CHAPTER 12: COMPANY FINANCIAL STATEMENTS UNDER IFRS

STANDARDS

LEARNING OBJECTIVES:
Prepare and present a statement of financial position, statement of profit or loss,
statement of changes in equity and statement of cash flows (or extracts) from the
accounting records and trial balance in a formant which satisfies the information
requirements of the entity.

Topic list
1. Statement of profit or loss (IAS 1)
2. Statement of financial position (IAS 1)
3. Statement of changes in equity (IAS 01)
4. Applying IAS 1 formats

1. The statement of profit or loss (IAS 1)

The IAS 1 statement of profit or loss functional format to be learned is shown in
the example below (Ducat plc). This includes the minimum disclosure
requirements of IAS 1. The main requirement is that all items of income and
expense recognised in a period shall be included in profit or loss.

Worked example: Statement of profit or loss

Ducat plc's statement of profit or loss is presented below.
Ducat plc
Statement of profit or loss for the year ended 31 December 20X3
£
Revenue 623,000
Cost of sales (414,000)
Gross profit 209,000
Other income 26,000
Distribution costs (73,000)
Administrative expenses (32,000)
Finance costs (15,000)
 Profit before tax 115,000
Income tax (35,000)
Profit for the period 80,000

Note that income tax is the term used in IAS 1 to refer to tax on the entity's profits.
It is not to be confused with income tax (PAYE) on an employee's salary. We will
use the term 'income tax throughout this Study Manual to refer to the tax paid by
companies.
1.1 Cost of sales, distribution costs and administrative expenses

The format and classification of those expenses depend on function of the expense.
Additional disclosures on the nature of expenses, including depreciation and
amortization, are required.

For the Accounting exam you should expect to make the following classifications:
(i) Cost of sales Purchases includes:

Purchase (net of discounts received) plus delivery inwards adjusted for opeing and
closing inventory and any substantial loss of inventory

In a manufacturing company wages of production staff, and maintenance and

depreciation expenses of production non-current assets, plus losses on their
disposal
(ii) Distribution costs includes:

Wages etc of marketing and distribution staff

Sales commission
Distribution expenses such as vehicle running costs and carriage outwards
Depreciation of motor vehicles used for distribution, and marketing costs such as
advertising and promotion, and any loss on disposal of such assets
Depreciation of other non-current assets used by distribution operations and any
loss on disposal of such assets
The cost of advertising and selling activities, since these are a part of distributing
goods and services to customers
(iii) Administrative expenses

Wages of administrative staff

Depreciation of non- current assets used by non-production and non-distribution
operations, and any loss on disposal of such assets
Amortisation of intangible assets
Expenses of substantial loss of inventory
Irrecoverable debts expenses
1.2 Other income

Income other than income classified as revenue should be shown separately.

Examples of other income include:
 dividends received on investments
 interest received on savings
 rent received from property
 insurance claim proceeds
 profits on disposal of non-current assets

1.3 Finance costs

Interest payable on bank loans and overdrafts

Interest on debt securities

2 The statement of financial position (IAS 1)

IAS 1 statement of financial position format is as follows

Ducat plc
Statement of financial position as at 31 December 20x3
 £ £
ASSETS
Non-current assets
Property, plant and equipment 427,000
Goodwill 15,000
Other intangible assets 110,000
552,000
Current assets
Inventories 51,000
Trade and other receivables 102,000
Other current assets (eg. prepayments) 20,000
Cash and cash equivalents 33,000
206,000
Total assets 758,000
EQUITY AND LIABILITIES
Equity
Share capital: £1 equity shares 150,000
Share capital: 10% £1 irredeemabie 20,000
preference shares
Share premium 125,000
Retained earnings 161,000
Other reserves 65,000
Total equity 521,000
Non-current liabilities
Long-term borrowings 158,000
Current liabilities
Trade and other payables (including 36,000
accruals)
Short-term borrowings 22,000
Provisions 10,000
Income tax payable 11,000
79,000
Total equity and liabilities 758,000

Points to note
All tangible assets (including land and buildings) are combined under the heading
"property, plant and equipment'. The user would refer to the non-current assets
note, as covered in Chapter 10, for detail.
Trade receivables and any other receivables (including VAT due) are combined as
'trade and other receivables"; prepayments are included in the heading 'other
current assets'. The allowance for receivables is offset against 'trade and other
receivables'.
Cash in hand and at bank are combined as 'cash and cash equivalents'.
Any long-term liabilities such as bank loans or debt securities that are not
repayable within 12 months are combined as 'long-term borrowings' under 'non-
current liabilities’. Redeemable preference shares would be included here.
There are detailed disclosure requirements for share capital in IAS 1, in particular
of the issued, fully paid and partly paid share capital, and of the par value. The
figure included in the statement of financial position is the called-up share capital,
both paid and unpaid.
Bank overdrafts, which are technically repayable on demand, are called 'short-term
borrowings'. They are not offset against any cash and cash equivalent asset
balances, unless a right of set-off exists.
Trade payables and other payables (including VAT, PAYE/NIC and sales
comrmission owed, interest payable and accruals) are combined as 'trade and other
payables’
Income tax payable is shown as a separate item under current liabilities.

