Illustrative full set of IFRS for SME financial statements

See the notes while reading the financial statements

Method 1: - Illustrating the classification of expenses by function
ABC PLC
Statement of Profit or Loss and Other Comprehensive income
For the year ended July 7 2011
Notes 2011(Birr) 2010(Birr)
Revenue 5 6,863,545.00 5,808,653.00

Cost of goods sold 5,178,530.00 4,422,575.00

Gross profit 1,685,015.00 1,386,078.00

Other income 6 88,850.00 25,000.00

Distribution cost 175,550.00 156,800.00

Administrative expenses 810,230.00 660,389.00

Other expense 106,763.00 100,030.00

Finance costs 7 26,366.00 36,712.00

Profit before tax 8 654,956.00 457,147.00

Income tax expense 9 202,687.80 142,169.10

Profit for the year 452,268.20 314,977.90

Retained earnings at start of year 2,218,742.90 2,003,765.00

Dividends 150,000.00 100,000.00

Retained earnings at end of year 2,521,011.10 2,218,742.90

Note: The format illustrated above aggregates expenses according to their function (cost of goods sold,
distribution, administrative etc). As the only changes to ABC Plc equity during the year arose from profit or loss
and payment of dividends, it has elected to present a single statement of comprehensive income and retained
earnings instead of separate statement of comprehensive income and changes in equity.

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ABC Plc Statement of comprehensive income and retained earnings for the year ended July
7/2011.
Method 2: Illustrating the classification of expenses by nature
ABC PLC
Statement of Profit or Loss and Other Comprehensive income
For the year ended July 7 2011
Notes 2011(Birr) 2010(Birr)

Revenue 5 6,863,545.00 5,808,653.00

Other income 6 88,850.00 25,000.00

Changes in inventories of finished goods and work in process 3,310.00 1,360.00

Raw material and consumables used 4,786,699.00 4,092,185.00

Employee salaries and benefits 936,142.00 879,900.00

Depreciation and amortization expense 272,060.00 221,247.00

Impairment of property, plant and equipment 30,000.00

Other expenses 249,482.00 145,102.00

Finance costs 7 26,366.00 36,712.00

Profit before tax 8 654,956.00 457,147.00

Income tax expense 9 202,687.80 142,169.10

Profit for the year 452,268.20 314,977.90

Retained earnings at start of year 2,218,742.90 2,003,765.00

Dividends 150,000.00 100,000.00

Retained earnings at end of year 2,521,011.10 2,218,742.90

Note: the format illustrated above aggregates expenses according to their nature (raw materials and
consumables, employee salaries and benefits, depreciation and amortization, impairment etc). As the only
changes to ABC Plc equity during the year arose from profit or loss and payment of dividends, it has elected to
present a single statement of comprehensive income and retained earnings instead of separate statements of
comprehensive income and changes in equity.

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 ABC plc. statement of financial position for as of July 7/2011
ABC PLC
Statement of Financial Position
As of July 7 2011
Notes 2011(Birr) 2010(Birr) 2009(Birr)
Assets
Current assets

Cash and cash equivalent 82,394.80 28,075.00 24,478.00

Trade and other receivables 10 585,548.00 573,862.00 521,234.00

Inventories 11 57,381.00 47,920.00 45,050.00

725,323.80 649,857.00 590,762.00

Non -current assets

Investment in associate 12 107,500.00 107,500.00 107,500.00

Property, Plant and equipment 13 2,549,945.00 2,401,455.00 2,186,002.00

Intangible assets 14 850.00 2,550.00 4,250.00

Deferred tax asset 15 3,734.10 2,607.10 2,155.00

2,662,029.10 2,514,112.10 2,299,907.00

Total assets 3,387,352.90 3,163,969.10 2,890,669.00

Liabilities and equity

Bank overdraft 16 83,600.00 115,507.00 20,435.00

Trade payables 17 431,480.00 420,520.00 412,690.00

Interest payable 7 2,000.00 1,200.00

Current tax liability 203,814.80 142,621.20 173,211.00

Provision for warranty obligations 18 4,200.00 5,040.00 2,000.00

Curren portion of employee benefit obligations 19 4,944.00 4,754.00 4,571.00

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 Current portion of obligations under finance leases 20 21,461.00 19,884.00 18,423.00

