1. 1 Processing, Reporting and Auditing Financial Accounts Components of Financial Statements Week 1

2. 2 Textbook B & J Elliott – Financial Accounting and Reporting 12th Edition Pearson Education ISBN 9780273712312 12 th Edition11 th Edition 10 th Edition

3. 3 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

4. 4 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

5. 5 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

6. 6 Additional statements Financial review by management Environmental statement Value added statement

7. 7 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 companys financial position It has departed from particular standard Details of departure Effect of departure for each item affected

8. 8 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

9. 9 Going concern Financial statements to be prepared on going concern basis unless Management intends to liquidate business Cease trading Sees no other alternative

10. 10 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

11. 11 Materiality & aggregation Each material class of similar items to be shown separately Items of dissimilar nature shown separately, unless immaterial

12. 12 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)

13. 13 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

14. 14 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

15. 15 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

16. 16 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

17. 17 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

18. 18 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

19. 19 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

20. 20 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

21. 21 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

22. 22 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

23. 23 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

24. 24 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

25. 25 Income statements may be analysed by: Nature of expense or Function of entity

26. 26 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

27. 27 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

28. 28 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 Doesnt show the amount of some important expenses Must include additional information in notes to the accounts Eg Depreciation/staff costs

29. 29 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