CHAPTER-8

P R E S E N TAT I O N O F
FINANCIAL
S TAT E M E N T S
1 IAS 1 PRESENTATION OF FINANCIAL
STATEMENTS

• IAS 1 covers the form and content of financial

statements. The main components are:
– – Statement of financial position
– – Statement of profit or loss and other
comprehensive income
– – Statement of changes in equity
– – Statement of cash flows
– – Notes to the financial statements
1.1 PROFIT OR LOSS FOR
THE YEAR
• The statement of profit or loss and other comprehensive
income is the most significant indicator of a company's
financial performance.
• So it is important to ensure that it is not misleading.
• IAS 1 requires that all items of income and expense recognized
in a period shall be included in profit or loss unless a Standard
or an Interpretation requires otherwise.
• Circumstances where items may be excluded from profit or loss
for the current year include the correction of errors and the
effect of changes in accounting policies. These are covered in
1.2 HOW ITEMS ARE
DISCLOSED
• IAS 1 specifies disclosures of certain items in certain ways:
–  Some items must appear on the face of the statement of financial position or
statement of profit or loss and other comprehensive income.
–  Other items can appear in a note to the financial statements instead.
–  Recommended formats are given which entities may or may not
follow, depending on their circumstances.
 1.3 IDENTIFICATION OF
FINANCIAL STATEMENTS
• The entity should identify each financial
statement and the notes very clearly.
• IAS 1 also requires disclosure of the
following information in a prominent
position.
–  Name of the reporting entity (or
other means of identification)
–  Whether the accounts cover the single
entity only or a group of entities
–  The date of the end of the reporting
period or the period covered by the
financial statements (as appropriate)
–  The presentation currency
–  The level of rounding used in
presenting amounts in the financial
statements
• Judgment must be used to determine the best method
of presenting this information.
• In particular, the standard suggests that the approach to this
will be very different when the financial statements are
communicated electronically.
• The level of rounding is important, as presenting figures
in thousands or millions of units makes the figures more
understandable. The level of rounding must be disclosed.
1.4 REPORTING PERIOD

• It is normal for entities to present financial statements annually and IAS 1 states
that they should be prepared at least as often as this.
• If (unusually) the end of an entity's reporting period is changed, for whatever reason,
the period for which the statements are presented will be less or more than one year.
• In such cases the entity should also disclose:
– (a) The reason(s) why a period other than one year is used
– (b) The fact that the comparative figures given are not in fact comparable
• For practical purposes, some entities prefer to use a period which approximates to
a year, eg 52 weeks, and the IAS allows this approach as it will produce statements
not materially different from those produced on an annual basis.
1.5 TIMELINESS

