Presentation of Financial Statements

2.3 Discuss the Presentation of the Financial Statements

2.3.1 Discuss the general features
2.3.2 Statement of Financial Position
2.3.2.1 Describe the definition of elements
2.3.2.2 Prepare a classified (showing current and non-current) Statement of Financial Position
2.3.3 Statement of Comprehensive Income
2.3.3.1 Discuss the nature of expense
2.3.3.2 Discuss the function of expense
2.3.3.3 Describe the components of profit from continuing operations
2.3.3.4 Describe the components of discontinued operations
2.3.4 Prepare a Statement of Changes in Equity
2.3.5 Statement of Cash Flows
2.3.5.1 Differentiate the sections of the statement of cash flows
2.3.5.2 Prepare cash flows from operations: direct and indirect methods
2.3.6 Prepare Notes to the Financial Statements
2.3.7 Compute and Disclose Earnings per Share Information
2.3.7.1 Basic EPS
2.3.7.2 Diluted EPS

Financial statements – “structured representation of entity’s financial position as a result of its operations”. The means by
which the information accumulated and processed in financial accounting is periodically communicated to the users.
The objectives of financial statements are (1) to provide information about financial position, performance and cash flow, and
(2) to show the result of management’s stewardship over the entity’s resources.
The management is responsible for the preparation of financial statements, and they would likely prepare the most accurate
financial forecast for an entity based empirical evidence
An entity shall present each financial statement with equal prominence

IAS 1 – prescribes the presentation of the general purpose financial statements to ensure “comparability”
Limitations of general purpose financial reports:
 They do not and cannot provide all the information that external users need
 They are not designed to show the value of the reporting entity, it only give information to estimate the value
 They are intended to provide common information to the users
 They are largely based on estimate rather than exact depiction

I. General features of Financial Statements

 Fair presentation
 All relevant transactions are presented in accordance with the PFRS which represents the GAAP
 Financial statements prepared under GAAP are not highly precise because estimate and judgment must be made
 Proper selection of accounting policies
 Going concern
 The entity is viewed as a continuing in operation indefinitely, unless the entity has an intention to liquidate
 Materiality and aggregation
 Similar items are presented in one line item
 Items of dissimilar in nature or function must be presented separately if immaterial
  When the classification of the items in financial statement is changed, the entity must reclassify the comparative
amount unless it is impracticable to do so
 Materiality depends on the relative size and nature of omission
 Accrual basis, except for cash flow
 Transactions are depicted in the period they occur even if the resulting cash payments / receipts occur in different
period
 It is used because it provides a better indication of ability to generate cash flows than cash basis, it is most useful for
predicting long-term financial performance
 Current earning based on accrual accounting is the most useful information in predicting future cash flows
 Offsetting
 Offsetting is permitted only when in reflects the substance of the transactions.
 It is accomplished when the gain or loss on sale of the asset is reported by deducting the disposal cost to the
proceeds
 Frequency of reporting
 Financial statements are prepared at least annually
 Comparative information
 Preceding year financial statements are also presented in the current financial statement in the form of beginning
balance
 Consistency
 Accounting methods and practices such as presentation of items in financial statements shall be applied on a uniform
basis from period to period

II. Statement of Financial Position

Show the entity’s financial condition as at certain date. It is used to assess the liquidity, solvency and financial flexibility.
Classified shows the distinction between current and non-current

ASSETS
Asset is a present economic resource controlled the entity as a result of past events
Asset valuation accounts are neither assets nor liabilities

CURRENT ASSETS
The entity shall classify the assets as current when:
 The asset is cash or cash equivalents that is unrestricted
 Held primarily for trading
 Expected to be realized, sold or consumed in the entity’s normal operating cycle
Operating cycle – is the time between the acquisition of assets for processing and their realization in cash or cash equivalents.
When there is much variability, it is measured at 12 months (Ex: inventory realized in cash or 12 months, whichever is longer)

 Expected to be realized within one year after the reporting period

NON-CURRENT ASSETS
The entity shall classify the asset as non-current when the assets are not classified as current
LIABILITIES
Liability is a present obligation of an entity to transfer an economic resource as a result of past events

CURRENT LIABILITIES
The entity shall classify a liability as current when:
 Expected to be settled within the normal operating cycle
 Due to be settled within 12 months after the reporting period
 Held primarily for trading
 Does not have the unconditional right to defer the settlement of a liability for atleast 12 months from the reporting period
NON-CURRENT LIABILITIES
The entity shall classify the liability as non-current when:
 The liabilities are not classified as current

Current and non-current presentation of assets and liabilities provides more useful information when the entity supplies goods
and services within a clearly identifiable operating cycle
This provides more relevant and reliable information for financial institution

EQUITY
Equity is the residual interest in the assets after deducting all the liabilities

Forms of equity:
 Owner’s equity
 Partner’s equity
 Shareholder’s equity

PRESENTATION OF STATEMENT OF FINANCIAL POSITION

The statement of financial position may be presented in the following manner (whichever provides more relevant information):
 Classified – shows distinction between current and non-current assets and liabilities
Current and non-current presentation of assets and liabilities provides more useful information when the entity supplies
goods and services within a clearly identifiable operating cycle

