Preparation and Presentation of Financial Statements

Learning Outcomes
At the end of this session, you should be
able to:
• Explain the objective of financial statements;
• Describe what constitutes a complete set of financial statements;
• Identify the information to be presented in financial statements;
• Describe the accounting treatment for changes in accounting policies,
accounting estimates and errors; and
• Explain the events after reporting period and their implications to the
financial statements.
Lesson Outline
• Objective of Financial Statements - LKAS 1

• Complete Set of Financial Statements - LKAS 1

⁻ Statement of Financial Position

⁻ Statement of Profit or Loss and Other Comprehensive Income

⁻ Statement of Changes in Equity

⁻ Statement of Cash Flows (LKAS 7)

⁻ Notes

• Accounting Policies, Changes in Accounting Estimates and Errors - LKAS 8

• Events After Reporting Period - LKAS 10

Presentation of Financial Statements (LKAS 1)
It prescribes the basis for presentation of general
purpose financial statements1 to ensure comparability
both with the entity’s financial statements of previous
1
Those intended to meet the needs of users who are not in a position to require
an entity to Prepare reports tailored to their particular information needs.
periods and with the financial statements of other entities.
• Sets out overall requirements for the presentation of
financial statements, guidelines for their structure and
minimum requirements for their content.
Objective of Financial Statements
• Provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.

• Also show the results of the management’s stewardship of the resources

entrusted to it.
Complete Set of Financial Statements

• Statement of Financial Position

• Statement of Profit or Loss and Other Comprehensive Income • Statement
of Changes in Equity
• Statement of Cash
Flows • Notes
• Comparative information in respect of the preceding period
• A statement of financial position at the beginning of the earliest
comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its
financial statements
Statement of Financial Position
• Shows the Financial Position of an entity as of a
particular date
– What is meant by Financial Position?
7
Information to be presented in the Statement of Financial Position

Information to be presented in the Statement of Financial Position

9
Current and Non-current Classification of Assets

An entity shall classify an asset as current when:

• It expects to realize the asset, or intends to sell or consume it, in its
normal operating cycle; or
• It holds the asset primarily for the purpose of trading; or
• It expects to realize the asset within 12 months after the reporting
period; or
• The asset is cash or a cash equivalent, unless the asset is restricted from
being exchanged or used to settle a liability for at least 12 months after
the reporting period.

All other assets are classified as non-current assets.

Current and Non-current Classification of Liabilities

An entity shall classify a liability as current when:
• It expects to settle the liability in its normal operating cycle; or
• It holds the liability primarily for the purpose of trading; or
• The liability is due to be settled within 12 months after the reporting
period; or
• The entity does not have an unconditional right to defer settlement of
the liability for at least 12 months after the reporting period.

All other liabilities are classified as non-current liabilities.

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Statement of Financial Position (Aitken Spence PLC)
Statement of Profit and Loss and Other Comprehensive Income

Statement of Profit and Loss and Other Comprehensive Income

• Shows the Financial Performance for a period •
Consists income and expenses
Income

Revenue Gains

Income generated
through the main Other
operating activities of an income and
entity. gains
e.g. Sales, Service e.g. Gain on sale of PPE
income

Statement of Profit and Loss and Other Comprehensive Income

Expenses

Expenses Losses

• Profit/Loss for Period:

Classification of expenses in profit and loss

Based on nature Based on function

16
Classification of expenses based on Nature

Classification of expenses based on Function

 Statement of Profit and Loss and Other Comprehensive
Income
• What is meant by Total Comprehensive Income?
“The change in equity during a period resulting from transactions and
other events, other than those changes resulting from
transactions with owners in their capacity as owners”

Total Comprehensive Income

Profit/Loss for the Period Other Comprehensive Income (OCI)

Recognition of Income and Expenses

• Profit or Loss – Total of income less expenses, excluding the components of other
comprehensive income.
• Other Comprehensive Income (OCI) - Items of income and expense that are not
recognized in profit or loss as required or permittedbyotherSLFRSs.
Other Comprehensive Income (OCI)
 Gains and losses arising from translating the Financial Statements of a oreign
operation.
 Gains or losses on re-measuring available-for-sale financial assets.
 The effective portion of gains and losses on hedging instruments in a cash
flow hedges.
 Changes in revaluation surplus.
 Actuarial gains and losses on defined benefit plans.
The Statement of Profit and Loss and Other Comprehensive Income
How to adjust taxes on Other Comprehensive Income?
(a) Net of related tax effects, or
(b) Before related tax effects and with one amount shown for the aggregate amount of
income tax relating to those components.
 Statement of Profit and Loss and Other Comprehensive Income
(Aitken Spence PLC)

