Chapter 1: Development of Accounting

Principles and Professional Practice

Learning Objectives:
 The environment of Accounting
 Overview of Accounting Principles (IFRS Vs
GAAP)
 Financial reporting requirements in Ethiopia
 The IASB and its governance structure
 List of IASB pronouncements
 The IASB’s conceptual framework for financial reporting
 IFRS-based Financial Statements (IAS 1)
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 1.1 The environment of Accounting

 Accounting, like other social science disciplines and human

activities, is largely a product of social, economic, political
and legal conditions, constraints, and influences
environment.
 Modern accounting is the product of many influences and
conditions, three of which deserve special consideration
are:
 First, accounting recognizes that people live in a world of
scarce resources. Accounting plays a useful role in obtaining a
higher standard of living because it helps to identify efficient and
inefficient users of resources.

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Environment of Act………..

 Second, accounting recognizes and accepts society’s

current and ethical concepts of property and other
rights when determining equity among the varying
interests in an enterprise or entity.
 Third, accounting recognizes that in highly developed,
complex economic systems, some (owners and
investors) entrusts the custodianship of and control
over property to others (managers). Thus, the function
of measuring and reporting information to absentee
investors (e.g. Shareholders) has been added to that of
recording and presenting financial data for owner –
manager use.
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 Environment of Acc..

 For purposes of study and practice, the discipline of

accounting is commonly divided into the following areas or
subsets: intermediate financial accounting, managerial (cost)
accounting, tax accounting, and not- for- profit (public sector)
accounting.

 Intermediate Financial accounting a specific branch of

accounting involving a process of recording, summarizing,
and reporting of financial statements relative to the
enterprise as a whole for use by parties both internal and
external to the enterprise.

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Environment of Acc..
 Managerial (cost) accounting is a branch of accounting that
is concerned with the identification, measurement, analysis,
and interpretation of accounting information so that it can be
used to help managers make informed operational decisions. It
is designed to provide decision-making information for
internal users.
 Tax accounting is the subsector of accounting that deals with
the preparations of tax returns and tax payments by
individuals, businesses, corporations and other entities.
 Nonprofit accounting is the unique process by which
nonprofits plan, record, and report upon their finances. While
for-profits primarily focus on earning a profit, nonprofits focus
more on the accountability aspect of accounting.

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 1.2 Overview of Accounting Principles (IFRS Vs GAAP)

 Great strides have been made by the FASB of US and the

IASB of UK to converge the content of U.S. GAAP & IFRS.
 There is continued support for the objective of a single set of
high-quality, globally accepted accounting standards.
 Both are guiding principles that help in the preparation and
presentation of a statement of accounts.
 A professional accounting body issues them. Both of the two
provides relevance, reliability, transparency, comparability,
understandability of the financial statement.

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 What is IFRS?

 IFRS is International Financial Reporting

Standards (IFRS) are a Set of accounting
standards developed by the International
Accounting Standards Board (IASB) in 2001.
 International Financial Reporting Standards (IFRS)

are a set of accounting rules for the financial

statements of business entities that are intended to
make them consistent, transparent, and easily
comparable around the world.

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IFRS
 It is currently the required accounting framework
in more than 120 countries including Ethiopia.
 IFRS requires businesses to report their financial

results and financial position using the same

rules; this means that, without any fraudulent
manipulation, there is considerable uniformity in
the financial reporting of all businesses using
IFRS, which makes it easier to compare and
contrast their financial results.

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Generally Accepted Accounting Principles (GAAP)

 IFRS is used primarily by businesses reporting their financial

results anywhere in the world except the United States.

 Generally Accepted Accounting Principles, or GAAP, is the

accounting framework used in the United States. GAAP is
much more rules-based than IFRS.

 IFRS focuses more on general principles than GAAP, which

makes the IFRS body of work much smaller, cleaner, and
easier to understand than GAAP.

