Chapter 3 - Statement of Financial 4.

Statement of cash flows (for the

Position and the Notes to the Financial period)
Statements 5. Notes - summary of significant
accounting policies and explanations
Financial Statements 6. Statement of Financial position at
- Company’s FS can be used as the beginning of preceding period
analytical tool when entity applies accounting
- Management’s report card policy retrospectively or restatement
- Basis for prediction Note: IAS 1 requires to include Statement
- Measurement of accountability of Financial position at the beginning of
- Provides economic history that is preceding period when the entity restates
comprehensive and quantitative its comparative. Restatement is necessary
- FS are a structured representation of under the ff:
the financial position and a. Retrospective application of
transactions of enterprise. accounting policy
- Objective: to provide information to b. Restatement of financial statements
users that are useful for economic because of prior period errors
decisions c. Reclassification of an element
- FS also shows the management Objective: to achieve comparability
stewardship Accounting Policies
- FS provide information about entity’s - FS largely affected by accounting
assets, liabilities, equity, income, policies adopted by management.
expenses,gains, losses, - IAS 8 Accounting policies, Changes
contributions, distributions, in Accounting policies, and Errors -
cashflows defined accounting policies as
- Overall, FS are the responsibility of specific principles, bases,
the management thus, presentation, conventions, rules and practices
information, and fairness depends - When a specific standard is required
on their assessment to a transaction, accounting policy is
IAS 1 Presentation of Financial Statements applied is determined by IAS Board
- Serves as the basis for presentation for the Standard or Interpretation
of FS - In the absence of
- Objective: to ensure comparability of standard/interpretation,
FS to other entity’s FS (intra management shall use judgement in
comparability) and FS with the same developing accounting policy that is:
entity’s FS (intercomparability). - Relevant to economic
Components of Financial Statements decisions
1. Statement of financial position (at - Reliable- faithful presentation
end of period) - In applying its judgement
2. Statement of Comprehensive management shall consider:
income (for the period) - Requirements and guidance
3. Statement of changes in equity (for in Standards
the period) - Definition, recognition criteria
and measurement
General Features 4. Materiality
1. Fair presentation and Compliance - Each material item should be
with IFRS presented in FS separately
- FS shall present fairly the financial - Immaterial amounts should be
position, performance, and cash aggregated as one line item in face
flows of FS while the details of it are
- Fair presentation means u complied presented in notes
to all applicable requirements of - Item is material if non-disclosure can
IFRS, present information that meets affect the decisions of users
qualitative characteristics, providing - Materiality depends on size and
additional disclosure nature. It is considered a threshold
PFRS Comprise of: - Immaterial items does not need to
- PFRS be disclosed
- PAS 5. Offsetting
- IFRIC - Offsetting means deducting one item
2. Going concern from another and presenting only the
- FS should be prepared on going face
concern basis unless the entity - E.g Receivables net of allowance for
decides to liquidate or cease trading bad debts
operation - Generally, offsetting is not allowed
- If FS are not prepared in going unless required that’s why deferred
concern, it shall be disclosed in tax assets are offset against
notes: deferred tax liabilities
- The fact that it was not 6. Frequency of Reporting
prepared in going concern - FS should prepared at least annually
- The basis of preparation - If prepared longer or shorter than
- The reason why not one year, it should be disclosed
considered going concern - Reporting annually does not prevent
3. Accrual Basis interim FS
- Entity should prepare FS in accrual 7. Comparative Information
basis - Should be disclosed in respect with
- In accrual basis, transactions are preceding period
recognized when they occur not - E.g when presenting FS of 2017,
when cash is affected comparative information of 2016
- Expenses are recognize on basis of shall also be presented
direct association/direct matching or 8. Consistency or presentation
systematic and rational allocation - Presentation of FS shall be the from
- Accrual basis also applies revenue period to period unless:
recognition principle which says that - It is apparent that significant
revenue is recognized at the point of change will benefit users
delivery of goods and services, - IFRS requires a change
provided that inflow of economic - When entity reclassifies:
benefit is probable and can be - The reason
measured. - The nature
 - The amount 2. Trade & Other Receivables
Identification of Financial Statements 3. Inventories
- FS shall be identified clearly 4. Biological Assets
- It shall contain: 5. Investments (Equity method)
- Name of the entity 6. Financial Assets
- If FS covers individual or 7. Intangible assets
group or entities 8. Investment property
- Financial position date or 9. Plant, property, equipment
period covered LIABILITIES & EQUITY
- Currency 1. Trade & other payables
- Level of rounding 2. Provisions
Statement of Financial Position 3. Financial liabilities
- Conventionally called Balance sheet 4. Liabilities and assets for current tax
- This FS reports the financial position 5. Deferred tax liabilities
of entity for a particular period 6. Liabilities included in disposal
- It is a summary of entity’s assets, 7. Non-controlling interest
liabilities, and equity 8. Issued capital
- Detailed basic accounting equation The following should be considered when
A= L + OE adding or not a line item:
- This statement is useful to various - Nature and liquidity
users for assessing economic - Function of assets
resources, its financial structure, - Amounts, nature and timing of
liquidity, solvency and capacity to liabilities
adapt Reporting Classifications
Elements of Financial Position - Entity shall present current and non-