Statement of Profit and Loss and Other Comprehensive Income

(Aitken Spence PLC)
The following information relates to Final PLC for the year ending 31.03.2018.
Rs.
Revenue 600,000
Cost of sales 220,000
Distribution costs 55,000
Administration expenses 40,000
Other expenses 5,000
Finance costs 10,000
Income tax expense 50,000
Other information:
• The revaluation surplus of land Rs. 80,000
• Gains arose from translating the financial statements of a foreign operation Rs. 21,000 • Loss on re-measuring
financial assets at fair value through OCI Rs, 19,000
Required: The Statement of Profit or Loss and Other Comprehensive Income for the year ending 31.03.2018
25

Statement of Changes in Equity

Shows the change in the equity during a period
How to present Total Comprehensive Income in the Statement of Changes in
Equity?
Statement of Changes in Equity - Aitken Spence PLC
 Statement of Cash Flows

Shows the inflows and outflows of cash and cash equivalents by category
(operating, investing, and financing activities) over a period of time.
Statement of Cash Flows (Aitken Spence PLC)

30
Statement of Cash Flows (Aitken Spence PLC)

31
 The Notes
• Provides basis of preparation of the Financial Statements and the specific and
other accounting policies.
• Provide details about items presented in other components of the
Financial Statements.
Notes (Aitken Spence PLC)

33
 General Requirements of LKAS 1
• Fair presentation and compliance with SLFRSs
• Going Concern
• Accrual Basis of Accounting
• Materiality and Aggregation
• Offsetting
• Comparative Information
Accounting Policies (LKAS 8)
 Accounting policies are the specific principles, bases,
conventions, rules, and practices applied by an entity in preparing and presenting financial
statements.

Accounting Policies
-Examples
Accounting Policies (LKAS 8) - How to decide the Accounting Policies of an entity?
 When an accounting standard specifically applies to a transaction or an
event, the accounting policy or policies applied to that item shall be determined by the
applying the relevant standard.
 In the absence a recommended accounting policy, management should use
its judgment in developing and applying an accounting policy.

Accounting Policies (LKAS 8) – Changing Accounting Policies

• An entity should select and apply its accounting policies consistently for similar
transactions, other events and conditions. • However, an entity can change
an accounting policy only if the change:
– is required by
OR
– Results in financial statements providing reliable and more relevant
information about entity’s financial position, financial
performance or cash flows.

• Change in recognition, measurement base or/ and

presentation
 Accounting Policies (LKAS 8) -
How to account for changes in Accounting Policies

If an accounting
standard specifically Should account for the change in
accordance with the specific transitional
requires changing provisions of the relevant standard
the accounting policy

Retrospective application (the

If the change is made application of a new accounting policy to
by an entity transactions and other events as if that
policy had always been applied)
voluntarily
The initial application of a policy to revalue assets in
accordance with LKAS 16 Property, Plant and Equipment or
LKAS 38 Intangible Assets is a change in an accounting
policy to be dealt with as a revaluation in accordance with
LKAS 16 or LKAS 38, rather than in accordance with LKAS 8.
Activity 2
ABC PLC changed its accounting policy relating to valuation of inventories from
weighted-average cost method to first-in, first-out (FIFO) method during the
year ended 31.3.2018. This was changed to reflect accurately the usage and
flow of inventories in the economic cycle. The impact on the inventory
valuation was determined due to this accounting policy change as follows:
March 31, 2016 an increase of Rs. 30,000
March 31, 2017 a decrease of Rs. 5,000
March 31, 2018 an increase of Rs. 50,000
The statements of profit or loss prior to change the policy were:
2017/18 (Rs.) 2016/17 (Rs.)
Revenue 350,000 300,000
Cost of sales (150,000) (140,000)
Gross profit 200,000 160,000
Distribution costs (35,000) (25,000)
Administration expenses (70,000) (60,000)
Finance costs (12,000) (9,000)
Profit for the year 83,000 (66,000
Retained earnings balance as at 01.04.2016 was Rs. 300,000.
Required: Show how this policy change should be adjusted in the Statement of
Profit or Loss and Other Comprehensive Income and the Statement of Changes
in Equity for the year ended 31.03.2018.
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Accounting Estimates (LKAS 8)