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 Principles-Based vs. Rules-Based Standards
 IFRS are referred to as being principles-based standards
 Provide core principles (objectives) with minimum

guidance.
 They are more loosely framed, allowing for professional

judgment to be applied
 The judgments are expected to be consistent with clear

conceptual framework
 Results in accounting that is more flexible to deal with

unique economic and business circumstances

 Some argue that allowing professional judgment
introduces bias

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US GAAP of FASB (1929) are referred to as
being rules-based standards:
 They are more prescriptive
 Provide a rule for every situation
 Body of knowledge too large and complicated
 Although more guidance is a comfort to some, it
becomes difficult to ensure that the standards are
all consistent.

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 Benefits of IFRS
 It benefits the economy by increasing the growth of its
international business.
 By encouraging the international investors to invest, it leads to
more foreign capital flows to the country.
 Financial statements prepared using a common set of
accounting standards help investors better understand
investment opportunities.
 The industry is able to raise capital from foreign markets at
lower cost if it can create confidence in the minds of foreign
investors that their financial statements comply with globally
accepted accounting standards.
 It offers accounting professionals more opportunities in any
part of the world if same accounting practices prevail
throughout the world.
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Major Difference's of GAAP&IFRS
1) Inventory costing method
IFRS doesn’t allow LIFO method

US GAAP allows LIFO method

2) Reversal of inventory write-downs

 IFRS allows

US GAAP doesn’t allow

3) Valuation of property, plant, and equipment

 IFRS: Cost less accumulated depreciation (or) fair

value(revaluation)
 U.S.GAAP: Cost less accumulated depreciation

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Differences …………….
4) Valuation of intangible assets
 IFRS: Cost less accumulated amortization (or) fair

value(revaluation)
 U.S GAAP: Cost less accumulated amortization.

Revaluation prohibited
5) Research and development expenditures
 IFRS:

 Research: expensed in the period incurred

 Development: that meet specified criteria: capitalized
 U.S GAAP: Both expensed in the period incurred
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Differences …………….
6) Contingencies
 IFRS: threshold for “probable” is defined as “more

likely than not” (greater than 50%)

 U.S. GAAP: accrue if it is probable and can be

reasonably estimated. GAAP defines probable as

“likely to occur” (a higher threshold of occurrence
than under IFRS)
7) Valuation of long-term contingencies
IFRS: present value—time value of money is material
U.S.GAAP: present value—only when timing of cash flows is

certain
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Differences …………….
8) Treatment of convertible debt
 IFRS: convertible debt is divided into its liability (bonds) and
equity (conversion option) elements
 U.S. GAAP: entire issue price is recorded as a liability
9) Cash inflows from interest and dividends received
IFRS: either operating or investing cash flows
U.S. GAAP: operating cash flows

10) Disclosure of noncash activities

 IFRS: Disallows presentation on the face of the statement and
requires reporting in a disclosure note
 U.S. GAAP: Reported either on the face of the statement of

cash flows or in a disclosure note

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1.3 Financial reporting requirements in Ethiopia
 Ethiopia passed a financial reporting law in 2014 which
requires the use of IFRS by commercial businesses operating in
Ethiopia.
Proclamation No. 847/2014
Regulation No. 332/2014
 Accounting and Auditing Board of Ethiopia (AABE) is
established by Regulation No. 332/2014
 It is an autonomous government organ accountable to

MOFEC.
 It is headed by the Director General
 It has 12-member Board of Directors
 Monitor & control IFRS implementation in Ethiopia

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Structure, strategic plan, and roadmap of AABE

The proclamation (No. 847/2014) requires:

 Commercial organizations to follow
 International Financial Reporting Standards (IFRS), or
 International Financial Reporting Standards for Small and

Medium Enterprises (IFRS for SME)

 Charities and societies to follow International Public Sector

Accounting Standards (IPSAS)

 Public auditors to follow International Standards for Auditing.
 Public interest entity (PIE) should use the full IFRS

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AABE duties (among others)
 Issue standards and directives relating to financial reporting
and auditing and ensure their compliance.
 Receive and register financial statements of reporting entities
 Review and monitor the accuracy and fairness of FS to enforce
compliance with the reporting standards
 Register and license public auditors
 Oversee professional accountancy bodies
 Establish, publish and review a code of professional conduct
and ethics for certified public accountants and certified
auditors
 Conduct or arrange for the conduct of professional
examination for the purpose of registering certified public
accountants
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 roadmap of AABE Reporting
SME

