CHAPTER 4

PRESENTATION OF FINANCIAL
STATEMENTS
 Learning objectives
• Appreciate the role of Annual Reports as a
communication tool
• Know the general presentation requirements of
financial statements
• Understand presentation requirements for
Statement of Financial Position
• Understand presentation requirements for
Statement of Comprehensive Income
• Understand presentation requirements for
Statement of Changes in Equity
 Annual reports
• They are the top source of information for
shareholders, lenders, potential investors and
many other stakeholders.

• They are used to project and share a vision and

serve as an important element of any entity’s
communication with all stakeholders.
• It is not only for commercial entities but also
for non profit organization, charities and other
welfare organization.
 Obtaining annual reports

Electronic copy
Traditional hard through
copy reports companies
webisite
Legal aspects
 Contents of annual reports
Information related to the corporate
Corporate Information such as BOD, organization structure,
major events, products……

Analysis & Analysis & Commentaries includes

commentaries Letter from chairman or BOD

Other statements & Disclosures related to

Disclosure Corporate Governance

Financial Statements Provides full set of financial

statements
Corporate Information
Analysis & Commentaries from chairman
Analysis & Commentaries from BOD
Other statements & Disclosures
Additional Disclosures
 Financial Statements
A statement of responsibility which clearly spells
out the preparation of financial statements.

Audited Financial Statements are required for all

the listed companies which is supposed to be
audited from the external auditor.

Auditor’s report is required which includes the

opinion of the auditor regarding the financial
status of the corporate.
 Audit report contains….

First section Audited financial statements and company

being audited.

Second Outlines the respective responsibilities of

section company’s management and auditor’s
responsibility
Third Describes how was the audit performed in
section accordance to the Generally accepted auditing
standards

Last section Expresses auditor’s combined opinion about

the entity’s financial performance remuneration
report & directors report
Forms of audit report opinion

Highest statement of assurance which is

Unqualified opinion made without reservation or qualification.

The financial statements are fairly presented

Qualified opinion except a disagreement on the treatment of
particular transaction

This opinion is provided when the financial

Adverse opinion statements do not fairly represent the
company’s financial performance
 Presentation requirement of
financial statements

Notes and
Statement of
Statement of Disclosures
financial Statement of Statement of
cash flows relating to
position at comprehensi changes in
for the accounting
the end of ve income equity for
period policies and
the period for the period the period
other
information
 Fair Presentation…..

• Fair presentation requires the faithful

representation of the effects of transactions,
other events and conditions in accordance
with the definitions and recognition criteria for
assets, liabilities, income, expenses.
 Compliance with IFRS

• Any company cannot proclaim compliance

with IFRS if it applies selective standards.

• When an entity applies IFRS with additional

disclosure when necessary, it is presumed to
result in financial statements that achieve a fair
presentation.
 Going Concern
• Going concern means an entity intends to and
has the ability to operate into foreseeable
future.

• When an entity does not have a going concern,

financial statements can no longer assume
such an ability to operate into future.

• For instance, Depreciation on the item of PPE.

 Materiality & Aggregation
• We have a wide variety of accounts with
which a business transacts.
 For instance

Motor vehicle
A/c

Repairs & Registration

Fuel Insurance maintenance fees
 Offsetting
• Unless required or allowed by Accounting standards, an entity is
not allowed to offset assets & liabilities or income & expenses.

• Ex: If Mr. A owes $500 and he has to receive $700 from Mr. B, he
cannot offset the amount and just show only $200 as receivable.

• Such offsetting practices will reduce the financial statement user’s

ability to understand the two separate business phenomenon.

• Offsetting is different from netting as netting states the

accumulated balance. Ex: Accumulated depreciation.
 Frequency of Reporting

• Entities are required to present a complete set

of financial information at least annually.

• Larger entities depending on stock exchange

requirements, are often required to report on a
half-yearly or quarterly basis which is usually
referred as interim reports.
 Comparative Information

• In any given financial statements there will be

comparative information as the figures given
will be with reference to the previous numbers.