3 The statement of changes in equity (IAS 1)

IAS 1 requires companies to prepare a statement of changes in equity as one of the
primary financial statements. The statement of changes in equity explains the
movement in the equity section of the statement of financial position from the
previous reporting date to the current reporting date.
The following should be shown in the statement of changes in equity:
(a) Total comprehensive income for the period. For the purposes of Accounting,
this is profit or loss for the period.
(b) The amounts of transactions with owners, showing separately contributions by
owners (eg issues of share capital and any related premium) and distributions to
owners (in the form of dividends)
(c) For each component of equity, a reconciliation between the carrying amount at
the beginning and end of the period, showing separately each change. For the
purposes of Accounting, share capital, share premium, retained earnings and other
reserves are the key components of equity that should be included in the statement
of changes in equity.
Movements in share capital result from cash share issues and bonus issues as
covered in Chapter 11 Sections 2 and 5.
Movements in retained earnings result from profits earned in the year and
dividends paid out to the equity owners as covered in Chapter 11 Sections 3 and 4.
Movements in retained earnings may also result from bonus issues of shares as
seen in Chapter 11 Section 5.
Worked example: Statement of changes in equity
The following has been extracted from the equity section of the statements of
financial position of Monty Ltd as at 30 April 20X8 and 20X9:
Equity 20X9 20X8
£ £
Share capital: £1 equity shares 120,000 100,000
Share premium 70,000 60,000
Retained earnings 122,400 86,700
Other reserves 12,000 12,000

Notes: Monty Ltd paid a dividend of 20p per share to all registered shareholders on
31 December 20X8 and issued 20,000 £1 equity shares at £1.50 on 1 February
20X9. The only other movement in equity in the year was in respect of profit for
the period of £55,700.
Requirement Prepare Monty Ltd's statement of changes in equity for the year
ended 30 April 20X9.

4. Applying the IAS 1 formats

The formats adapted from IAS 1 sets out a minimum requirement for what should
appear on the face of the statement of financial position, although additional items
are allowed to make the information more relevant. No set order of items is
presented in IAS 13; entities are encouraged to adapt the order and the descriptions
to enhance relevance, though in practice comparability encourages similar entities
to adopt similar presentations. Where a single figure or 'line item' appears in the
statement of financial position, the company must disclose further sub-
classifications in the notes in a manner that is appropriate to its operations.

Worked example: Preparing IAS 1 format financial statements

To draw together everything we have covered so far we shall work through a full
example of how to use the final trial balance to prepare an IAS 1 format statement
of financial position and statement of changes in equity.
The chief accountant of Format plc has extracted the following initial trial balance
from the ledger accounts as at 31 December 20X2.

Format plc
Trial balance as at 31 December 20X2
£’000 £’000
Dr Cr
Issued equity shares of £1
10% irredeemable preference
shares of £1 each
Trade receivables and trade
payables
Bank
Inventory at 1.1.X2
6% loan notes
Sales
Rental income
Loan note interest (six months to
30.6.X2)
Administration and general
expenses, excluding salaries
Administration salaries
Distribution expenses
Purchases
Salaries associated with
manufacture of goods
Delivery inwards
 Property costs
Freehold land, at cost
Fixtures and fittings, at cost
Accumulated depreciation,
fixtures and fittings
Allowance for receivables
Goodwill

The following items have yet to be dealt with:

(1) An inventory count has revealed the closing inventory figure to be £2,020,000.
(2) The company depreciates fixtures and fittings at 20% on the straight-line basis.
(3) An impairment review has shown that 10% should be written off goodwill. The
charge should be to administrative expenses.
(4) The credit controller has said that a debt of £15,000 should be written off as
irrecoverable and the allowance for receivables should be increased to £200,000.
(5) The income tax due on profits for the year is estimated at £750,000.
(6) The allocation of expenditure between distribution costs and administrative
expenses should be as follows.
Distribution Administrative
(%) (%)
Property costs 25 75
Depreciation 50 50

(7) The loan notes are repayable in full in 10 years' time. Interest is paid in two
equal instalments per annum.
(8) A1 for 8 bonus issue relating to issued equity shares was made out of retained
earnings on 31 December 20X2. There were no new issues of preference shares
during the year.
Requirement
(i) Prepare year-end journal entries to adjust for the above items and prepare the
final trial balance for Format plc
(ii) Prepare a statement of profit or loss for Format plc for the year ended 31
December 20X2 and a statement of financial position as at that date.
(iii) Prepare a statement of changes in equity for Format plc for the year ended
31 December 20X2

Notes: In the exam, all expenses/losses in the SOPL must be included as negative numbers, i.e,
with a minus sign in front or in brackets