Reporting Date:
Other PIEs 2011
Reporting Date:
Significant PIEs
Transition Date: SMEs
2010/11
• IFRS re
Transition Date: by oth
Other PIEs 2009/10 • IFRS/Quarterly • Audit
reporting by other proced
Transition Date: PIEs • Stakeh
Significant PIEs 2008/09 • IFRS/Quarterly • Audit procedures comm
reporting by sig. • Stakeholders • Compl
PIEs communications monit
• Audit procedures • Compliance
2007/08 • Transition Other
• Stakeholders monitoring for sig.
adjustments communications PIEs
• Prepare IFRS • Other PIE’s • SMEs prepare
•
Awareness
• opening SFP prepare opening opening SFP and
Assessment
Competency

• comparative figs
IFRS Competency

•
Amendment of laws, Dry Runs for SFP &
comparative figs • Stakeholders
regulation and “significant PIEs”
directives • • Dry Runs for communications
• Training Prepare • Dry Runs for SMEs
other PIEs
• Planning/impact comparative • SME’s commence
analysis figures transition
• Transition
IFRS

adjustments/
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BS for sig. PIEs
Realization and standardization of statutory reporting
1.4 The IASB and its governance structure

 The current structure of the IASB's governance network

includes the Monitoring Board, IFRS Foundation, IASB,
IFRS Interpretations Committee, and IFRS Advisory Council
for a total of 108 individual actors.
 See the organizational structure/governance structure of IASB
in the following slide.

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Thursday, June 19, 2025 Compiled by: Mindaye T 22
1.5 List of IASB pronouncements

 The IASB has issues Annual Improvements to IFRS Standards.

The IASB issues three major types of pronouncements:
1. International Financial Reporting Standards
2. Conceptual Framework for Financial Reporting
3. International Financial Reporting Standards Interpretations

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 (1) International Financial Reporting Standards:

 Financial accounting standards issued by the IASB are referred to

as International Financial Reporting Standards (IFRS).
 The IASB has issued 17 of these standards to date, covering in
2001).

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List of 17 IFRS: Use this link: https://www.iasplus.com/en/standards/ifrs

 IFRS 1: First-time Adoption of  IFRS 9: Financial Instruments

International Financial  IFRS 10: Consolidated Financial
Reporting Standards Statements
 IFRS 2: Share-based Payment 
IFRS 11: Joint Arrangements
 IFRS 3: Business  IFRS 12: Disclosure of Interests
Combinations in Other Entities
 IFRS 4- Insurance Contracts  IFRS 13: Fair Value
with limited exceptions Measurement
 IFRS 5: Non-current Assets  IFRS 14: Regulatory Deferral
Held for Sale and Discontinued Accounts
Operations  IFRS 15: Revenue from
 IFRS 6: Exploration for and
Contracts with Customers
Evaluation of Mineral  IFRS 16: Leases
Resources  IFRS 17: Insurance Contract
 IFRS 7: Financial Instruments:
applied to all insurance types
Disclosures
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 IFRS 8: Operating Segments
(1) International Financial Reporting Standards:

 The committee issued 41 IASs, the list of International

Accounting Standards (IAS) for detailed information

 Use this link: https://www.iasplus.com/en/standards/ias

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the list of 41 International Accounting Standards (IAS)
Name Issued
IAS 1 Presentation of Financial Statements 2007*
IAS 2 Inventories 2005*
IAS 3 Consolidated Financial Statements 1976
IAS 4 Depreciation Accounting 1999
IAS 5 Information to Be Disclosed in Financial Statements 1976
IAS 6 Accounting Responses to Changing Prices 1999
IAS 7 Statement of Cash Flows 1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2003
IAS 9 Accounting for Research and Development Activities
IAS 10 Events After the Reporting Period 2003
IAS 11 Construction Contracts 1993
IAS 12 Income Taxes 1996*
IAS 13 Presentation of Current Assets and Current Liabilities 1998
IAS 14 Segment Reporting 1997
IAS 15 Information Reflecting the Effects of Changing Prices 2003
IAS 16 Property, Plant and Equipment 2003*
IAS 17 Leases 2003*
IAS 18 Revenue 1993*
IAS 19 Employee Benefits 2011
Accounting for Government Grants and Disclosure of Government
IAS 20 1983
Assistance
IAS 40 Investment Property 2003*
IAS 41 Agriculture 2001

