1. Chapter 3 – Published Financial Statements of Limited Companies Introduction Duties & responsibilities of directors IAS 1 – Presentation of financial statements Statement of profit or loss and other comprehensive income Statement of changes in equity / Statement of financial position Dealing with dividends in the financial statements Directors’ report / Auditors report Statement of cash flows Accounting policies / Notes to the financial statements Bonus issues & rights issues

2. The content of limited company accounts: The financial statements of a company comprise the following elements; statement of profit or loss and other comprehensive income statement of financial position statement of cash flows statement of changes in equity notes to the financial statements, including a statement of the company’s accounting policies directors’ report auditors’ report

3. Duties and responsibilities of directors: The directors of a limited company are elected by the shareholders to manage the company on their behalf The directors are put in a position of trust by the shareholders to be responsible for the stewardship of the company’s financial Information The directors of a limited company have a duty to ensure that the provisions of the Companies Act which relate to accounting records and statements are followed

4. Duties and responsibilities of directors: The main provisions of the Acts are that, a company’s accounting records must,  show and explain the company’s transactions  disclose with reasonable accuracy at any time the financial position of the company  enable the directors to ensure that the company’s statement of profit or loss and other comprehensive income and financial position give a true and fair view of the company’s financial position a company’s accounting records must contain,  day-to-day entries of money received and paid, together with details of the transactions  a record of the company’s assets and liabilities  details of inventories held at the end of the year

5. Duties and responsibilities of directors: The main provisions of the Acts are that, a company’s financial statements must be prepared in accordance with the Companies Act and with either UK accounting standards or international financial reporting standards the directors must report annually to the shareholders on the way they have run the company on behalf of the shareholders Every company director has a responsibility to ensure that the statutory accounts are produced and filed with the Registrar of Companies within a set time The filing deadlines after the end of the accounting period are; 9 months for a private limited company 6 months for a public limited company

6. IAS 1 - Presentation of financial statements: The objective of this accounting standard is to set out how financial statements should be presented to ensure comparability with previous accounting periods and with other entities The standards states that ‘the objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions’ Financial statements also show the results of management’s stewardship of the resources entrusted to it, the statements provide information about an entity’s; assets liabilities equity income and expenses, including gains and losses contributions by, and to, owners in their capacity as owners cash flows

7. IAS 1 - Presentation of financial statements: IAS 1 states that a complete set of financial statements comprises; statement of financial position statement of profit or loss and other comprehensive income statement of changes in equity statement of cash flows accounting policies and explanatory notes comparative information for the preceding period Note that IAS1 states that;  all of the financial statements are to be given equal prominence  the statements of profit or loss and other comprehensive income can be presented as either;  a single statement, or  a profit or loss section, immediately followed by a separate statement of comprehensive income

8. IAS 1 - Presentation of financial statements: Overall considerations, the financial statements must present fairly the financial position, financial performance, and cash flows of an entity The application of international financial reporting standards, supported by appropriate additional disclosures, is presumed to result in financial statements that achieve a fair presentation IAS 1 requires that an entity whose financial statements comply with the standards should make an explicit and unreserved statements of such compliance in the notes

9. IAS 1 - Presentation of financial statements: IAS 1 requires compliance with a number of accounting concepts and other considerations, going concern accruals basis of accounting (match income to expenditure) materiality and aggregation (individual classification of assets) offsetting (not permitted for assets and liabilities) frequency of reporting (at least annually) comparative information (compare figures from previous periods)

10. IAS 1 - Presentation of financial statements: IAS 1 sets out the detailed disclosures to be shown on the face of the statement of profit or loss and other comprehensive income, statement of financial position, and statement of changes in equity There are some general principles that the standard requires, these include the identification of; the financial statements, which are to be distinguished from other information in the corporate report the name of the reporting entity whether the financial statements are for an individual entity or for a group the period covered by the financial statements (for the year ended) the currency of the financial statements the level of rounding used for money amounts (thousands, millions etc.)

11. Statement of profit or loss and other comprehensive income: The published statement of profit or loss and other comprehensive income does not have a to detail every single overhead or expense incurred by the company Instead the main items are summarised, however IAS1 requires that certain items must be detailed on the face of the statement, including, revenue finance costs share of the profit or loss of associates tax expense other comprehensive income for the year Further detail may be needed to give information relevant to an understanding of financial performance When items are material, their nature and amount is to be disclosed separately

12. Statement of profit or loss and other comprehensive income: The statement of profit or loss and other comprehensive income shows the, profit or loss total other comprehensive income comprehensive income for the year (profit or loss and other comprehensive income (taken to the statement of changes in equity) Expenses in the statement of profit or loss and other comprehensive income must be analysed either by nature (ledger account) or by function (sections) depending on which provides the more reliable and relevant information The analysis by nature is often appropriate for manufacturing companies, while the analysis by function is commonly used by trading companies Review the example statement of comprehensive income of XYZ PLC on page 60, this shows an analysis by function

13. Statement of profit or loss and other comprehensive income: Much of the detail shown in the statement of profit or loss and other comprehensive income is summarised. For example, revenue incorporates the figures for sales and sales returns cost of sales include opening inventories, purchases, purchases returns, carriage inwards and closing inventories distribution costs include warehouse costs, post and packing, delivery drivers’ wages, running costs of vehicles, depreciation of vehicles, etc. administration expenses include office costs, rent and rates, heating and lighting, depreciation of office equipment, etc. You should study a recent statement of profit or loss and other comprehensive income for a large public limited company, use the web directory at the front of your book or search on the web for ‘financial statements’ or ‘investor centre’

14. The statement of changes in equity brings together all the gains and losses for the period, including items which do not pass through the income statement The most common example of an item which does not pass through income statement is a gain on the revaluation of a non-current asset Revaluation gains cannot be taken to the income statement because they are unrealised, but nevertheless, they may form an important part of a company’s overall performance The statement of changes in equity highlights the effect of revaluations and other items such as prior period adjustments and helps users of the financial statements to appreciate their impact upon the company’s overall financial performance

15. Statement of changes in equity: IAS 1, Presentation of Financial Statements, requires that a statement of changes in equity is one of the components of financial statements (changes in profit / loss & comprehensive income) The information to be given in the statement of changes in equity is; total comprehensive income for the period (profit only if none) reconciliation between opening and closing balances of items in the statement of changes in equity the dividends paid to shareholders during the period Review the example statement of changes in equity of XYZ PLC on page 62 Attempt activity questions 3.7 on page 81 & 3.8 on page 82

16. Statement of financial position: IAS 1 In pairs or small groups list as many items as possible that should be shown on the face of the statement of financial position The standard, surprisingly, doesn’t specify an exact order of how the items should be listed, however most companies will have to separate out current and non-current assets and liabilities IAS 1 does however permit a presentation based on liquidity where It provides information that is reliable and more relevant non-current assets current assets current liabilities non-current liabilities equity

17. Statement of financial position: IAS 1 Further detail can be given, either on the statement of financial position or in the notes, PPE (different classes) trade and other receivables (trade customers / prepayments) inventories (raw materials, work-in-progress, finished goods etc.) share capital and reserves (various classes) In particular, IAS 1, requires the following disclosure about share capital, the number of shares authorised the number of shares issued and fully paid, and issued but not fully paid the par value per share, or that the shares have no par value Review the statement of financial position example for XYZ PLC on page 64

18. Dealing with dividends in the financial statements: Dividends are distributions to the shareholders, who own the company, as a return on their investment Most companies pay dividends twice a year (interim dividend and final dividend) Interim dividends are usually paid just after halfway through the financial year (based on profits for the first six months of trading) Final dividends are paid early in the next financial year and are based on the profits reported for the full financial year Final dividends are proposed by the directors and approved by shareholders at the Annual General Meeting (AGM) of the company Review the timeline of events on page 65, you will note here that only dividends actually paid in the financial year are recorded in the financial statements, with any final dividends being recorded as a note to the accounts (see the XYX PLC example on page 66)

19. Directors’ report: includes review of the activities of the company over the past year and of likely developments in the future Statement of cash flows: IAS 7 requires that limited companies must include, in their financial statements, a statement of cash flows Such a statement shows an overall view of money flowing in and out during an accounting period It links profit with changes in assets and liabilities and the effect on the cash of the company

20. Auditors’ report: Larger companies must have their financial statements audited by external auditors, who are appointed by the shareholders The auditors’ report, which is printed in the published financial statements, is the culmination of their work There are three main sections of the auditor’s report, respective responsibilities of directors and auditors – the,  directors are responsible for producing the financial statements  auditors are responsible for providing an opinion on the financial statements basis of opinion – the framework of auditing standards within which the audit was conducted, other assessments, and the way in which the audit was planned and performed opinion – the ‘auditors’ view of the company’s financial statements Note: small and medium sized companies are exempt from audit requirements

21. Accounting policies: Accounting policies are the specific accounting methods selected by the directors and used by a company (depreciation, for example) in the preparation of financial statements IAS 1, Presentation of Financial Statements, requires companies to disclose the accounting policies used as part of the notes to the financial statements In selecting and applying accounting policies; where an accounting policy is given in an accounting standard (IAS & IFRS) for a particular transaction, then that policy must apply where there is no accounting standard to give guidance, the management of the company must use its judgement to give information that is useful to users, in making decisions

22. Accounting policies: A company selects its accounting policies to fit the qualitative characteristics of useful financial information set out in the Conceptual Framework for Financial Reporting; relevance faithful representation comparability verifiability timeliness understandability Changes of accounting policies can only occur, if the change is required by an accounting standard results in the financial statements providing more relevant information that faithfully represents the effects of transactions on the financial statements

23. Notes to the financial statements: IAS 1, Presentation of Financial Statements, requires a number of notes to the financial statements, these include, information about the basis of preparation of the financial statements and the specific accounting policies used disclosure of information required by international financial reporting standards that is not already included in the statements of profit or loss and other comprehensive income, changes in equity, financial position, or cash flows the provision of additional information that is relevant to an understanding of the financial statements Notes are to be presented systematically, with cross-referencing from the financials statements to the relevant notes Included in the notes is to be a summary of significant accounting policies followed

24. Bonus issues and rights issues: Limited companies, and particularly plcs, quite often increase their capital by means of either bonus issues or rights issues of shares Whilst both of these have the effect of increasing the number of shares in issue, they have quite different effects on the structure of the company statement of financial position Bonus issues – free shares to existing shareholders (reserves turned into permanent share capital) based on existing share holding Note here that capital and revenue reserves can be used for bonus issues (capital used first if possible as it is one of few uses of a capital reserve, which cannot be used to fund the payment of dividends Rights issues – are issued to existing shareholders by a company seeking to raise finance through the issue of shares (cheaper to offer to existing shareholders than going to market) based on existing share holding