 Unclassified – shows no distinction between current and non-current, and is presented based on liquidity
This provides more relevant and reliable information for financial institution

Statement of Financial position is illustrated in the separate file

III. Statement of Comprehensive Income

Comprehensive income includes all changes in equity except those resulting from investments by and distributions to owners.
It reveals net earnings for a period of time.
Earnings exclude certain gains and losses included in comprehensive income, gains are increases in equity from peripheral
transactions

Statement of comprehensive income consists of:

 Profit or loss – total income less expenses
 Other comprehensive income
Comprehensive income may be presented as a:
 Two statement approach
 Single statement approach

Comprehensive income for the period is presented showing separately the total amount attributable to owners of the parent
and the non-controlling interest

PROFIT OR LOSS

It is the total of income less expenses, excluding the components of other comprehensive income.
Items of income
1. Income from operations, revenue
2. Other income – interests, rents, etc
3. Income from investments – share in net income of associate
4. Income or loss from discontinued operation

Items of expenses
1. Cost of goods sold
2. Distribution cost / selling expense – cost of selling, advertising and delivery
3. Administrative expense – cost of administering the business, includes all operating expenses other than COGS & selling
4. Other expenses – expenses from peripheral or incidental transactions
5. Income tax expense

Expenses may be presented as:

 Functional presentation – classifies the expenses according to their function, and is allocated to COGS, Distribution, etc
 Natural presentation – expenses are aggregated to their nature

Extraordinary items has been eliminated

OTHER COMPREHENSIVE INCOME

This comprises items of income and expense including reclassification adjustments that are not recognized in profit or loss as
required or permitted by PFRS.

OCI to be reclassified into P/L

1. Gain for loss from translation of Foreign Currency financial statements
2. Unrealized gain or loss on derivatives designated as cash flow hedge
3. Unrealized gain or loss on debt investment at FVOCI

OCI to be reclassified into Retained Earnings

4. Unrealized gain or loss on equity investment at FVOCI
5. Change in revaluation surplus
6. Remeasurement of defined benefit plan
7. Gain or loss to credit risk of financial liability at FVPL
IV. Statement of Changes in Equity
Shows the movement in the elements of components in the Shareholder’s Equity

Equity, beginning Changes: Equity, ending

1. Total Income
2. Effect of changes in accounting policies &
correction of errors
3. Transaction to owners; contributions and
distributions

In the statement of changes in equity, the effect of a change in accounting policy and correction of prior period error are
presented separately for each component of equity.

V. Notes to Financial Statements

Provide narrative description or disaggregation of items presented in financial statements and information about items that do
not qualify for recognition. Notes to financial statements are integral part of financial statements; they amplify items presented
in the financial statements.

Purpose of the notes:

 To present information about the basis of preparation of financial statements and accounting policies used. (there is a
separate lecture for the accounting policies)
 To disclose the information required by PFRS but not presented elsewhere in the financial statements.
 To provide additional information not presented but necessary for a fair presentation.

The note usually contains:

1. General information of the reporting entity
2. Statement of compliance with PFRS
3. Summary of significant accounting policies
4. Disaggregation of line items
5. Other disclosures required by the PFRS

The presentation of the notes to financial statements in a systematic manner is mandatory, as far as practicable
The cross-reference between each line item in the financial statements and any related information disclosed in the notes to
financial statements is mandatory
Disclosures of information about key sources of estimation uncertainty, as well as information about judgments are mandatory
The notes to financial statements should not be used to correct an improper presentation in the financial statements
APPENDIX
ITEMS OF CURRENT AND NON-CURRENT ASSETS

CURRENT ASSETS

The asset is cash or cash equivalents that is unrestricted Held primarily for trading

 Cash  Financial assets at Fair Value through profit or loss

 Cash equivalents (debt and equity)

Expected to be realized, sold or consumed in the entity’s Expected to be realized within one year after the reporting
normal operating cycle period
 Trade receivables  Current non-trade receivables
 Inventories  Non-current assets held for sale
 Prepayments

NON-CURRENT ASSETS

 Property, plant and equipment

 Long-term investments (cash surrender value)

 Intangible assets
 Investments at FVOCI, if silent as to current
 Deferred tax asset
 Other non-current assets

CURRENT LIABILITIES

Expected to be settled within the normal operating cycle Held primarily for trading

 Trade and other payables (salaries, employment taxes,  Short-term borrowings (Financial Liability: bonds
and other accruals) – it is current even if are due to be payable)
settled after more than 12 months from the end of the
reporting period

Does not have the unconditional right to defer the settlement Due to be settled within one year after the reporting period
of a liability for atleast 12 months from the reporting period
 Current non-trade payables (bank overdrafts, dividends
 Current portion of long-term debt (no discretion to payable and other non-trade payables)
refinance)  Current provisions

NON-CURRENT LIABILITIES
 Non-current portion of long term debt

 Lease liability
 Deferred tax liability
 Long-term obligations to officers
 Deferred revenue