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the list of 41 International Accounting Standards (IAS)
IAS 21 The Effects of Changes in Foreign Exchange Rates 2003*
IAS 22 Business Combinations 1998*
IAS 23 Borrowing Costs 2007*
IAS 24 Related Party Disclosures 2009*
IAS 25 Accounting for Investments 2004
IAS 26 Accounting and Reporting by Retirement Benefit Plans 1987
IAS 27 Separate Financial Statements 2011
IAS 27 Consolidated and Separate Financial Statements 2003
IAS 28 Investments in Associates and Joint Ventures 2011
IAS 28 Investments in Associates 2003
IAS 29 Financial Reporting in Hyperinflationary Economies 1989
Disclosures in the Financial Statements of Banks and Similar Financial
IAS 30 1990
Institutions
IAS 31 Interests In Joint Ventures 2003*
IAS 32 Financial Instruments: Presentation 2003*
IAS 33 Earnings Per Share 2003*
IAS 34 Interim Financial Reporting 1998
IAS 35 Discontinuing Operations 1998
IAS 36 Impairment of Assets 2004*
IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998
IAS 38 Intangible Assets 2004*
IAS 39 Financial Instruments: Recognition and Measurement 2003*
IAS 40 Investment Property 2003*
IAS 41 Agriculture 2001

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 (2) Conceptual Framework for Financial Reporting

 The Conceptual Framework for Financial Reporting sets

cohesive set of interrelated concepts—a conceptual
framework—that will serve as tools for solving existing and
emerging problems in a consistent manner of F/R.
 For example, the objective of general-purpose financial
reporting discussed earlier is part of this Conceptual
Framework.

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(3) International Financial Reporting Standards Interpretations

 Interpretations issued by the IFRS Interpretations Committee are also

considered authoritative and must be followed. The IFRS
Interpretations Committee has issued about 23 of these interpretations
to date (see this link https://www.iasplus.com/en/standards/ifric ).

 The IFRS Interpretations Committee helps the IASB in

many ways. For example, emerging issues often attract
public attention. If not resolved quickly, these issues can
lead to financial crises and shame. They can also undercut
public confidence in current reporting practices.

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List of
Sn 23 IFRIC
Name Interpretations of IFRS Interpretations Issued

Committee

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities 2004

IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments 2004
IFRIC 3 Emission Rights 2004
IFRIC 4 Determining Whether an Arrangement Contains a Lease 2004
Rights to Interests arising from Decommissioning, Restoration and Environmental
IFRIC 5 2004
Rehabilitation Funds
Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic
IFRIC 6 2005
Equipment
Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary
IFRIC 7 2005
Economies
IFRIC 8 Scope of IFRS 2 2006
IFRIC 9 Reassessment of Embedded Derivatives 2006
IFRIC 10 Interim Financial Reporting and Impairment 2006
IFRIC 11 IFRS 2: Group and Treasury Share Transaction 2006
IFRIC 12 Service Concession Arrangements 2006
IFRIC 13 Customer Loyalty Programs 2007
IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their
IFRIC 14 2007
Interaction
IFRIC 15 Agreements for the Construction of Real Estate 2008
IFRIC 16 Hedges of a Net Investment in a Foreign Operation 2008
IFRIC 17 Distributions of Non-cash Assets to Owners 2008
IFRIC 18 Transfers of Assets from Customers 2009
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 2009
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 2011
IFRIC 21 Levies 2013
IFRIC 22 Foreign Currency Transactions and Advance Consideration 2016 31
IFRIC 23 Uncertainty over Income Tax Treatments 2017
 1.6 IASB conceptual Framework for F/R

 The Conceptual Framework for the Financial Reporting is a

basic document that sets objectives and the concepts for general
purpose financial reporting.
 It describes the basic principles for presentation and preparation
of financial statements in line with IFRS.
 Framework is not a standard itself. In cases, when there are no
specific rules for transaction and need to develop accounting
policy, then look to the Framework to its basic principles and
definitions.
 Sometimes, it may happen that the rules in that IFRS standard
will be contrary to what the Framework says, in this case,
apply the standard, not the Framework.