• If the publication of financial statements is delayed too

long after the reporting period, their usefulness will be
severely diminished.
• Local legislation and market regulation imposes specific
deadlines on certain entities.
• IAS 1 looks at the statement of financial position and
statement of profit or loss and other comprehensive
income.
2 STATEMENT OF FINANCIAL
POSITION
• IAS 1 suggests a format for the statement of financial position. Certain
items are specified for disclosure on the face of the financial
statements.
2.1 STATEMENT OF FINANCIAL POSITION EXAMPLE
 The IAS 1 does not prescribe the order or format
in which the items listed should be presented.
 It simply states that they must be presented
separately because they are so different in
nature or function from each other.
2.2 INFORMATION PRESENTED EITHER ON THE
FACE OF THE STATEMENT OF FINANCIAL
POSITION OR BY NOTE
• Further sub-classification of the line items listed
above should be disclosed either on the face of the
statement of financial position or in the notes.
• The classification will depend upon the nature of the
entity's operations.
• As well as each item being sub-classified by its nature,
any amounts payable to or receivable from any group
company or other related party should also be
disclosed separately.
• Disclosures will vary from item to item and IAS 1 gives the
following examples.
– (a) Property, plant and equipment are classified by class as
described in IAS 16, Property, plant and equipment.
– (b) Receivables are analyzed between amounts receivable from trade
customers, other members of the group, receivables from related
parties, prepayments and other amounts.
– (c) Inventories are sub-classified, in accordance with IAS 2 Inventories,
into classifications such as merchandise, production supplies, materials,
work in progress and finished goods.
– (d) Provisions are analyzed showing separately provisions for
employee benefit costs and any other items classified in a manner
appropriate to the entity's operations.
– (e) Equity capital and reserves are analyzed showing separately the
various classes of paid in capital, share premium and reserves.
 THE FOLLOWING DISCLOSURES MUST BE MADE, EITHER
ON THE FACE OF THE STATEMENT OF FINANCIAL
POSITION OR IN THE REL ATED NOTES.
• (a) Share capital disclosures (for each class of share capital)
– (i) Number of shares authorized
– (ii) Number of shares issued and fully paid, and issued but not fully paid
– (iii) Par value per share, or that the shares have no par value
– (iv) Reconciliation of the number of shares outstanding at the beginning and
at the end of the year
– (v) Rights, preferences and restrictions attaching to that class including
restrictions on the distribution of dividends and the repayment of capital
– (vi) Shares in the entity held by the entity itself or by related group
companies
– (vii) Shares reserved for issuance under options and sales contracts, including
the terms and amounts
• (b) Description of the nature and purpose of each reserve within
3 THE CURRENT/NON-
CURRENT DISTINCTION
• An entity must present current and non-current assets as
separate classifications on the face of the statement of
financial position.
• A presentation based on liquidity should only be used where it
provides more relevant and reliable information, in which case
all assets and liabilities must be presented broadly in order of
liquidity.
• In either case, the entity should disclose any portion of an
asset or liability which is expected to be recovered or settled
after more than twelve months. For example, for an
amount receivable which is due in instalments over 18 months,
the portion due after more than twelve months must be
• The IAS emphasizes how helpful information on the
operating cycle is to users of financial statements.
• Where there is a clearly defined operating cycle within
which the entity supplies goods or services, then
information disclosing those net assets that are
continuously circulating as working capital is useful.
• This distinguishes them from those net assets used in
the long-term operations of the entity.
• Assets that are expected to be realized and liabilities
that are due for settlement within the operating cycle
are therefore highlighted.
3.2 CURRENT ASSETS
• An asset should be classified as a current asset
when it:
–  Is expected to be realized in, or is held for sale or
consumption in, the normal course of the entity's operating
cycle; or
–  Is held primarily for trading purposes or for the short-term
and expected to be realized within twelve months of the end
of the reporting period; or
–  Is cash or a cash equivalent asset which is not restricted
in its use.
• All other assets should be classified as non-current
assets.
• Non-current assets includes tangible,
intangible, operating and financial assets of a
long-term nature.
• Other terms with the same meaning can be
used (eg 'fixed', 'long-term').
WHAT IS OPERATING CYCLE?

• The operating cycle of an entity is the

time between the acquisition of assets for
processing and their realization in cash or
cash equivalents.
• Current assets therefore include inventories
and trade receivables that are sold, consumed
and realized as part of the normal operating
cycle. This is the case even where they are
not expected to be realized within twelve
months.
• Current assets will also include marketable
securities if they are expected to be realized
within twelve months after the reporting
period. If expected to be realized later, they
should be included in non-current assets.
3.3 CURRENT LIABILITIES
• liability should be classified as a current liability when it:
–  Is expected to be settled in the normal course of the entity's
operating cycle; or
–  Is held primarily for the purpose of trading; or
–  Is due to be settled within twelve months after the end of the
reporting period; or when
–  The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the end
of the reporting period.
• All other liabilities should be classified as non-current
liabilities.
• The categorization of current liabilities is very similar
to that of current assets.
• Thus, some current liabilities are part of the working
capital used in the normal operating cycle of the
business (ie trade payables and accruals for employee
and other operating costs).
• Such items will be classed as current liabilities even
where they are due to be settled more than
twelve months after the end of the reporting
period.
• There are also current liabilities which are not
settled as part of the normal operating cycle, but
which are due to be settled within twelve months
of the end of the reporting period.
• These include bank overdrafts, income taxes,
other non-trade payables and the current portion
of interest-bearing liabilities.
• Any interest-bearing liabilities that are used to
finance working capital on a long-term basis, and
that are not due for settlement within twelve
months, should be classed as non-current
4 STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME

• In June 2011 the IASB published an

amendment to IAS 1 called 'Presentation of
items of other comprehensive income'.
• This changed the name of the 'statement of
comprehensive income' to the 'statement of
profit or loss and other comprehensive income'.
4.1 FORMAT