• Why accounting estimates?
– Inherent uncertainties in business activities.
– Many items in the financial statements are to be estimated since they
cannot be measured exactly.
• E.g. Useful life, residual value of PPE, Depreciations method, Warranty obligations
• Accounting estimates may change when business environment changes or
the management gains more experience.
Accounting Estimates (LKAS 8)
What is a change in accounting estimates?

Change in accounting estimate is an adjustment of the

carrying amount of an asset or a liability, or the amount of the
periodic consumption of an asset, which results from the
assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities.
Accounting Estimates (LKAS 8) - How to account for changes in accounting
estimates?
• The effect of a change in accounting estimate should be recognized
prospectively by including it in profit or loss in;
– The period of change if the change affects that period only; or
– The period of the change and future periods, if the change affects both.
The following balances were extracted from Heavy PLC on 01.04.2017.
Rs.
Provision for law suits 300,000
Motor vehicle at cost 2,900,000
Accumulated depreciation - motor vehicle 600,000
 The motor vehicle was acquired on 01.04.2015 and on that date following estimations were made.
Useful life – 8 years; Residual value – Rs. 500,000
Motor vehicles are depreciated on straight line method.
On 31.03.2018, the estimated useful life of the motor vehicle was changed to 6 years from the initial estimation
of 8 years which was made at the acquisition of the asset. On this date, the residual value was estimated to Rs.
300,000.
A former employee of the company had filled a lawsuit requesting a compensation due to a damaged caused
during work. Accordingly, the company had made a provision of Rs. 300,000 as at 31.03.2017. However, on
01.03.2018, the court ordered the company to pay only Rs. 250,000 to the employee. The company paid this
amount to the employee on 05.04.2018.
Required: Show the extracts of financial statements for the year ended 31.03.2018 (Comparative information is
not required).
Errors LKAS 8 - How to account for the prior period errors?
• Errors in financial statements can arise on account of incorrect
recognition, measurement, presentation, or disclosure of items in
financial statements
• The entity should correct material errors relating to prior
periods retrospectively in the first set of financial statements
authorized for issue after their discovery.
(Retrospective restatement)
Activity 4
While carrying out the audit of Rainbow PLC during the year ended 31.03.2018, it was
noticed that the salaries and wages for the year ended 31.03.2017 was incorrectly
recorded in the books of account at Rs.30,000 instead of Rs.50,000. The extracts of the
Statement of Profit or Loss and Other Comprehensive Income for the years ending March
31, 2018 and 2017, before correction of this error were as follows:
2017/18 2016/17
Revenue 900,000 800,000
Cost of sales (500,000) (450,000)
Gross profit 400,000 350,000
Administrative expenses (130,000) (120,000)
Distribution Costs (40,000) (13,000)
Finance costs (10,000) (7,000)
Profit before taxes 220,000 210,000
Income taxes (44,000) (42,000)
Profit for the year 176,000 168,000
 The retained earnings reported for the year ended 31.03.2017 was as follows;
Balance as at 01.04.2016 50,000
Profit for the year 168,000
Balance as at 31.03.2017 218,000
Rainbow PLC’s income tax rate is 20%.
Required: Prepare the restated financial statements of Rainbow PLC for the year ended
31.03.2018 with comparatives.
Events After Reporting Period – LKAS 10

Events After Reporting Period

Examples for adjusting events Examples for non-adjusting events

The settlement of a court case that existed during The decline of market value of
the reporting period (any new provisions must also investments
be recognized)

The finalization of the purchase/sale price of an The destruction of a factory building

asset that has been purchased/sold during the by a fire after the reporting date
reporting period

The discovery of an error that has an impact on the Major business combination after the
financial position or financial results of the entity reporting period
for the reporting period

The bankruptcy of a customer, that existed in the Major ordinary share transaction
trade receivables at the reporting date
Dividend declaration after the
reporting period

Net realizable value of inventories that existed at Major purchase of assets and
the reporting date is decided after the reporting classification of assets as held for
date sale