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IASB’s Conceptual Framework for Financial

Thursday, June 19, 2025 33

First Level: Basic Objective

 The objective of general-purpose financial reporting is to

provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.

 General-purpose financial reporting helps users who lack

the ability to demand all the financial information they
need from an entity and therefore must rely, at least
partly, on the information provided in financial reports.

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 Second Level: Fundamental Concepts

 The second level of IASB conceptual framework

deals with qualitative characteristics of accounting
information and basic elements of financial
statements.

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(Hierarchy of Accounting Qualities)

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Basic Elements of Financial Statements

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 Third Level: Recognition, Measurement, & Disclosure Concepts

 Here, we identify the concepts as basic assumptions,

principles, and a cost constraint.
 Five Basic Assumptions
 Economic Entity Assumption
 Going Concern Assumption
 Monetary Unit Assumption
 Periodicity Assumption
 Accrual Basis of Accounting

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 Four Basic Principles of Accounting
1) Measurement Principles (Historical cost or fair value)
2) Revenue Recognition Principle
3) Expense Recognition Principle
4) Full Disclosure Principle (foot notes to financial statements)
Cost Constraint
In providing information with the qualitative characteristics that
make it useful, companies must consider an overriding factor that
limits (constrains) the reporting. This is referred to as the cost
constraint. In order to justify requiring a particular measurement or
disclosure, the benefits perceived to be derived from it must exceed
the costs perceived to be associated with it.

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 1.7. IFRS-based Financial Statements (IAS1)

 IAS 1 refers to financial statements as “ a structured

representation of the financial position and financial
performance of an entity”.
 IAS1-Prescribes the basis for presentation of general purpose
financial statements to ensure comparability within the entity and
with other entities.
 Sets out overall requirements for the presentation of financial
statements.
 provides guidelines for financial statements structure and
minimum requirements for their content.

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 Objective of IFRS financial statement
 As per IFRS, a financial statement form should present true and
fair picture of the business affairs of an organization. Since these
statements are used by different constituents of the
regulators/society, they are required to present the true view of
financial position of the organization.
 As per IFRS, the main qualitative characteristics required in its
main financial statement forms include:
 Understandability
 Relevance
 Reliability
 Comparability
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Objective of Financial statements

 They are a principal means through which an entity

communicates its financial information to external
parties.
 They provide information about the financial
position, financial performance and cash flows of an
entity to a wide range of users in making economic
decisions.
 They also show the results of the management’s
stewardship of the resources entrusted to it.

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 Identification of financial statements:

IAS 1 also requires disclosure of :

1) Name of the reporting entity
 Whether the accounts cover the single entity or a

group of entities ( report type)

2) The date of the end of the reporting period or the
period covered by the financial statements (as
appropriate)
3) The presentation currency.
4) The level of rounding used in presenting amounts in
the financial statements(thousands, millions…)

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Complete Set of Financial Statements:

IAS 1 defines a complete set of financial statements to be

comprised of the following:
A. Statement of financial position.
B. Statement of Comprehensive Income
C. Statement of changes in equity.
D. Statement of cash flows.
E. Notes to the financial statements.

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Statement of financial position
 Cash and cash equivalents
 Assets classified as held for sale under IFRS 5
 Trade and other payables
 Provisions
 Financial liabilities
 Current tax liabilities and assets as in IAS 12
 Deferred tax liabilities and assets
 Liabilities included in disposal groups under IFRS 5
 Non-controlling interests
 Issued capital and reserves
 An entity can present additional line items, headings and subtotals in
Statement of Financial Position, provided such presentation will give
more relevant and reliable information to the users for their
understanding of the entity’s financial position.
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 The current/non-current distinction
• An entity must present current and non-current, assets and
Liabilities as separate classifications on the face of the statement of
financial position .
• However, if the entity is for example financial institutions,
presentation in the order of liquidity (decreasing order) but
product based companies presentation is in order of increasing
liquidity provides more reliable and relevant information than a
current/non-current presentation.
• whichever method of presentation is used, the entity should
disclose amounts expected to be recovered/settled within and after
more than twelve months of the reporting date (IAS 1.61).
• The distinction between current and non-current items depends on the length of
the entity’s operating cycle. However, when the entity’s normal operating cycle is
not clearly identifiable, it is assumed to be twelve months.