1. Assets current assets, and current and non-
- Define by IASB and FRSC as, current liabilities separately on the
economic resources controlled by SFP
entity as a result of past events and - Except when based on liquidity
with future economic benefits information is reliable and relevant
2. Liabilities - IAS 1 requires assets to be
- Present obligation of entity arising presented in current and non-current
from past events, and settlement is - Asset shall only be presented based
expected to result in outflow from on liquidity if it’s more relevant to
resources users
3. Equity Current Assets
- Residual interest in the assets of - Asset is current if:
enterprise after deducting the - If it expects to be realize,
liabilities consume, or sell in normal
- Also called net assets operating cycle
Information to be presented in the Face of - Holds asset for purpose of
Statement of Financial Position trading
ASSETS - Expects asset to be realize
1. Cash and Cash Equivalent within 12 months
 - It is cash and cash securities of another
equivalent, unless restricted enterprise
from being used - Deferred tax assets- amount
- Entity’s normal operating cycle is tax recoverable and offset
usually from the acquisition of assets against deferred tax liabilities
to the realization of cash - Receivables not due
- Normal operating cycle For currently- long term
manufacturing: purchase materials, receivables
manufacture goods, sold, and - Other Non-current financial
collection from customer assets- any asset that is
- Merchandise: purchase of goods, cash, has contractual right to
sold, collection receive and exchange and
- Service: providing services and equity instrument of another
collection from customers entity that are not realizable
- Trade receivables and inventories within 12 months
are current assets, even if they are - Intangible assets- identifiable
not expected to be realized in cash non-monetary assets that
within 12 months provide rights and privileges
- Installment trade receivables are like copyrights, franchise,
current assets however, portion that patents, trademarks
can’t be realized within 12 months - Note: Goodwill excess of purchase
shall be disclosed price paid by acquiring company and
- FVPL are current assets because presented separately from
they are intended to meet working intangibles
capital requirements - Biological assets- living
- Non-trade receivables that are animals, and plants
realized within 12 months Current Liabilities
Non-current Assets - Liability if:
- Non-current assets: - Settled within normal
- Property, plant, equipment- operating cycle
tangible assets that have a - Held for the purpose of
useful life more than 1 year, trading
use for rental, for production, - Due and settled within 12
for administration. Land, months
building, machines, - Entity does not have
furnitures, equipment, tools, unconditional rights to defer
returnable containers - Obligations related to central
- Investment Property - revenue producing activities are
property like land or building current liabilities- trade payables and
held for lease to earn rental accruals and operating costs
or capital appreciation or sale - Other payables that are not due
in ordinary course within 12 months but primarily held
- Investment in Associates- for trading- bank overdrafts,
investment in equity
 dividends payable, current portion of - It should be classified as current
long-term payable asset only when they meet criteria
- Obligations that are due within 12 required by IFRS 5
months are current liabilities as long - Liabilities shall be presented
as at the end of the period there is separately as well and should not be
no discretion to refinance offset to Assets held for sale
- It will only be Non-current liability if Equity
refinance happen on or before end - Term that broadly encompasses the
of reporting period capital of entity
- When entity violates debt covenant, - In corporation the equity/net assets
liability will be demandable thus, is known as the shareholders equity
current liability - Shareholder’s equity is composed
- However, agreement not to of: Share capital, share premium, or
refinance happen on or before additional paid in capital,
reporting period it will remain non- accumulated profits/retained
current earnings and cumulative other
- Obligations that are current and comprehensive income
were refinanced after the reporting - Entity shall disclose either in
period but before the financial financial position or changes in
statement requires disclosure and equity the:
no need of outflow of resources. - Number of shares authorize
Examples of events: - Number of shares issued
- Refinancing - Par value per share
- Rectification of a breach - Reconciliation of number of
- Receipt from lender a period shares
of grace - Rights, preferences,
Non-current Liabilities restrictions
- All liabilities not reported in current - Shares held by entity or by
are classified as non-current subsidiaries
liabilities - Shares reserved for issue
- Bonds payable, mortgage loans, under options and contracts
long-term notes payable, non- Format of the Statement of Financial
current portion of long term payable, Position
long term loan from affiliated - IAS 1 does not prescribe uniform
companies, officers, shareholders, format in presentation of financial
deferred tax liability position
Non-current Assets Held for Sale and - Why? Due to different measurement
Liabilities related to these assets and classification or nature and size
- Non-current assets that are of items
classified as “HELD FOR SALE” - E.g PPE measured in cost model is
under IFRS 5 shall be presented separate from PPE measured in
separate in financial position revaluation model
- In judging whether to separate a
item it shall be based to:
 - Nature and liquidity - Determination of cost of
- Function of assets assets after reporting period
- Amount, nature , timing of (gains or loss on sale)
liabilities - Determination of profit-
1. Report Form- assets, liabilities, sharing or bonus payments
equity shown vertically after reporting period
2. Account Form- shown in T-account (expense & liability)
3. Financial Position Form- this format - Discovery of errors and
emphasizes working capital position frauds (corrections)
(CURRENT ASSETS-CURRENT Non-Adjusting Events
