F7-04 IAS 1 Presentation of Financial Statements PDF

Preview

Summary

Its the FR Course For ACCA...

Description

Session 4

IAS 1 Presentation of Financial Statements FOCUS This session covers the following content from the ACCA Study Guide. A. The Conceptual and Regulatory Framework for Financial Reporting 1.

The need for a conceptual framework and the characteristics of useful information

d)

Discuss whether faithful representation constitutes more than compliance with accounting standards.

B. Accounting for Transactions in Financial Statements 9.

Reporting financial performance

c)

Indicate the circumstances where separate disclosure of material items of income and expense is required.

D. Preparation of Financial Statements 1.

Preparation of single entity financial statements

a)

Prepare an entity’s statement of financial position and statement of profit or loss and other comprehensive income in accordance with the structure prescribed within IFRS.

b)

Prepare and explain the contents and purpose of the statement of changes in equity.

Session 4 Guidance Understand the need for faithful representation and how this is achieved (s.2.1–2.3) and the additional disclosure that is necessary when financial statements are prepared other than on a going concern basis (s.2.4). Learn the minimum line items which must be shown in the financial statements (s.4.5, s.5.2). The examiner may well ask you to produce a statement of profit or loss using either the "nature of expense" or "function of expense" method (s.5.5).

(continued on next page) F7 Financial Reporting

Becker Professional Education | ACCA Study System

Ali Niaz - [email protected]

VISUAL OVERVIEW Objective: To describe general purpose financial statements and to set out presentation considerations, guidelines for structure and minimum content requirements.

STRUCTURE AND CONTENT • "Disclosure" • Identification • Reporting Date and Period • Terminology

FINANCIAL STATEMENTS

OVERALL CONSIDERATIONS

• IAS 1

• Faithful Representation

• Representation • Objectives

• Emphasis • Departure From IFRS

• Components • Supplementary Statements

• Going Concern • Accrual Basis • Consistency • Materiality and Aggregation • Offsetting • Comparative Information

STATEMENT OF FINANCIAL POSITION • Current v Non-current • Current Assets • Current Liabilities • Overall Structure • Presenting Elements

STATEMENT OF COMPREHENSIVE INCOME • Presentation • Profit or Loss • Other Comprehensive Income • Material Items

STATEMENT OF CHANGES IN EQUITY • A Separate Statement • Structure • Reclassification

NOTES TO THE FINANCIAL STATEMENTS • Structure • Accounting Policies • Estimation Uncertainty • Capital Disclosures • Other Disclosures

• Analysis of Expenses

Session 4 Guidance Understand what is meant by "offsetting" (s.2.8). Learn the criteria for recognising assets and liabilities as current (s.4.2, s.4.3). Understand what is presented in the statement of changes in equity and why (s.6).

© 2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali Niaz - [email protected]

4-1

F7 Financial Reporting

Session 4 • IAS 1 Presentation of Financial Statements

1

Financial Statements

1.1

IAS 1

1.1.1

Objective

< To prescribe the content of general purpose financial statements to ensure comparability with:

the entity's own financial statements; and financial statements of other entities. < To achieve this the standard sets out: = overall considerations for the presentation; = guidelines for the structure; and = minimum requirements for content of financial statements. = =

1.1.2

General Purpose Financial Statements

< General purpose financial statements are those intended to

meet the needs of users who are not in a position to demand reports tailored to specific information needs.

< The financial statements may be presented separately or in

another public document (e.g. annual report or prospectus).

1.1.3

Application

< To financial statements of individual entities and consolidated financial statements of groups.

< To all types of entities, including banks, insurance and other financial institutions.

< To entities with a profit objective (including public sector business entities).

1.1.4

Terminology

< "IFRSs" is a generic term which encompasses all standards (IFRSs and IASs) and interpretations (IFRICs and SICs).

< "IAS", "IFRS", "IFRIC" and "SIC" are specific terms for individual pronouncements (e.g. IAS 2 Inventory).

1.2

Representation

< Financial statements are a structured financial representation of: financial position of an entity; and = transactions undertaken by an entity. =

1.3

Objectives of Financial Statements

The objective of financial statements is to provide information useful to a wide range of users in making economic decisions about:*  financial position;  performance; and  cash flows.

4-2

*The Framework (see Session 2) is also relevant to the objectives of financial statements.

