The Framework and IAS 1: Presentation of Financial Statements

Framework & Presentation
The Framework
and
IAS 1: Presentation of financial statements
© Gripping GAAP Overheads: 2008 – Sowden-Service 1

Framework
Framework for the preparation and presentation of

financial statements
• objectives of financial statements

• underlying assumptions (2)
• qualitative characteristics (4)
• the elements (5)
• recognition of the elements
• measurement of the elements
Objective of f/statements
providing info about:

• financial position, perform. & cash flows
• results of mgmt’s stewardship of the resources
entrusted to it
• useful to wide range of users for econ decisions.

Underlying assumptions Qualitative characteristics
- accrual basis - understandable
- going concern - relevance
- reliability
- comparability.

Elements in the financial
statements
Assets Liabilities
• Resource • Present obligation
• Controlled by the • Of the entity
entity • As a result of a past
• As a result of a past event
event • From which future
• From which future economic benefits are
economic benefits are expected to flow from
expected to flow to the entity
the entity
Equity
• Assets less
• Liabilities

Equity
• Assets less
• Liabilities
Income Expenses
• An increase in • A decrease in economic
economic benefits benefits
• During the accounting • During the accounting
period period
• In the form of • In the form of
increases in assets or decreases in assets or
decreases in liabilities increases in liabilities
• Resulting in increases • Resulting in decreases
in equity in equity
• Other than • Other than
contributions from distributions to equity
equity participants participants

Recognition & measurement of elements
Recognition:
Meet:
- definition
-recognition criteria
Measurement:
- historical cost
- current cost
- Present values
- Fair values
- Liquidation values
- etc

Recognition of
elements
Asset and liability Income and expense

• Future economic • Reliably measurable
benefits probable
• Reliably measurable
Recognition criteria
met?
Yes No
• Recognise; and where Is the item material to the

applicable user?
• Disclose separately (if
required by IFRS or for
fair presentation)
Yes No
Disclose Ignore

Second: painting our entrance hall
IAS 1
Presentation of financial statements
• objective of IAS 1
• objective of financial statements
• the 5 statements in a set of fin. statements
• the 8 general features
• the structure & content of fin. statements
Set of financial statements
- Statement of financial position (old BS)

- Statement of comprehensive income (old IS)
- Statement of changes in equity
- Statement of cash flows
- Notes to the financial statements

ABC Ltd
Statement of financial position 20X2
As at 31 December 20X2 C’000’s
ASSETS X
Non-current assets X
Property, plant and equipment X
Goodwill X
Other intangible assets X
Current assets X
Inventories X
Trade and other receivables X
Cash and cash equivalents X
EQUITY AND LIABILITIES X

Issued SC and reserves (the total in the SOCIE) X
Non-current liabilities X
Long-term borrowings X
Deferred tax X
Provisions X
Current liabilities X
Trade and other payables X
Current portion of long-term borrowings X
Short-term borrowings X
Current tax payable X

Statement of Comprehensive Income
Expenses
• Function method (i.e. use or purpose)

• Nature method
One statement or two statements
• Statement of profit or loss

• Statement of comprehensive income
OR
• Statement of comprehensive income (all inclusive)
Other comprehensive income

• Change in revaluation surplus
• Actuarial gains or losses on DBP
• Gains or losses on translating foreign operations
• Gains or losses on available-for-sale financial assets
• Effective portion of gains or losses on hedging
instruments in a cash flow hedge

ABC Ltd
Statement of comprehensive income
For the year ended 31 December 20X2 (function method)
20X2
C
Revenue X
Other income X
Finance costs (X)

Profit before tax X
Tax expense (X)
Profit for the period X
Other comprehensive income X
Total comprehensive income X

Cost of sales (X)

Distribution costs (X)
Administration costs (X)
Other costs (X)

Add/ (Less) Changes in inventories of FG and WIP (X)

Raw materials and consumables used (X)
Employee benefit costs (X)
Depreciation (X)
Other expenses (X)
Total expenses (X)