LIABILITIES = WORKING CAPITAL) - Events after reporting period
Events after Reporting Period - If immaterial and do not influence
- Events after reporting period need decisions of users, can be ignored
assessment by management - If material and influences users,
because it affect the amounts or should be disclosed to notes of
element of the items in face of financial statements
financial statements - Examples:
- These events are favorable and - Combination or disposing of
unfavorable, that occur between end subsidiaries
of reporting period and issuance of - Announcing discontinue op
financial statements - Destruction of assets due to
- Issuance date of financial fire
statements is the date approved to - Restructuring
issue FS - Change in tax rates
Types of Events Notes to the Financial Statements
1. Adjusting events- events that existed - Since not all company’s activities
at end of the period can be disclosed on the face of FS,
2. Non-adjusting events- events that additional disclosure is added on
occur after reporting period notes
Adjusting Events - These notes shall:
- Requires entity to adjust amounts to - Present information about
the financial statements in order to basis of preparation and
reclassify information, and recognize accounting policies
elements that were not recognized - Disclosed information
- Examples: required by IFRS
- Settlement after reporting - Provide additional
period of a court case (add Information not present on
liability) the face of FS
- Receipt of information after - Notes should be arranged in a
reporting period (e.g logical sequence with note number
bankruptcy- recognition of so that it can be CROSSED-
impairment loss) REFERENCE with other entities
- Notes are presented on the following
order:
 - Statement of compliance with Components of Comprehensive Income
IFRS a. Profit or loss- measured between
- Summary of significant income less expenses recorded in
accounting policies applied conventional income statement
- Supporting information for b. Other comprehensive income-
items presented on face consist mainly of gains or losses that
- Other disclosures are expected to be reversed over
Limitations of Statement of Financial time
Position Approaches to Measurement of Profit
- Despite usefulness it also has 1. Capital Maintenance approach-
weaknesses measures profit or net income as
- The real worth of business does not excess of ending capital after
reflect in this statement due to excluding effects of transactions with
different measurement bases owners. There are Two concepts:
- Measurement problems a. Financial Capital
Maintenance- profit is earned
Chapter 4 - The Statement of when net assets at end of
Comprehensive Income and Statement period exceeds net assets at
of Changes in Equity the beginning of period
Introduction (2017>2016) after excluding
- Information about entity’s distributions and
performance helps users predict contributions (net
future profitability and cash- assets=assets-liabilities)
generating ability - Economist view of
Statement of Comprehensive Income determining profit
- Income statement is widely used by b. Physical Capital
various users Maintenance- requires
- Creditors use income statement for adoption of cost basis
checking the ability of entity to measurement
generate cash - Profit is earned when
- Investors use income statement to physical productive
check past income and predict future capacity at end of
earnings period exceeds the
- Management use income statement beginning period after
to measure effectiveness of entity’s excluding
resources distributions and
- This statement is important because contributions
it shows profit or loss which - Note: Dividends declared are added back
indicates performance of entity and additional capital investments are
- Comprehensive income is a change deducted to capital or net assets to
in equity other than those with eliminate the changes in capital
owners 2. Transaction Approach- measured as
- Excludes contribution from owners difference between total income and
and distribution to owners total expenses
 - This approach use accrual - There is probably inflow of
basis to measure economic benefit
performance of activities - Inflow can be reliably
- This approach is used in measured
measuring income in - Revenue is recognized in accrual basis, at
accounting today the point of delivery of goods or services
- Corporation’s profit= income- rather than they affect cash
expenses Revenue Recognition under IFRS 15
- This approach help users - Talks about Revenue from contracts
better assess the future with customers
performance of entity and - IFRS 15 uses a five-step process
ability to generate cash flows revenue recognition framework:
Elements of Performance - Identifying a contract with
1. Income- increase in economic customer
benefit through inflow, enhancement - Identifying performance
of assets, decrease of liabilities. obligation in contract
Thus, Increase in equity - Determining transaction price
a. Revenue- arise from central - Allocating transaction price to
revenue producing activities performance obligations
b. Gains- incidental to - Recognizing revenue when
operations of the entity or as entity satisfies a
- Revenues are generated from: performance obligation
- Selling of products - Contract with customer shall be
- Rendering of services within scope of IFRS 15 if met:
(interest, fees, royalties, rent) - Contract has been approved
- Disposing of resources (sale by parties
of PPE) - Each party’s right to be
2. Expenses- decrease in economic transferred are identifiable
benefits through outflows, depletion - Payment terms can be
of assets, incurrence of liabilities. identified
Thus, decrease in equity. - Contract has commercial
a. Expenses- result from central substance
revenue producing activities - It is probable that
b. Losses- results from consideration to which entity
incidental transactions is entitled in exchange will be
- Expenses are recognized: collected
- Associating cause and effect - Transaction price- amount expected
- Systematic and rational in exchange for goods and services
allocation Special Revenue Recognition Principles
- Immediate recognition - End of production method also
Revenue Recognition Principles recognizes revenue before actual
- Revenue and gains are recognized sales of goods.