© 2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali Niaz - [email protected]

F7 Financial Reporting

Session 4 • IAS 1 Presentation of Financial Statements

< To show the results of management's stewardship. < To meet this objective, financial statements provide

information about an entity's: assets; = liabilities; = equity; = income and expenses including gains and losses; and = cash flows. =

1.4

Components

< A complete set of financial statements includes:* statement of financial position; statement of profit or loss and other comprehensive income; = a statement of changes in equity; = statement of cash flows; = accounting policies and explanatory notes. = =

1.5

Supplementary Statements

< Entities also may present additional information on a voluntary basis. For example: = Environmental reports = Value added statements = A review by management (management commentary) to include financial and other information. < Such additional statements presented are outside the scope of IFRSs.

2 2.1

*A complete set of financial statements should also include comparable figures for the previous period, meaning there will be two statements of financial position, etc. However, if an entity changes an accounting policy or amends a prior period error, then a third statement of financial position must be presented for comparison purposes.

Overall Considerations Faithful Representation and Compliance with IFRSs

< Financial statements should "present fairly": financial position; financial performance; and = cash flows. < Achieved by appropriate application of IFRSs (and any necessary additional disclosures). = =

< Inappropriate accounting treatments are not rectified by; = =

2.2

disclosure of accounting polices used; or notes or explanatory material.

Emphasis

In virtually all circumstances, fair presentation is achieved by compliance in all material respects with applicable IFRSs. Compliance with IFRSs must be disclosed.

© 2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali Niaz - [email protected]

4-3

F7 Financial Reporting

Session 4 • IAS 1 Presentation of Financial Statements

< Fair presentation requires: selection and application of appropriate accounting policies; and = presentation of information (including accounting policies) in a manner which provides relevant, reliable, comparable and understandable information. < Additional disclosures when the requirements of IFRSs are insufficient to enable users to understand the effect of particular transactions on the financial position and performance of the entity. =

< Where an IFRS is applied before its effective date, that fact must be disclosed.

2.3

Departure From IFRS

< In extremely rare circumstances, if compliance would be

misleading, and therefore departure from a standard is necessary to achieve a fair presentation, the entity must disclose:* = That management has concluded that the financial statements fairly present the entity's financial position, performance and cash flows. = That it has complied in all material respects with applicable IFRSs except that it has departed from a standard in order to achieve a fair presentation. = The standard from which the entity has departed, the nature of departure, including the treatment that the standard would require together with the reason why that treatment would be misleading in the circumstances and the treatment adopted. = The financial effect of the departure on the entity's profit or loss, assets, liabilities, equity and cash flows for each period presented.

2.4

*Departures from IFRS are often referred to as " true and fair override" (i.e. that a "true and fair" view takes precedence).

Going Concern

< It is management's responsibility: to assess the entity's ability to continue as a going concern (considering all information available for the foreseeable future); = to prepare financial statements on a going concern basis (unless management considers that it is probable that the entity will be liquidated/cease trading); and = to disclose material uncertainties which may affect the going concern concept. < The degree of consideration depends on the facts in each case. If the entity has a history of profitable operation and ready access to financial resources, detailed analysis may not be required before a conclusion is reached. =

That an entity is a going concern is the only underlying assumption (see Session 2).

< In other cases management may need to consider a wide range of factors, such as:

current and expected future profitability; = debt repayment schedules; and = sources of finance. < Foreseeable future is at least, but not limited to, 12 months from the end of the reporting period. =

4-4

© 2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali Niaz - [email protected]

F7 Financial Reporting

Session 4 • IAS 1 Presentation of Financial Statements

< When financial statements are not prepared on a going

concern basis, that fact must be disclosed, together with the basis on which the financial statements have been prepared and the reason for departing from the going concern concept.

2.5 2.5.1

Accrual Basis of Accounting Concept

< Assets, liabilities, equity, income and expenses are: recognised when they occur (not as cash or its equivalent is received or paid); and = recorded in the accounting records and reported in the financial statements of the periods to which they relate. =

2.5.2

"Matching" Concept

< Expenses are recognised on the basis of a direct association

An entity must prepare its financial statements (except the statement of cash flows) under the accrual basis of accounting.

between:

= =

2.6

costs incurred; and earning of specific items of income.

Consistency of Presentation

< Presentation and classification of items in financial statements shall be retained from one period to the next.

< IFRS does allow for changes in presentation and/or

classification but only in the following circumstances:

The change will result in a more appropriate presentation (e.g. if there is a significant change in the nature of the entity's operations). = A change is required by a financial reporting standard or an interpretation. =

2.7

Materiality and Aggregation

Materiality—omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken based on 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.

< Materiality provides that the specific disclosure requirements of IFRSs need not be met if a transaction is not material. Material Items

Immaterial Amounts

< Present separately in financial

< Aggregate with amounts of similar nature

statements.

or function (in the financial statements or the notes). < Need not be presented separately.