• This allows readers to make better sense of

the financial information.
 Consistency of Presentation

• Entities are required to maintain the

presentation and classification of items in the
financial statements from one period to
another.

• For ex: If an entity classify investment income

under the head “other income” it should be
continued to do so.
 Notes to the Accounts
• Complete set of financial statements includes notes to the accounts.
• They are the integral part of financial statements & contain additional
information beyond the items presented on the face of financial
statements.

• Contents of notes to the accounts:

 Summary of significant accounting policies.
 Estimates & assumptions used in preparation of financial statements.
 Additional supporting information for an item.useful life and
depreciation rates
 Other disclosure requirements.
 Presentation requirements for
statement of financial position
• IAS 1 specifies at a minimum the below
mentioned line items should be displayed on
the Balance Sheet.
 Continued…
• Information on the liquidity of an entity’s
financial resources & obligations is important
to the investors.

• Liquidity basically means how quickly an item

can be readily converted to cash.

• This can be typically done by grouping the

assets into current and non-current and
liabilities into current and non-current
liabilities.
Order to Presentation in Balance
Sheets
Statement of Comprehensive
Income
 Contents of Income Statement
 Revenue

 Finance costs

 Share of profits of associates

 Tax expense
 Classification of expense
An income statement by
nature method is the one
in which expenses are
disclosed according to
their nature such as
depreciation, transports
costs, rent expense, wages
and salaries etc.
Expense by nature
-The reporting entity
aggregates expenses
according to their nature.
It does not reallocate them
among functions within the
entity.
There is no reallocation
of these expenses to
different functions of
the entity (i.e. cost of
Expenses goods sold, selling
costs, administrative
costs and other
expenses.
Expenses by function
-The reporting entity classifies
expense into functional
categories such as cost of sales,
cost of distribution…….
This method can provide more
relevant information to users
than the classification of
expense by nature.
 Presentation requirements for statement of
changes in Equity.
• The statement of changes in equity reconciles
the movement in total equity, from beginning
to the end of its financial period.
 Accounting policies

Accounting policies are defined as the specific

principles, bases, convention, rules and practices
applied by an entity in preparing and presenting
financial statements.
3 types of relevant accounting
changes

Changes due to new accounting

standards or pronouncements

Changes in accounting estimates

Changes in accounting policies

 Evaluating entity’s short term liquidity

Total Current assets

Current
Ratio Total Current liabilities

• Ex: M/s Ashish has $200,000 in their current assets

and $100,000 in their current liabilities.
• Current Ratio =
• Total current assets 200,000
• Total current liabilities 100,000 2
 Question

– Which statement is true?

– A) Chairman’s letters are part of financial statements.

– B) Corporate annual reports are a part of a financial statements.
– C) Management discussions and analysis are part of notes to the
accounts.
– D) Financial statements are part of corporate annual reports.
 Solution

D) Financial statements are part of corporate annual reports.

 Question
• The first item in the analysis and
commentaries section of an annual report is
typically:

• A) Management analysis & discussions.

• B) Chairman’s message / letter to
shareholders.
• C) Auditor’s report on the company’s financial
position & performance
• D) Segment performance
 Solution

• B) Chairman’s message / letter to

shareholders.
 Question
• Who is responsible for the preparation of
financial statements?

• A) Auditor
• B) Management
• C) Chief Financial Officer (CFO) and
accounting staff
• D) Chairman of the Board.
 Solution

• B) Management
 Question
• What is account format?

• A) Balance sheet format that lists assets on left

and liabilities and shareholders equity on right.
• B) Income statement format that lists all the
expenses and income.
• C) Statement of Changes in Equity format that
represents the balances of equity at the
beginning and the end of the financial year.
• D) None of these.
 Solution

• A) Balance sheet format that lists assets on left

and liabilities and shareholders equity on right.
 •END OF
• CHAPTER 4