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Thursday, June 19, 2025 48
 B) Statement of Comprehensive Income (Format)

 IAS 1 allows income and expense items to be presented

either:
 In a single statement of profit or loss and other

comprehensive income; or
 In two statements: a separate statement of profit or loss

and statement of other comprehensive income.

 The statement should also Shaw Profit or loss and
comprehensive income for the period attributable to:
 Non-controlling interests
 Owners of the parent

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 Elements Statement of comprehensive income

A. Profit or loss (Normal business operation continued/ discontinued)

B. item of other comprehensive income(OCI) which include:
 Revaluation surplus of PPE and intangible assets;
 Re-measurements on defined benefit plans
 Gains and losses arising from translating the financial
statements of a foreign operation
 Gains and losses on re-measuring available-for-sale financial
assets
 Gains and losses on re-measuring hedging instruments .
 Share of OCI of associates and joint ventures.
 Foreign exchange gains and losses arising from translations of
financial statements of a foreign operation (IAS 21)
C. Total comprehensive income.
= Profit or loss + Other comprehensive income

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Thursday, June 19, 2025 51
 C) A statement of changes in equity for the reporting period

 This statement is meant to show the movement in equity during

the accounting period. It reflects various components of the
equity
 Distribution of total comprehensive income during the year to
various equity components
 Distribution of dividend to owners and other transaction with
owners like issue of shares.
 Effect of changes in accounting policies: this statement makes
reconciliation of balance of equity components at the beginning
and end of the accounting period if retrospective adjustments
and retrospective restatements are made to the opening balance
of retained earnings due to errors or change in accounting
policy.( Two periods statement of equity are presented)
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Shareholders’ equity comprises the
following elements:
 Net profit or loss during the accounting period
attributable to shareholders
 Increase or decrease in share capital reserves
 Dividend payments to shareholders
 Gains and losses recognized directly in equity
 Effect of changes in accounting policies
 Effect of correction of prior period error

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 Statement of Changes in Equity according to IAS1
Items Share capital Retained Revaluation surplus Total equity
earnings
Reporting currency USD USD USD USD
Balance at 1 January 2019 100,000 30,000 - 130,000
Changes in accounting policy - - - -
Correction of prior period error - - - -
Restated balance 100,000 30,000 - 130,000
Changes in equity for the year
2019
Issue of share capital - - - -
Income for the year - 25,000 - 25,000
Revaluation gain - - 10,000 10,000
Dividends - (15,000) - (15,000)
Balance at 31 December 2019 100,000 40,000 10,000 150,000
Changes in equity for the year 2020

Issue of share capital - - - -

Income for the year - 30,000 - 30,000
Revaluation gain - - 5,000 5,000
Dividends - (20,000) - (20,000)
Balance at 31 December 2020 100,000 50,000 15,000 165,000
54
Thursday, June 19, 2025
Opening Balance
 This represents the balance of shareholders’
equity reserves at the start of the comparative
reporting period as reflected in the prior period’s
statement of financial position. The opening
balance is unadjusted in respect of the correction
of prior period errors rectified in the current period
and also the effect of changes in accounting
policy implemented during the year as these are
presented separately in the statement of changes
in equity.

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Effect of Changes in Accounting Policies

 Since changes in accounting policies are applied

retrospectively, an adjustment is required in stockholders’
reserves at the start of the comparative reporting period
to restate the opening equity to the amount that would be
arrived if the new accounting policy had always been
applied.

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Effect of Correction of Prior Period Error

 The effect of correction of prior period errors must be

presented separately in the statement of changes in equity
as an adjustment to opening reserves.
 The effect of the corrections may not be netted off against
the opening balance of the equity reserves so that the
amounts presented in current period statement might be
easily reconciled and traced from prior period financial
statements.