© 2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali Niaz - [email protected]

4-5

F7 Financial Reporting

Session 4 • IAS 1 Presentation of Financial Statements

2.8

Offsetting

< Assets and liabilities, and income and expenses, shall not be offset unless another standard or interpretation requires or allows the use of offsetting.* < Offsetting, except when the offset reflects the substance of a transaction, would detract from the ability of users to understand the events which occurred and would inhibit the assessment of the entity's future cash flows. < An allowance of bad or irrecoverable debts against receivables is not seen as offsetting. < The standard does allow some netting off of items within the statement of comprehensive income. For example: = Gains/losses on the sale of non-current assets are reported after deducting the carrying value from the proceeds. = Expenditure related to a recognised provision, where reimbursement occurs from a third party, may be netted off against the reimbursement. = Gain/losses relating to a group of similar transactions will be reported on a net basis (e.g. foreign exchange gains and losses). Any material gain or loss should be reported separately.

2.9

*IAS 12 Income Taxes requires a tax liability to be offset against a tax asset under certain conditions.

Comparative Information

< One year's prior period results must be included as part of current period financial statements for comparison purposes. Numerical information in the previous period < DISCLOSE unless an IFRS permits/requires otherwise.

Narrative and descriptive information in the previous period < INCLUDE when relevant to understanding current period's financial statements (e.g. re legal disputes).

< When the presentation or classification of items in the financial statements is amended: if practicable, restate comparatives and disclose the nature, amount and reason for restatement; = if impracticable, disclose the reason for not restating and the nature of the changes which would otherwise have been made. < If the entity has changed an accounting policy or reflected a prior period error, then a third statement of financial position is presented as at the beginning of the prior financial year. =

4-6

© 2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali Niaz - [email protected]

F7 Financial Reporting

Session 4 • IAS 1 Presentation of Financial Statements

3

Structure and Content

3.1

"Disclosure"

< IAS 1 uses the term in a broad sense, encompassing items presented in each of the financial statements as well as in the notes to the financial statements.

3.2

Identification of Financial Statements

< Financial statements shall be clearly identified and distinguished from other information in the same published document (e.g. annual report or prospectus). 3.2.1

Importance

< IFRSs apply only to the financial statements and not to other information so users must be able to distinguish information prepared using IFRSs from other information not subject to accounting requirements. 3.2.2 Information to Be Prominently Displayed (and Repeated Where Necessary)

< Component of the financial statements presented (e.g. statement of financial position).

< Name of reporting entity. < Whether financial statements cover an individual entity or a group.

< End of reporting period or the period covered by the financial statements (as appropriate).

< Presentation currency. < Level of precision used (e.g. 000, millions, etc).

3.3

Reporting Date and Period

< Financial statements shall be presented at least annually. < In exceptional circumstances where an entity's end of reporting period changes and the statements are presented for a period longer or shorter than a year, the entity discloses: = =

3.4

the reason for a period other than one year being used; and the fact that comparative amounts for the statement of comprehensive income, changes in equity, statement of cash flows and related notes are not comparable.

Terminology

< The standard applies a terminology which is consistent with all other standards but it does not prohibit the use of other terms as long as the meaning is clear (e.g. non-current assets can still be termed "fixed" assets).

© 2014 DeVry/Becker Educational Development Corp. All rights reserved.

Ali Niaz - [email protected]

4-7

F7 Financial Reporting

Session 4 • IAS 1 Presentation of Financial Statements

4

Statement of Financial Position

4.1

The Current/Non-current Distinction

< An entity shall present current and non-current assets and current and non-current liabilities as separate classifications in the statement of financial position, unless when presentation based on liquidity order provides more relevant and reliable information. This may be the case for financial institutions. < Whichever method is adopted, where a classification includes amounts which will be recovered in less than 12 months and more than 12 months, an entity shall disclose the amount to be settled or recovered after more than 12 months. < A separate classification: distinguishes net assets which are continuously circulating as working capital from those used in long-term operations; = highlights assets expected to be realised within the current operating cycle and liabilities due for settlement in the same period. < Other useful information: =

= =

4.2

maturity dates of trade and other receivables and payables; inventories expected to be recovered more than one year from the end of the reporting period.

Current Assets

An asset is classified as "current" when it satisfies one of the following criteria:  it is expected to be realised, or is intended for sale or consumption, in the normal course of the operating cycle; or  it is held primarily for trading purposes;  it is expected to be realised within 12 months of the end of the reporting period; or  it is cash or cash equivalent which is not restricted in use.

< There are two conceptual views of the term "current": the liquidity approach and the operating cycle approach.

< All other assets are classified as "non-cu...