Example 16 from GG: SOCI: two layouts compared
Solution to example 16A: SOCI: single statement
Apple Limited
Statement of comprehensive income
For the year ended 31 December 20X1
20X1
C
Revenue 1 000 000
Cost of sales (450 000)
Distribution costs (120 000)
Administration costs (80 000)
Finance costs (100 000)
Profit before tax 250 000
Tax expense (70 000)
Profit for the year 180 000
Other comprehensive income, net of tax:

Revaluation surplus increase (170 000)
Total comprehensive income 10 000

Solution to example 16B: SOCI: two statements
Apple Limited
Income statement 20X1
For the year ended 31 December 20X1 C
Revenue 1 000 000
Cost of sales (450 000)
Distribution costs (120 000)
Administration costs (80 000)
Finance costs (100 000)
Profit before tax 250 000
Tax expense (70 000)
Apple Limited
Statement of comprehensive income 20X1
For the year ended 31 December 20X1 C
OCI, net of tax:

Revaluation surplus increase (170 000)
Total comprehensive income 10 000

Reclassification adjustments
Occurs with gains or losses on:
• translating foreign operations;
• re-measuring available-for-sale financial assets;
• the effective portion of hedging instruments in a cash flow
hedge.
Never occurs on:
• changes in a revaluation surplus;
• actuarial gains and losses on defined benefit plans.

Changes to profit or loss
Changes to profit or loss:
• Income
• Expenses
• Adjustments to income and expenses through, for example:
o Changes in estimates
o Correction of current period errors
o Correction of prior period errors – immaterial
o Correction of prior period errors – material
o Changes in accounting policy
Changes to profit or loss
• Generally made through SOCI; BUT
• Made through SOCIE instead if change due to
o Correction of prior period errors – material
o Changes in accounting policy

ABC Ltd
Statement of changes in equity
For the year ended 31 December 20X2
Share Share Retained Total
capital premium earnings equity
C C C C
Bal: 1/1/20X1 restated X X X X
Previously reported X
Change in acc policy X
Correction of error X
Total CI X
Less divs declared (X)
Add issue of shares X X
Bal: 31/12/20X1 - X X X X
restated
Previously reported X
Change in acc policy X
Correction of error X
Total CI X
Less divs declared (X)
Add issue of shares X X
Bal: 31/12/20X2 X X X X

Notes to the fin. statements
Statement of compliance
Significant accounting policies
- measurement bases
- acc policies important to understanding
- judgments made by mgmt re acc policies chosen
Information about:
- items in other 4 FS’s that need deeper disclosure
- items not in other 4 FS’s
- where an IFRS/ statute requires disclosure
- non-financial disclosures (e.g. mgmt objectives and
policies re risk management)
- where you think disclosure is relevant
- judgments made by mgmt affecting amts
- capital management

2 Kinds of Judgments made by Mgmt
- which acc policy to use (source of policy uncertainty)
- making estimates (sources of estimation uncertainty)
Sources of estimation uncertainty
Disclosure needed if:
- significant risk
- that a material adjustment to the CA of an A or L
- may be needed in the next financial year.
Disclosure would include:
- 6 aspects need disclosure (See SGIFR: Chp2, Sect 4) or
(See GG pg 52)

Example 1: Source of Estimation Uncertainty
What S of EU disclosure is required for
• an investment in shares
• measured at fair value based on market prices, where a
• a significant risk exists of a material change to its CA
• next year?
Answer 1:
None, because:
• the possible change in CA is caused by
• the market price changing –
• not by incorrect assumptions made by management.
Example 2: Judgements re choice of acc policy
Give an example of a mgmt judgment re choice of policy.
Answer 2:
• When management decides that one of its buildings is ‘held
for sale’ and is not ‘held for use’
• with the result that IAS 40: Investment property is used to
account for that building instead of IAS 16: Property, plant
and equipment

Example 3: Judgements causing estimation uncertainty
Give an example of:

• a judgement that may be a source of EU,
• the A or L it may affect and
• briefly explain how the judgement could affect the
estimated amount.