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 Restated Balance
 This represents the equity attributable to stockholders at
the start of the comparative period after the adjustments in
respect of changes in accounting policies and correction of
prior period errors as explained above.
Changes in Share Capital
 Issue of further share capital during the period must be added in
the statement of changes in equity whereas redemption of shares
must be deducted therefrom. The effects of issue and redemption
of shares must be presented separately for share capital reserve
and share premium reserve.

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 Dividends

 Dividend payments issued or announced during the

period must be deducted from shareholder equity as
they represent distribution of wealth attributable to
stockholders.
 Income / Loss for the period

 This represents the profit or loss attributable to

shareholders during the period as reported in the

income statement.

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Changes in Revaluation Reserve

 Revaluation gains and losses recognized during the

period must be presented in the statement of changes in
equity to the extent that they are recognized outside the
income statement.

 Revaluation gains recognized in income statement due to

reversal of previous impairment losses however shall not
be presented separately in the statement of changes in
equity as they would already be incorporated in the profit
or loss for the period.

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 Other Gains & Losses

 Any other gains and losses not recognized in the income

statement may be presented in the statement of changes in
equity such as actuarial gains and losses arising from the
application of IAS 19 Employee Benefit.
 Closing Balance
 This represents the balance of shareholders’ equity reserves
at the end of the reporting period as reflected in the
statement of financial position.

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 Purpose & Importance of Statement of changes in equity

 Statement of changes in equity helps users of financial statement to identify

the factors that cause a change in the owners’ equity over the accounting
periods. Whereas movement in shareholder reserves can be observed from the
balance sheet, statement of changes in equity discloses significant information
about equity reserves that is not presented separately elsewhere in the financial
statements which may be useful in understanding the nature of change in
equity reserves.

 Examples of such information include share capital issue and redemption

during the period, the effects of changes in accounting policies and correction
of prior period errors, gains and losses recognized outside income statement,
dividends declared and bonus shares issued during the period.

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d) Statement of Cash Flows

 Statement of Cash Flows, also known as Cash Flow

Statement, presents the movement in cash flows over
the period as classified under operating, investing and
financing activities.
 Example
Following is an illustrative cash flow statement presented
according to the indirect method suggested in IAS 7
Statement of Cash Flows:

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Statement of Cash Flows for the year ended 31 December 2020
figures in USD
Years 2020 2019
Cash flows from operating activities
Profit before tax 40,000 35,000
Adjustments for:
+Depreciation 10,000 8,000
+Amortization 8,000 3,000
+Impairment losses 12,000 3,000
+Bad debts written off 500 -
+Interest expense 800 1,000
-Gain on revaluation of investments (21,000) -
-Interest income (11,000) (9,500)
-Dividend income (3,000) (2,500)
-Gain on disposal of fixed assets (1,200) (1,850)
Cash balance till now 35,100 40,650
Working Capital Changes:
Increase in inventory (1,000) 550
Decrease in trade receivables 3,000 1,400
Increase in trade payables 2,500 (1,300)
Cash generated from operations 39,600 41,300
Dividend paid (8,000) (6,000)
Income tax paid (12,000) (10,000)
Net cash from operating activities (A) 19,600 (25,300)
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 Statement of Cash Flows ………………
Items 2020 2019
(B)Cash flows from investing activities
Capital expenditure- (100,000) (85,000)
Purchase of investments- (25,000) -
Dividend received 5,000 3,000
Interest received 3,500 1,000
Proceeds from disposal of fixed assets 18,000 5,500
Proceeds from disposal of investments 2,500 2,200
Net cash used in investing activities (B) (96,000) (73,300)
(C)Cash flows from financing activities

Issuance of share capital+ 1,000,000 -

Bank loan received+ - 100,000
Repayment of bank loan- (100,000) -
Interest expense- (3,600) (7,400)
Net cash from financing activities (C) 896,400 92,600
Net increase in cash & cash equivalents (A+B+C) 820,000 44,600
Cash and cash equivalents at start of the year 77,600 33,000
Cash and cash equivalents at end of the year to 897,600 77,600
the statement of financial position

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 Basis of Preparation
 Statement of Cash Flows presents the movement in cash and cash
equivalents over the period.
 Cash and cash equivalents generally consist of the following:
 Cash in hand.
 Cash at bank.
 Short term investments that are highly liquid and involve very low risk of
change in value (therefore usually excludes investments in equity
instruments).
 Bank overdrafts in cases where they comprise an integral element of the
organization’s treasury management (e.g. where bank account is allowed
to float between a positive and negative balance (i.e. overdraft) as
opposed to a bank overdraft facility specifically negotiated for financing a
shortfall in funds (in which case the related cash flows will be classified
under financing activities).