751,499.80 709,526.20 631,330.00

Non -current liabilities

Bank loan 16 50,000.00 150,000.00 150,000.00

Long -term employee benefit obligation 19 5,679.00 5,076.00 5,066.00

Finance leases 20 23,163.00 44,624.00 64,508.00

78,842.00 199,700.00 219,574.00

Total liability 830,341.80 909,226.20 850,904.00

Equity

Share capital 22 30,000.00 30,000.00 30,000.00

Retained earnings 4 2,521,011.10 2,218,742.90 2,003,765.00

Legal Reserve 6,000.00 6,000.00 6,000.00

2,557,011.10 2,254,742.90 2,039,765.00

Total liabilities and equity 3,387,352.90 3,163,969.10 2,890,669.00

Statement of cash flows for the year ended July 7/2011

ABC PLC
Statement of Cash flow
For the year ended July 7 2011
Notes 2011(Birr) 2010(Birr)
Cash flow from operating activities

Profit for the year 452,268.20 314,977.90

Adjustments for non-cash income and expense

Non-cash finance cost (a) (a) 800.00 1,200.00

Non -cash Income tax expense (b) (b) 60,066.60 (31,041.90)

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 Depreciation of property, plant and equipment 270,360.00 219,547.00

Impairment loss 30,000.00

Amortization of intangibles 1,700.00 1,700.00

Cash flow included in investing activities

Gain on sales of equipment 63,850.00 -

Changes in operating assets and liabilities

Decrease (increase) in trade and other receivables 11,686.00 52,628.00

Decrease (increase) in inventories 9,461.00 2,870.00

Increase(decrease) in trade payable (C ) 10,120.00 10,870.00

Increase in current and long-term employee benefit payable 793.00 193.00

Net cash flow from operating activities 741,110.80 461,948.00
Cash flows from investing activities

Proceeds from sale of equipment 100,000.00

Purchases of equipment 485,000.00 435,000.00

Net cash flow from investing activities (385,000.00) (435,000.00)

Cash flows from financing activities

Payment of finance lease liabilities (19,884.00) (18,423.00)

Repayment of borrowings (100,000.00)

Dividends paid (150,000.00) (100,000.00)

Net cash flow from financing activities (269,884.00) (118,423.00)

Net cash increase (decrease) in cash and cash equivalents 86,226.80 (91,475.00)

Cash and cash equivalents at the beginning of the year (87,432.00) 4,043.00

Cash and cash equivalents at the end of the year 23 (1,205.20) (87,432.00)

(a) Finance cost paid in cash 25,566.00 35,512.00

(b) Income taxes paid in cash 142,621.20 173,211.00

(c ) Includes unrealized foreign exchange loss 1,000.00

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ABC Plc : Accounting policies and explanatory notes to the financial statements for the year ended July
7/2011

1. General information
ABC Plc is a limited liability company in Ethiopia. The address of its registered office and principal place of
business is Gulele sub city, Woreda 1, around Sidist kilo, Addis Ababa, Ethiopia. Its principal activities are
the manufacture and sale of candles.

2. Basis of preparation and accounting policies

These financial statements have been prepared in accordance with the International Financial Reporting
Standard for Small and Medium-sized Entities issued by the International Accounting Standards Board.
They are presented in Ethiopian Birr.
Investments in associates
Investments in associates are accounted for at cost less any accumulated impairment losses.
Dividend income from investments in associates is recognized when the company right to receive payment
has been established. It is included in other income.

Revenue recognition
Revenue from sales of goods is recognized when the goods are delivered and title has passed. Royalty
revenue from licensing candle-making patents for use by others is recognized in accordance with the
relevant license agreements. Revenue is measured at the fair value of the consideration received or
receivable, net of discounts and sales-related taxes collected on behalf of the government of Ethiopia.

