be applied consistently for similar transactions.
• Changes are made when required by standards, resulting in more relevant information, or when adopting a generally accepted principle.
• How to report: Apply interpretation per transitional provision or retrospectively if no provision exists/voluntary change.
• Retrospective application applies new policies as if always used; if impractical, use prospective application.

Definition of Accounting Estimate

• A monetary amount in financial statements subjected to measurement uncertainty that arises when amounts cannot be directly observed
• Examples include loss allowances, net realizable value, fair value, depreciation, and warranty obligations.

Reporting Changes in Accounting Estimate

• Recognize changes currently and prospectively by including them in income or loss.
• Apply prospectively from the date of change. Changes in depreciation method are examples .

Prior Period Errors Defined

• Omissions and misstatements in financial statements.
• They may occur due to mathematical mistakes, policy misapplication, or fraud.
• Correction requirements: Correct by adjusting opening balances and restating comparative statements.
• Challenges include determining the type of change and applying retrospective adjustments correctly.

Differences Between Accounting Policy vs Estimate: Accounting Policy

• Policy is a specific method and principle used to prepare financial statements, setting rules and applying the same policies each period with retroactive adjustments.
• Estimate is an adjustment to carrying amounts based on current information, subject to change, and applied prospectively.
• Both affect financial statements and require judgment while aiming for accurate reporting and requiring disclosure.

Importance of PAS 8

• Enhances financial statement comparability, aids informed decisions, and ensures compliance with accounting standards.

PFRS 5: Non-Current Assets Held for Sale and Discontinued Operations

• Prescribes accounting for assets held for sale and discontinued operations.
• Scope includes PPE, investment property, investments in associates, and intangible assets.

Definition of Non Current Asset

• A long-term investment that can't easily be converted to cash within a year.
• Classifying Non-Current Assets Held for Sale or Disposal Groups: Classified as held for sale if carrying amount is recovered mainly through a sale rather than continued use.
• Conditions of sale: Asset must be available for immediate sale, and the sale is highly probable (management committed, active program to locate buyer, expected complete sale within one year, actively marketed at reasonable price).

Exceptions to the 1-Year Rule

• If delays are beyond the entity's control with sufficient evidence of commitment to sell, assets can still be classified as held for sale.
• Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less disposal costs.
• Measurement of fair value: If fair value less cost of disposal is less than carrying amount, the write-down is treated as an impairment loss, recognize a gain if fair value is > carrying amount but not in excess of any impairment loss previously recognized

Measurement and Presentation of Non Current Assets

• Noncurrent asset held for sale are not depreciated or amortized
• Changes to a plan of sale: Measure at the lower of the asset's carrying amount or recoverable amount at the decision date.
• Assets classified as noncurrent follow PAS 1 and are not reclassified as current until meeting 'held for sale' criteria.
• Noncurrent assets in disposal groups are presented separately.
• Defined: A component disposed of or classified as held for sale, representing a major line of business or a subsidiary acquired for resale.

Examples of Discontinued Operation

• Happens when a company eliminates a component's results from its operations and cash flows
• Instances also include selling by a diversified entity of a major division and selling controlling interest in another entity.
• Examples of not discontinued operations: Phasing out of a product line or shifting production.

Income Statement Presentation for Discontinued Operations

• Income or loss from discontinued operations is presented as a single amount, net of tax, below income from continuing operations. Shall include:
• Revenue, expenses, and income attributable to discontinued operations
• Any impairment loss and termination cost of employees
• Assets are measured at the lower of fair value less cost of disposal and carrying amount.
• Assets and liabilities are presented separately; noncurrent assets are not depreciated.