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Basis of Preparation

 As income statement and balance sheet are prepared

under the accruals basis of accounting, it is necessary
to adjust the amounts extracted from these financial
statements (e.g. in respect of non cash expenses) in
order to present only the movement in cash inflows and
outflows during a period.

 All cash flows are classified under operating, investing

and financing activities as discussed below.

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a) Operating Activities

 Cash flow from operating activities presents the movement

in cash during an accounting period from the primary
revenue generating activities of the entity.
 For example, operating activities of a hotel will include cash
inflows and outflows from the hotel business (e.g. receipts
from sales revenue, salaries paid during the year etc), but
interest income on a bank deposit shall not be classified as
such (i.e. the hotel’s interest income shall be presented in
investing activities).
 Profit before tax as presented in the income statement could
be used as a starting point to calculate the cash flows from
operating activities.

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 Operating Activities
 Following adjustments are required to be made to the profit before tax
to arrive at the cash flow from operations:
1) Elimination of non-cash expenses (e.g. depreciation, amortization,
impairment losses, bad debts written off, etc).
2) Removal of expenses to be classified elsewhere in the cash flow
statement (e.g. interest expense should be classified under
financing activities).
3) Elimination of non-cash income (e.g. gain on revaluation of
investments).
4) Removal of income to be presented elsewhere in the cash flow
statement (e.g. dividend income and interest income should be
classified under investing activities unless in case of for example an
investment bank).
5) Working capital changes (e.g. an increase in trade receivables must
be deducted to arrive at sales revenue that actually resulted in cash
inflow during the period).

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b) Investing Activities
 Cash flow from investing activities includes the movement in
cash flow as a result of the purchase and sale of assets other
than those which the entity primarily trades in (e.g. inventory).
So for example, in case of a manufacturer of cars, proceeds
from the sale of factory plant shall be classified as cash flow
from investing activities whereas the cash inflow from the sale
of cars shall be presented under the operating activities.
 Cash flow from investing activities consists primarily of the
following:
 Cash outflow expended on the purchase of investments and
fixed assets.
 Cash inflow from income from investments.
 Cash inflow from disposal of investments and fixed assets.
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 c) Financing activities
 Cash flow from financing activities includes the movement
in cash flow resulting from the following:

 Proceeds from issuance of share capital, debentures & bank loans

were considered as Cash inflow

 Cash outflow expended on the cost of finance (i.e. dividends and

interest expense).

 Cash outflow on the repurchase of share capital and repayment of

debentures & loans.

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 Purpose & Importance

 Statement of cash flows provides important insights about

the liquidity and solvency of a company which are vital for
survival and growth of any organization.

 It also enables analysts to use the information about historic

cash flows to form projections of future cash flows of an
entity (e.g. in NPV analysis) on which to base their economic
decisions.

 By summarizing key changes in financial position during a

period, cash flow statement serves to highlight priorities of
management.
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Purpose & Importance
 For example, increase in capital expenditure and
development costs may indicate a higher increase in
future revenue streams whereas a trend of excessive
investment in short term investments may suggest lack
of viable long term investment opportunities.
 Furthermore, comparison of the cash flows of different
entities may better reveal the relative quality of their
earnings since cash flow information is more objective
as opposed to the financial performance reflected in
income statement which is susceptible to significant
variations caused by the adoption of different
accounting policies.

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Individual Assignment I (15%)
 Listand write brief note on the following
 17 IFRSs

 23 IFRIC Interpretations
 41 IASs

Submission date: after one week (21/03/2014 E.C)

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 The End of Chapter 1

Thank you for your Attendance

May God Bless Ethiopia!

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