Functional currency
The functional currency of the Plc is the Ethiopian Birr. Monetary assets and liabilities denominated in
currencies other than the functional currency are translated into the functional currency at rates of
exchange prevailing at the Statement of Financial Position dates. Transactions denominated in currencies
other than the functional currency are translated into the functional currency at the exchange rates
prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency
transactions are included in the determination of net income (loss) for the respective periods.

Borrowing costs
All borrowing costs are recognized in profit or loss in the period in which they are incurred.

Income tax
Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year.

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Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the
financial statements and their corresponding tax bases (known as temporary differences). Deferred tax
liabilities are generally recognized for all temporary differences that will result in taxable amounts in
determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is
recovered or settled (taxable temporary differences). Deferred tax assets are generally recognized for all
temporary differences that will result in amounts that are deductible in determining taxable profit (tax
loss) of future periods when the carrying amount of the asset or liability is recovered or settled (deductible
temporary differences)—but only to the extent that it is probable that taxable profits will be available
against which those deductible temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and is adjusted to reflect the
current assessment of future taxable profits. Any adjustments are recognized in profit or loss.

Deferred tax is calculated at the tax rates that are expected to apply to the taxable profit (tax loss) of the
periods in which it expects the deferred tax asset to be realized or the deferred tax liability to be settled,
on the basis of tax rates that have been enacted or substantively enacted by the end of the reporting
period.

Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and any
accumulated impairment losses.

Depreciation is charged so as to allocate the cost of assets less their residual values over their estimated
useful lives, using the straight-line method. The following annual rates are used for the depreciation of
property, plant and equipment:

Buildings 2 percent
Fixtures and equipment 10-30 percent

If there is an indication that there has been a significant change in depreciation rate, useful life or residual
value of an asset, the depreciation of that asset is revised prospectively to reflect the new expectations.

Intangible assets
Intangible assets are purchased computer software that is stated at cost less accumulated depreciation and
any accumulated impairment losses. It is amortized over its estimated life of five years using the straight-
line method. If there is an indication that there has been a significant change in amortization rate, useful
life or residual value of an intangible asset, the amortization is revised prospectively to reflect the new
expectations.

Impairment of assets
At each reporting date, property, plant and equipment, intangible assets and investments in associates are
reviewed to determine whether there is any indication that those assets have suffered an impairment loss.
If there is an indication of possible impairment, the recoverable amount of any affected asset (or group of
related assets) is estimated and compared with its carrying amount. If estimated recoverable amount is
lower, the carrying amount is reduced to its estimated recoverable amount and an impairment loss is

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recognized immediately in profit or loss.

Similarly, at each reporting date, inventories are assessed for impairment by comparing the carrying
amount of each item of inventory (or group of similar items) with its selling price less costs to complete and
sell. If an item of inventory (or group of similar items) is impaired, its carrying amount is reduced to selling
price less costs to complete and sell, and an impairment loss is recognized immediately in profit or loss.

If an impairment loss subsequently reverses, the carrying amount of the asset (or group of related assets) is
increased to the revised estimate of its recoverable amount (selling price less costs to complete and sell, in
the case of inventories), but not in excess of the amount that would have been determined had no
impairment loss been recognized for the asset (group of related assets) in prior years. A reversal of an
impairment loss is recognized immediately in profit or loss.

Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks
and rewards of ownership of the leased asset to the Plc. All other leases are classified as operating leases.
Rights to assets held under finance leases are recognized as assets of the Plc at the fair value of the leased
property (or, if lower, the present value of minimum lease payments) at the inception of the lease. The
corresponding liability to the lessor is included in the statement of financial position as a finance lease
obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation
so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are
deducted in measuring profit or loss. Assets held under finance leases are included in property, plant and
equipment, and depreciated and assessed for impairment losses in the same way as owned assets.
Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term
of the relevant lease.

Inventories
Inventories are stated at the lower of cost and selling price less costs to complete and sell. Cost is
calculated using the first-in, first-out (FIFO) method.

Trade and other receivables

Most sales are made on the basis of normal credit terms and the receivables do not bear interest. Where
credit is extended beyond normal credit terms, receivables are measured at amortized cost using the
effective interest method. At the end of each reporting period, the carrying amounts of trade and other
receivables are reviewed to determine whether there is any objective evidence that the amounts are not
recoverable. If so, an impairment loss is recognized immediately in profit or loss.

Trade payables
Trade payables are obligations on the basis of normal credit terms and do not bear interest. Trade payables
denominated in a foreign currency are translated into Birr using the exchange rate at the reporting date.
Foreign exchange gains or losses are included in other income or other expenses.
Bank loans and overdrafts
Interest expense is recognized on the basis of the effective interest method and is included in finance
costs.

Employee benefits―long-service payment

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The liability for employee benefit obligations relates to government-mandated long-service payments. All
full-time staff, excluding directors, are covered by the programme. A payment is made of 5 per cent of
salary (as determined for the twelve months before the payment) at the end of each of five years of
employment. The payment is made as part of the June payroll in the fifth year. The Plc does not fund this
obligation in advance.
The Plc’s cost and obligation to make long-service payments to employees are recognized during the
employees’ periods of service. The cost and obligation are measured using the projected unit credit
method, assuming a 4 per cent average annual salary increase, with employee turnover based on the Plc's
recent experience, discounted using the current market yield for high quality corporate bonds.

Provision for warranty obligations

All goods sold by the Plc are warranted to be free of manufacturing defects for a period of one year. Goods
are repaired or replaced at the Plc’s option. When revenue is recognized, a provision is made for the
estimated cost of the warranty obligation.

3. Key sources of estimation uncertainty

Long-service payments
In determining the liability for long-service payments (explained in note 19), management must make an
estimate of salary increases over the following five years, the discount rate for the next five years to use in
the present value calculation, and the number of employees expected to leave before they receive the
benefits.

4. Restriction on payment of dividend

Under the terms of the bank loan and bank overdraft agreements, dividends cannot be paid to the extent
that they would reduce the balance of retained earnings below the sum of the outstanding balance of the
bank loan and the bank overdraft.

5. Revenue
2011 2010

Sales of goods 6,743,545.00 5,688,653.00

Royalties - licensing of candle - making patents 120,000.00 120,000.00

6,863,545.00 5,808,653.00
6. Other income
Other income includes dividends received from an associate of Birr 25,000.00 in both 2010 and 2011 and gain on
disposal of property, plant and equipment of Birr 63,850.00 in 2011

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 7. Finance cost
2011 2010

Interest on bank loan and overdraft (21,250.00) (30,135.00)

Interest on finance leases (5,116.00) (6,577.00)

(26,366.00) (36,712.00)
8. Profit before tax
The following items have been recognized as expenses (income) in determining profit before tax:
2011 2010

Cost of inventories recognized as expense 5,178,530.00 4,422,575.00

Research and development cost (included in other expenses ) 31,620.00 22,778.00

Foreign exchange loss on trade payables (included in other
expenses) 100.00

Warranty expense (include in cost of goods sold* 5,260.00 7,340.00

*if the entity classifies its expenses by nature in its income statement, this would say 'included in raw materials
and consumables used'
9. Income tax expense
2011 2010

Current tax 203,814.80 142,621.20

Deferred tax (1,127.00) (452.10)

202,687.80 142,169.10
Income tax is calculated at 30 per cent of the estimated assessable profit for the year.

Income tax expense for the year Birr 270,250 in 2011 (Birr 189,559 in 2010) differs from the amount that would
result from applying the tax rate of 30 per cent to profit before tax because, under the tax laws of Ethiopia, some
employee compensation expenses (Birr 20,670 in 2011 and Birr 16,750 in 2010) that are recognized in measuring
profit before tax are not tax-deductible.

