EXPLANATION ABOUT FINANCIAL STATEMENTS

Accounting – YKPN Business School

Introduction

The purpose of financial reporting in IASB’s Conceptual Framework for Financial

Reporting 2010 is to provide financial information about the reporting entity, which is useful to
existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity. The revised IAS 1 was effective for annual periods beginning
on or after January 1, 2009. In June 2011, the IASB issued an amendment to IAS 1 titled
Presentation of Items of Other Comprehensive Income, which took effect for annual periods
beginning on or after July 1, 2012. The amendment improves the consistency and clarity of
items recorded in other comprehensive income. Components of other comprehensive income
are grouped together on the basis of whether they are subsequently reclassified to profit or loss
or not. The name of the statement of comprehensive income is changed to statement of profit or
loss and other comprehensive income.

IAS 1, Presentation of Financial Statements, is applicable to all general-purpose financial

statements prepared and presented in accordance with IFRS. IAS 1 is applicable both to
consolidated and separate financial statements, but is not applicable to the structure and content
of interim financial statements. IAS 1 is developed for profit-orientated entities. Entities with
not-for-profit activities or public sector entities may apply the standard, provided that
appropriate adjustments are made to particular line items in the financial statements. Entities
whose share capital is not classified as equity (such as mutual funds) may also apply IAS 1
provided the member’s interest is appropriately disclosed.

Definitions

The financial statements 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. Applying a
requirement is impracticable when the entity cannot apply it after making every reasonable
effort to do so. Standards and Interpretations issued by the International Accounting Standards
Board (IASB), which comprise:

1) International Financial Reporting Standards;

2) International Accounting Standards (issued by the former International Accounting
Standards Committee (IASC));
3) Interpretations developed by the International Financial Reporting Interpretations
Committee (IFRIC); and
4) Interpretations developed by the former Standing Interpretations Committee (SIC).

Those omissions and misstatements which could, individually or collectively, influence the
economic decisions which users make on the basis of the financial statements. Materiality
depends on the size and nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combination of both, could be the
determining factor. Information provided in addition to that presented in the financial
statements, which comprise a summary of significant accounting policies and other explanatory
information, including narrative descriptions or disaggregation of items presented in those
statements as well as information about items which do not qualify for recognition in those
statements. Items of income and expense (including reclassification adjustments) which are not
recognised in profit or loss as required or permitted by other IFRS or Interpretations. The
components of other comprehensive income include:

1) Changes in revaluation surplus (IAS 16 and IAS 38);

2) Remeasurements of defined benefit plans (IAS 19);
3) Gains and losses arising from translating the financial statements of a foreign operation
(IAS 21);
4) Gains and losses on remeasuring of investments in equity instruments designated and
financial assets measured at fair value through other comprehensive income (IFRS 9);
5) The effective portion of gains and losses on hedging instruments in a cash flow hedge
(IFRS 9).

The total of income less expenses, excluding the components of other comprehensive income.
Amounts reclassified to profit or loss in the current period which were recognised in other
comprehensive income in the current or previous periods. 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. It comprises all components of “profit or
loss” and of “other comprehensive income.”

Financial statements are a central feature of financial reporting—a principal means through
which an entity communicates its financial information to external parties. The IASB’s
Framework describesthe basic concepts by which financialstatements are prepared.It does so by
defining the objective of financial statements; identifying the qualitative characteristics which
make information in financial statements useful; and defining the basic elements of financial
statements and the concepts for recognising and measuring them in financial statements.

The concept of depreciation, amortisation and depletion is justifiable and appropriate only if it
is reasonable to assume that the entity will continue to operate for the foreseeable future.

Accrual basis of accounting. Financial statements, except for the statement of cash flows, are to
be prepared using the accrual basis of accounting. Under the accrual basis of accounting, an
entity recognises the elements of the financial statements (items such as assets, liabilities,
income and expenses) when they meet the definition and recognition criteria for those elements
in the Framework. Consequently, transactions and events are recognised when they occur and
they are recorded in the accounting records and presented in the financialstatementsin the
periods when they occur(and not when cash is received or paid). For example, revenues are
recognised when earned and expenses are recognised when incurred, without regard to the
time of receipt or payment of cash.
Materiality and aggregation. Financial statements are the result of processing, aggregating and
classifying a large number of transactions or other events based on their nature or function, and
presenting condensed and classified data which are comprised within individual line items. If a
line item is not individually material, it can be aggregated either in the financial statements or in
the notes (for example, disaggregating total revenues into wholesale revenues and retail
revenues), but only to the extent that this will enhance the usefulness of the information in
predicting the entity’s future cash flows. An entity should disaggregate similar items which are
measured on different bases and present them on separate lines; for example, an entity should
not aggregate investments in debt securities measured at amortised cost and investments in
debt securities measured at fair value.

References

Wiley. (2018). Interpretation and Application of IFRS Standars