Answer 3:
Judgement: mgmt thought we could win a legal case
Account affected: Provisions for law suits (L):
How affected: If judgement wrong (i.e. we lose), the amount
could be underestimated – or possibly not provided for at all!
Judgement: mgmt expects technological advances that they
think will reduce the cost of the future rehabilitation of
environment due in 20 years
Account affected: Provision for rehabilitation costs
How affected: If the technological advances don’t happen, the
provision would be underestimated – if unexpected technology
is developed, the provision could be overestimated
Judgement: mgmt expects to have to rehabilitate environment
in 20 years
Account affected: Provision for rehabilitation costs
How affected: If the rehabilitation only has to happen in 30
years, the provision will be overestimated (estimates based on
PV factors for 20 years instead of 30 years)

General features
- fair presentation & compliance with IFRS;
- sometimes departure required & allowed
- sometimes departure required but disallowed
- going concern;
- accrual basis;
- materiality and aggregation;
- offsetting;
- sometimes allowed
- sometimes required
- sometimes disallowed
- reporting frequency;
Formatted: Bullets and
Numbering
- comparative information;
- if change in presentation since prior yr
- 2 yrs of comparatives needed for SOFP
- consistency.

The Framework and IAS 1: Presentation of Financial Statements

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Framework & Presentation

IAS 1: Presentation of financial statements

© Gripping GAAP Overheads: 2008 – Sowden-Service 1

Framework for the preparation and presentation of

• objectives of financial statements

providing info about:

© Gripping GAAP Overheads: 2008 – Sowden-Service 2

Underlying assumptions Qualitative characteristics

- accrual basis - understandable

- going concern - relevance

© Gripping GAAP Overheads: 2008 – Sowden-Service 3

Elements in the financial

© Gripping GAAP Overheads: 2008 – Sowden-Service 4

© Gripping GAAP Overheads: 2008 – Sowden-Service 5

Recognition & measurement of elements

© Gripping GAAP Overheads: 2008 – Sowden-Service 6

Asset and liability Income and expense

• Recognise; and where Is the item material to the

© Gripping GAAP Overheads: 2008 – Sowden-Service 7

Second: painting our entrance hall

Presentation of financial statements

Set of financial statements

- Statement of financial position (old BS)

© Gripping GAAP Overheads: 2008 – Sowden-Service 8

EQUITY AND LIABILITIES X

© Gripping GAAP Overheads: 2008 – Sowden-Service 9

Statement of Comprehensive Income

• Function method (i.e. use or purpose)

One statement or two statements

• Statement of profit or loss

• Statement of comprehensive income (all inclusive)

Other comprehensive income

© Gripping GAAP Overheads: 2008 – Sowden-Service 10

Finance costs (X)

© Gripping GAAP Overheads: 2008 – Sowden-Service 11

Cost of sales (X)

© Gripping GAAP Overheads: 2008 – Sowden-Service 12

Add/ (Less) Changes in inventories of FG and WIP (X)

© Gripping GAAP Overheads: 2008 – Sowden-Service 13

Example 16 from GG: SOCI: two layouts compared

Solution to example 16A: SOCI: single statement

Cost of sales (450 000)

Distribution costs (120 000)

Administration costs (80 000)

Finance costs (100 000)

Profit before tax 250 000

Tax expense (70 000)

Profit for the year 180 000

Other comprehensive income, net of tax:

Total comprehensive income 10 000

© Gripping GAAP Overheads: 2008 – Sowden-Service 14

Solution to example 16B: SOCI: two statements

Cost of sales (450 000)

Distribution costs (120 000)

Administration costs (80 000)

Finance costs (100 000)

Profit before tax 250 000

Tax expense (70 000)

Profit for the year 180 000

OCI, net of tax:

Total comprehensive income 10 000

© Gripping GAAP Overheads: 2008 – Sowden-Service 15

Occurs with gains or losses on: