1. Financial Statements

2. Overview of session 1. Introduction 2. Components and elements
of financial statements
3. Questions

3. Financial statements
1. Introduction

4. Framework for preparing F/S
Why have a framework? Purpose
What does it cover? Scope
Does it have constraints? Limitations
Purpose:
basis for the review of current and development of future IPSAS / E.C. accounting rules
Assist preparers, auditors and users in applying and/or interpreting IPSAS / E.C. accounting rules
Scope:
Defines qualitative characteristics that determine the usefulness of information in financial statements
Deals with the definition, recognition and measurement of the elements from which financial statements are constructed

5. Framework for preparing F/S
Objectives of financial statements
This section j
Qualitative characteristics of financial statements
Net assets and
net assets maintenance k m l
Components and elements of
financial statements
Section 2

6. Purpose of F/S
F/S are a structured representation of the financial position and of the transactions undertaken by an entity that is useful to a wide range of users in making and evaluating decisions about the allocation of resources.
Specifically, the objectives of F/S in the public sector are to provide information useful for decision-making, and to demonstrate the accountability of the entity for the resources entrusted to it.
F/S can also have a predictive/prospective role, providing information useful in predicting the level of resources required for continued operations and the resources that may be generated by them.

7. Scope of the E.C. F/S The E.C. financial statements will:
Consolidate those of entities controlled (e.g. Agencies and institutions)
Proportionately consolidate those of jointly controlled entities (e.g. Galileo)
Report its share in the result and net assets of entities in which it has a significant influence using the equity method of accounting (e.g. European Investment Fund)
All entities concerned will have to report to the E.C. using the E.C. accounting rules

8. Qualitative characteristics of F/S
Main objective of FS: Provide reliable information on financial position, performance and changes in financial position
Main characteristic: Decision usefulness
Major qualitative Understandability Comparability
characteristics:
Relevance Reliability
(Materiality)
Substance over form Prudence
True and fair view
Understandable = understandable to the « average user » - suggests a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence
Relevant = relevant to the user when making economic decisions – the relevance of information is affected by its nature and materiality – information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the F/S
Reliable = free from material error and bias - information can be depended upon by users to represent faithfully what it can reasonably be expected to represent
Substance over form – refer to introduction
Prudence – but this is not a reason to include excessive provisions

9. Constraints
Main objective of FS: Provide reliable information on financial position, performance and changes in financial position
Main characteristic: Decision usefulness
Major qualitative Understandability Comparability
characteristics:
Relevance Reliability
(Materiality)
Substance over form Prudence
Constraints: Timeliness Cost-benefit balance
True and fair view

10. 2. Components and elements of financial statements

11. Components of F/S IPSAS European Communities (FR)
Statement of financial position
Balance sheet
Statement of financial performance
Economic outturn account (including segment reporting)
Statement of changes in net assets
Statement of changes in net assets
Cash flow statement
Cash flow table
Accounting policies and notes to the financial statements
Notes to the financial statements

12. Balance sheet elements
Assets
Net assets and Liabilities
Net assets
Liabilities
Total Assets
Total Net Assets and Liabilities
Resources
Controlled as a result from past events
Embodying future economic benefits or service potential
The residual interest
Present obligations
Resulting from past events
The settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential

13. Aggregated – Detailed in the notes
Balance sheet
Assets
Net assets and Liabilities
Non-current assets
Net assets
Non-current liabilities
Current assets
Current liabilities
Total assets
Total net assets and liabilities
Increasing liquidity
This year + prior year
Aggregated – Detailed in the notes
To be realised in the normal course of the E.C.s’ operating cycle or within 12 months + cash and cash equivalents

14. Balance sheet
Detailed structure
See financial report 2005 page 15

15. Economic outturn account elements
result
of the year - =
Income
Expenses
Increases in economic
benefits
Decreases in economic
benefits
The net assets maintenance concept:
The excess of income over expense translates into an increase in the residual interest (the excess of assets over liabilities) – and vice-versa
Where assets and liabilities are not equal, a residual figure for net assets/equity will be reported;
If > 0, can be interpreted as the net resources that may be applied for the provision of goods or services in the future (= the community’s investment in the entity);
If < 0, may be viewed as the amount of future taxation or other revenues which are already committed to paying off debt and other liabilities.

16. Economic outturn account
Detailed structure
See financial report 2005 page 19

17. Extraordinary items Net Surplus or Deficit
= Surplus or Deficit from ordinary activities and extraordinary items
Extraordinary =
Rare
Unusual
Outside control of entity
Material
Example:
Costs associated with the provision of services following a natural or man-made disaster, for example, the provision of shelter to homeless people following an earthquake.
In order for a such an event to qualify as an extraordinary event it would need to be of a magnitude that would not normally be expected in either the geographic area in which it occurred or the geographic area associated with the entity, and the provision of emergency services or the restoration of essential services would need to be outside the scope of ordinary activities of the entity concerned.
Where an entity has responsibility for providing assistance to those affected by natural disasters then costs associated with this activity would not generally meet the definition of an extraordinary item
Indicate that non-recurring items that do not meet the definition of an extraordinary item form part of surplus/(deficit) from ordinary activities but should be disclosed to facilitate understanding of the financial statements, comparability with prior years and prospective analysis.

18. Statement of changes in net assets
Detailed structure
See financial report 2005 page 33

19. Cash flow table
Detailed structure
See financial report 2005 page 29

20. Notes to the financial statements
Accounting policies
Impact of the transition to accrual accounting
Notes to the Balance Sheet
Notes to the Economic Outturn Account
Notes to the Cashflow table
Off-Balance Sheet and notes
Financial risk management
Related party disclosures
Events after the balance sheet date
Consolidated entities
Non-consolidated entities

21. Accounting policies IPSAS-compliant when ruled out by IPSAS
Options retained when an IPSAS allows one or more alternative accounting policies
Internally-developed when no specific requirement exists

22. Changes in accounting policies
Changes in accounting policies = change from one allowed basis of accounting to another allowed basis of accounting
Example: the initial adoption of a policy to carry assets at revalued amounts
Normally applied retrospectively (restate comparative information)
Fundamental errors
Changes in accounting estimates
Give examples of each. The examples should help preparing the exercises.

23. Fundamental errors
Significant errors in a prior year’s financial statements as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts, fraud or oversights
Example: omission of a major class of expenses in the financial statements
Normally correct retrospectively: restate comparative information
Give examples of each. The examples should help preparing the exercises.

24. Changes in accounting estimates
Many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available.
Estimates may be required, for example, of GNI-based revenue revenue due by Member States, bad debts arising from uncollected receivables, or the useful lives of depreciable assets
Accounting estimates by their nature are approximations that may need revision as additional information becomes known
Recognise the effect in the period of the change
Give examples of each. The examples should help preparing the exercises.

25. Segment information
A distinguishable activity or group of activities of an entity for which it is appropriate to separately report financial information for the purpose of evaluating past performance and for making decisions about the future allocation of resources
« Service segments » are naturally aligned with activities identified in budget documentation
E.g. At a national « whole-government » level financial information is generally aggregated and reported in a manner which reflects major economic classifications of activities undertaken and/or portfolio responsibilities of individual ministers: health, defence, education, …

26. The E.C.s’ segment information
Current
Prior
E.C. policy areas e. g.
Expenses
Operating assets
Operating liabilities
Reconciliation to total amounts reported
Accounting policies
Agriculture
Regional policy
Humanitarian Aid
Internal Market
External Relations
Others

27. Financial statements
3. Questions