• IAS 1 (revised) allows income and expense

items to be presented either:
– (a) In a single statement of profit or loss and other
comprehensive income; or
– (b) In two statements: a separate statement of
profit or loss and statement of other comprehensive
income.
•Companies are given the
option of presenting this
information in two statements:
• Next slides
5 STATEMENT OF PROFIT OR
LOSS
• IAS 1 offers two possible formats for
the statement of profit or loss or
separate profit or loss section – by
function or by nature. Classification
by function is more common.
5.1 EXAMPLES OF SEPARATE
STATEMENTS OF PROFIT OR
LOSS
•Illustrating the
classification of expenses
by function-next slide
•Illustrating the
classification of
expenses by nature-
next slide
5.2 INFORMATION
PRESENTED IN THE
STATEMENT OF PROFIT OR
• The standard lists the following as the minimum to be disclosed on the
LOSS
face of the statement of profit or loss.
– (a) Revenue
– (b) Finance costs
– (c) Share of profits and losses of associates and joint ventures accounted for
using the equity method
– (d) Pre-tax gain or loss recognised on the disposal of assets or settlement of
liabilities attributable to discontinued operations
– (e) Tax expense
– (f) Profit or loss
• The following items must be disclosed as
allocations of profit or loss for the period.
– (a) Profit or loss attributable to non-
controlling interest
– (b) Profit or loss attributable to owners of the
parent
5.3 INFORMATION
PRESENTED EITHER IN THE
STATEMENT OR IN THE
• An analysis of expenses must be shown either in the
NOTES
profit or loss section (as above, which is encouraged by
the standard) or by note, using a classification based on
either the nature of the expenses or their function.
• This sub-classification of expenses indicates a range
of components of financial performance; these may differ
in terms of stability, potential for gain or loss and
predictability.
5.4 DIVIDENDS

• IAS 1 also requires disclosure of the amount of dividends paid during the
period covered by the financial statements.
• This is shown either in the statement of changes in equity or in the notes.
QUESTION
• A friend has bought some shares in a company quoted on a local stock
exchange and has received the latest accounts. There is one page he is
having difficulty in understanding.
• Required
• Briefly, but clearly, answer his questions.
• (a) What is a statement of financial position?
• (b) What is an asset?
• (c) What is a liability?
• (d) What is share capital?
• (e) What are reserves?
• (f) Why does the statement of financial position balance?
• (g) To what extent does the statement of financial position value my
investment?
ANSWER
• (a) A statement of financial position is a statement of the assets,
liabilities and capital of a business as at a stated date. It is laid out to show
either total assets as equivalent to total liabilities and capital or net assets
as equivalent to capital. Other formats are also possible but the top half (or
left hand) total will always equal the bottom half (or right hand) total.
• (b) An asset is a resource controlled by a business and is expected to be of
some future benefit. Its value is determined as the historical cost of
producing or obtaining it (unless an attempt is being made to reflect rising
prices in the accounts, in which case a replacement cost might be used).
Examples of assets are:
– (i) Plant, machinery, land and other non-current assets
– (ii) Current assets such as inventories, cash and debts owed to the business
with reasonable assurance of recovery: these are assets which are not intended
to be held on a continuing basis in the business
• (c) A liability is an amount owed by a business, other than the
amount owed to its proprietors (capital). Examples of liabilities
are:
– (i) Amounts owed to the government (sales or other taxes)
– (ii) Amounts owed to suppliers
– (iii) Bank overdraft
– (iv) Long-term loans from banks or investors
• It is usual to differentiate between 'current' and 'long-term'
liabilities. The former fall due within a year of the end of the
reporting period.
• (d) Share capital is the permanent investment in a business
by its owners. In the case of a limited company, this takes the
form of shares for which investors subscribe on formation of
the company. Each share has a nominal or par (ie face) value
(say $1). In the statement of financial position, total issued
• (e) If a company issues shares for more than their par value (at a
premium) then (usually) by law this premium must be recorded separately
from the par value in a 'share premium account'. This is an example of a
reserve. It belongs to the shareholders but cannot be distributed to them,
because it is a capital reserve. Other capital reserves include the
revaluation surplus, which shows the surpluses arising on revaluation of
assets which are still owned by the company.
• Share capital and capital reserves are not distributable except on the
winding up of the company, as a guarantee to the company's creditors that
the company has enough assets to meet its debts. This is necessary
because shareholders in limited liability companies have 'limited liability';
once they have paid the company for their shares they have no further
liability to it if it becomes insolvent. The proprietors of other businesses are,
by contrast, personally liable for business debts.
• Retained earnings constitute accumulated profits (less losses) made by
the company and can be distributed to shareholders as dividends. They
too belong to the shareholders, and so are a claim on the resources of the
company.
• (f) Statements of financial position do not always
balance on the first attempt, as all accountants know!
However, once errors are corrected, all statements of
financial position balance. This is because in double
entry bookkeeping every transaction recorded has
a dual effect. Assets are always equal to liabilities plus
capital and so capital is always equal to assets less
liabilities. This makes sense as the owners of the
business are entitled to the net assets of the business
as representing their capital plus accumulated
surpluses (or less accumulated deficit).
• (g) The statement of financial position is not intended as a statement
of a business's worth at a given point in time. This is because, except
where some attempt is made to adjust for the effects of rising prices,
assets and liabilities are recorded at historical cost and on a
prudent basis. For example, if there is any doubt about the
recoverability of a debt, then the value in the accounts must be
reduced to the likely recoverable amount. In addition, where non-
current assets have a finite useful life, their cost is gradually written
off to reflect the use being made of them.
• Sometimes non-current assets are revalued to their market value
but this revaluation then goes out of date as few assets are revalued
every year.
• The figure in the statement of financial position for capital and
reserves therefore bears no
• relationship to the market value of shares. Market values are the
7 CHANGES IN EQUITY