10. Trade and other receivables

2011 2010

Trade debtors 528,788.00 528,384.00

Prepayments 56,760.00 45,478.00

585,548.00 573,862.00

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 11. Inventories
2011 2010

Raw materials 42,601.00 36,450.00

Work in process 1,140.00 900.00

Finished goods 13,640.00 10,570.00

57,381.00 47,920.00
12. Investment in associate
The company has 35 percent of an associate called XYZ.
2011 2010

Cost of investment in associate 107,500.00 107,500.00

Dividend received from associate (included in other
income) 25,000.00 25,000.00
13. Property, Plant and Equipment

Land and Fixtures and

buildings equipment Total
July
8/2010 Balance 1,960,000.00 1,102,045.00 3,062,045.00

Addition during the year 485,000.00 485,000.00

Disposals 241,000.00 241,000.00

July
7/2011 Balance 1,960,000.00 1,346,045.00 3,306,045.00
Accumulated depreciation and impairment
July
8/2010 Balance 390,000.00 270,590.00 660,590.00

Annual Depreciation 30,000.00 240,360.00 270,360.00

Impairment 30,000.00 30,000.00

Less: accumulated depreciation on assets disposed of 204,850.00 204,850.00

July
7/2011 Balance 420,000.00 336,100.00 756,100.00
Carrying amount
July
7/2011 Balance 1,540,000.00 1,009,945.00 2,549,945.00

During 2011 the Plc noticed a significant decline in the efficiency of a major piece of equipment and so carried out
a review of its recoverable amount. The review led to the recognition of an impairment loss of Birr 30,000.

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 The carrying amount of the Plc’s fixtures and equipment includes an amount of Birr 40,000 (2010: Birr 60,000) in
respect of assets held under finance leases.

On 10 June 2011 the directors resolved to dispose of a machine. The machine’s carrying amount of Birr 1,472 is
included in fixtures and equipment at 8 July 2011, and trade payable includes the Plc's remaining obligation of Birr
1,550 on the acquisition of this machine. Because the proceeds on disposal are expected to exceed the net
carrying amount of the asset and related liability, no impairment loss has been recognized.

14. Intangible assets

Software: Amount

July 8/2010 Balance 8,500.00

Addition -

Disposals -

July 7/2011 Balance 8,500.00

Accumulated depreciation and impairment

July 8/2010 Balance 5,950.00

Annual amortization (included in administrative expense)* 1,700.00

July 7/2011 Balance 7,650.00

Carrying amount

July 7/2011 Balance 850.00

*If the entity classifies its expenses by nature in its income statement, this would say 'included in depreciation
and amortization expense’.
15. Deferred tax

Differences between amounts recognized in the income statement and amounts reported to tax authorities in
connection with investments in the subsidiary and associate are insignificant.
The deferred tax assets are the tax effects of expected future income tax benefits relating to:

(a) The long-service benefit (note 19), which will not be tax-deductible until the benefit is actually paid but
has already been recognized as an expense in measuring the Plc's profit for the year.

(b) the foreign exchange loss on trade payables, which will not be tax-deductible until the payables are
settled but has already been recognized as an expense in measuring the Plc's profit for the year.

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 Management considers it probable that taxable profits will be available against which the future income tax
deductions can be utilized.
The following are the deferred tax liabilities (assets) recognized by the plc:
Foreign Long -
exchange service
Software loss benefit Total

(2,155.0
July 8/2009 Balance 1,700.00 (3,855.00) 0)
Change (credit) to profit or loss
for the year (510.00) 57.90 (452.10)

(2,607.1
July 8/2010 Balance 1,190.00 - (3,797.10) 0)

Change (credit) to profit or loss (1,127.0

for the year (510.00) (300.00) (317.00) 0)

(3,734.1
July 7/2011 Balance 680.00 (300.00) (4,114.10) 0)

The deferred tax assets for the foreign exchange loss and the long-service benefits and the deferred tax liability
for software relate to income tax in the same jurisdiction, and the law allows net settlement. Therefore, they
have been offset in the statement of financial position as follows:

2011 2010

Deferred tax liability 680.00 1,190.00

Deferred tax asset (4,414.10) (3,797.10)

Balance (3,734.10) (2,607.10)

16. Bank overdraft and loan
2011 2010

Bank overdraft 83,600.00 115,507.00

Bank loan -fully repayable in 2014, prepayable
without penalty 50,000.00 150,000.00

133,600.00 265,507.00

The bank overdraft and loan are secured by a floating lien over land and buildings owned by the plc with a
carrying amount of Birr 266,000 at July 7/2011(Birr 412,000 at July 8/2010).

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 17. Trade payables
Trade payables at July 7/2011 include Birr 42,600 denominated in foreign currencies (nil at July 7/2010).

18. Provision for warranty obligations

Changes in the provision for warranty obligations during 2011 were:
2011

July 8/2010 Balance 5,040.00

Additional Accrual during the year 5,260.00

Cost of warranty repairs and replacement during the year (6,100.00)

July 7/2011 Balance 4,200.00

The obligation is classified as a current liability because the warranty is limited to twelve months.

19. Employee benefit obligation―long-service payments

The Plc's employee benefit obligation for long-service payments under a government-mandated plan is
based on a comprehensive actuarial valuation as of 7 July 2011 and is as follows:
2011

Obligation at 8/July 2010 9,830.00

Additional accrual during the year 7,033.00

Benefit payments made in year (6,240.00)

Obligation at 7/July 2011 10,623.00

The obligation is classified as:
2011 2010

Current liability 4,944.00 4,754.00

Non-current liability 5,679.00 5,076.00

Total 10,623.00 9,830.00

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 20. Obligations under finance leases
The Plc holds one piece of specialized machinery with an estimated useful life of five years under a five-
year finance lease. The future minimum lease payments are as follows:

2011 2010

Within one year 25,000.00 25,000.00

Later than one year but within five years 25,000.00 50,000.00

Later than five years - -

50,000.00 75,000.00
The obligation is classified as:
2011 2010

Current liability 21,461.00 19,884.00

Non-current liability 23,163.00 44,624.00

44,624.00 64,508.00
21. Commitments under operating leases
The Plc rents several sales offices under operating leases. The leases are for an average period of three
years, with fixed rentals over the same period.
2011 2010
Minimum lease payments under operating leases recognized as
an expense during the year 26,100.00 26,100.00
At year-end, the Plc has outstanding commitments under non-cancellable operating leases that fall due as
follows:
2011 2010

Within one year 13,050.00 26,100.00

Later than one year but within five years - 13,050.00

Later than five years - -

13,050.00 39,150.00
22. Share capital
Balances as at July 7/2011 and 2010 of Birr 30,000 comprise 30 ordinary shares with par value Birr 1,000
fully paid, issued and outstanding.

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 23. Cash and cash equivalents
2011 2010

Cash on hand 82,394.80 28,075.00

Overdrafts (83,600.00) (115,507.00)

Total (1,205.20) (87,432.00)

24. Contingent liabilities
During 2011 a customer initiated proceedings against ABC plc for a fire caused by a faulty candle. The
customer asserts that its total losses are Birr 50,000 and has initiated litigation claiming this amount.

The Plc’s legal counsel does not consider that the claim has merit, and the Company intends to contest it.
No provision has been recognized in these financial statements as the Plc’s management does not consider
it probable that a loss will arise.
25. Events after the end of the reporting period

On 25 August 2011 there was a flood in one of the candle storage rooms. The cost of refurbishment is
expected to be Birr 36,000. The reimbursements from insurance are estimated to be Birr 16,000.

On 14 September 2011 the directors voted to declare a dividend of Birr 1.00 per share (Birr 30,000 total)
payable on 15 November 2011 to registered shareholders on 31 November 2011. Because the obligation
arose in 2011, a liability is not shown in the statement of financial position at 7 July 2011.
26. Approval of financial statements
These financial statements were approved by the board of directors and authorized for issue on October
30, 2011

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