• IAS 1 requires a statement of changes in equity. This

shows the movement in the equity section of the
statement of financial position.
• A full set of financial statements includes a statement
of changes in equity.
8 NOTES TO THE FINANCIAL
STATEMENTS

•Some items need to be

disclosed by way of note.
8.1 CONTENTS OF NOTES
• The notes to the financial statements will amplify the
information given in the statement of financial
position, statement of profit or loss and other
comprehensive income and statement of changes in
equity.
• We have already noted above the information which
the IAS allows to be shown by note rather than in the
statements. To some extent, then, the contents of the
notes will be determined by the level of detail shown
on the face of the statements.
8.2 STRUCTURE

• The notes to the financial statements should perform the following

functions.
• (a) Provide information about the basis on which the financial
statements were prepared and which specific accounting policies
were chosen and applied to significant transactions/events
• (b) Disclose any information, not shown elsewhere in the financial
statements, which is required by IFRSs
• (c) Show any additional information that is relevant to understanding which
is not shown elsewhere in the financial statements
• The way the notes are presented is important. They should be
given in a systematic manner and cross referenced back
to the related figure(s) in the statement of financial position,
statement of comprehensive income or statement of cash
flows.
• Notes to the financial statements will amplify the information
shown therein by giving the following.
• (a) More detailed analysis or breakdowns of figures in the
statements
• (b) Narrative information explaining figures in the
statements
• IAS 1 suggests a certain order for notes to the financial
statements. This will assist users when comparing the
statements of different entities.
• (a) Statement of compliance with IFRSs
• (b) Statement of the measurement basis (bases) and
accounting policies applied
• (c) Supporting information for items presented in each
financial statement in the same order as each line item and
each financial statement is presented
• (d) Other disclosures, eg:
– (i) Contingent liabilities, commitments and other financial disclosures
– (ii) Non-financial disclosures
• The order of specific items may have to be varied occasionally,
but a systematic structure is still required
8.3 PRESENTATION OF
ACCOUNTING POLICIES
• The accounting policies section should describe the following.
• (a) The measurement basis (or bases) used in preparing the financial
statements
• (b) The other accounting policies used, as required for a proper
understanding of the financial statements
• This information may be shown in the notes or sometimes as a separate component of the
financial statements.
• The information on measurement bases used is obviously fundamental to an understanding of
the
• financial statements. Where more than one basis is used, it should be stated to which
assets or liabilities each basis has been applied.
8.4 OTHER DISCLOSURES
• An entity must disclose in the notes:
– (a) The amount of dividends proposed or declared before the financial
statements were authorised for issue but not recognised as a distribution to
owners during the period, and the amount per share
– (b) The amount of any cumulative preference dividends not recognised
• IAS 1 ends by listing some specific disclosures which will always be
required if they are not shown elsewhere in the financial statements.
– (a) The domicile and legal form of the entity, its country of incorporation and
the address of the registered office (or, if different, principal place of business)
– (b) A description of the nature of the entity's operations and its principal
activities
– (c) The name of the parent entity and the ultimate parent entity of the group
• We can now prepare the financial
statements
 END
OF
CHAPTER THREE