when:
 - Usually for metals and farm products other comprehensive income
that are immediately sold at assured like:
price - Changes in
Two methods are used when collectibility of Revaluation surplus
sales price is not reasonably assured: - Gains or losses
1. Installment method- recognizes - Unrealized gains or
revenue in direct proportion to losses
collections (GP realized= collections - Effective portion of
x GP rate based on sales) gains or losses
2. Cost recovery method- most prudent - Actuarial gains or
recognition, when collection is losses
extremely uncertain - Note: effects in changes in
- Both methods are used for accounting estimates shall
significant amounts of sales price be included in profit or loss
and not in accordance with IFRS because they affect income
and shall not be applied in financial and expense
reporting but accepted in tax - However, corrections of prior
purposes period error represents
Concept of Comprehensive Income adjustments of profit or loses
- Revised IAS 1 broadens information that’s why reported in
in conventional income statement changes in equity
because it only shows profit for the IAS 8 Accounting policies, changes in
period accounting estimates and errors prohibits
- Now it is expanded as inclusion of cumulative effect change in
Comprehensive Income that accounting policy in comprehensive income
includes revenue, gains, expenses - Profit or loss plus other
and losses comprehensive income =
- The following do not result in total comprehensive income
comprehensive income: IAS 1 permits choice of presentation of
- Contributions from owners Comprehensive income:
(investments, sale of capital, a. Single statement
equity instruments) b. Two statement format
- Distribution to owners Information to be presented on Face of the
(drawings, dividends, Statement of Comprehensive Income
treasury shares) 1. Revenue
- Comprehensive income is classified 2. Gains or losses
into: 3. Finance cost
- Profit or loss -total income 4. Share in profit or loss
less total expense 5. Financial asset that is reclassified -
- Other comprehensive any gains or loss from carrying
income- items that meet amount and fair value
definition of income and 6. Tax expense
expense but are excluded in 7. Single amount comprising post-tax
profit or loss is included in profit or loss and post-tax gain
 8. Profit or loss - Expenses are classified according to
9. Each component of other function
comprehensive income - Cost of sales
10. Share of other comprehensive - Distribution or selling
income of associates/joint venture expenses
11. Total comprehensive income - General or administrative
For consolidated financial statements, entity expenses
shall disclose: - Other expenses
a. Profit or loss attributable to - This method is more relevant to
i. Non-controlling interest users but allocation of costs
ii. Owners of parent requires judgement
b. Total comprehensive income att to: - COGS is often most significant item
i. Non-controlling interest deducted to revenue
ii. Owners of parent Trading using periodic inventory system:

Presentation of Expense
IAS 1 requires entity to present analysis of
expense in profit or loss section using
classification based on either:
- Nature of expense Manufacturing:
- Function of expense
IAS 1 encourages entity to present analysis
on face of SCI either single or two format
Discontinued Operations
Finance Cost - To better evaluate the current
- Should be presented as a separate financial performance of an entity
line item in profit or loss and predict future performance
- This includes expenditures relating discontinued operations shall be
to borrowings like interests presented separately.
Nature of Expense Method - IFRS 5 Non-current assets held for
- Present expense based on nature sale and discontinued operations -
- Shows expenses as purchases, prescribes separate presentation of
salaries, depreciation, utilities and discontinued operation
other operating expenses What is a discontinued operation?
- No need to reallocate expenses - is a component of an entity that has
based on function been disposed or held for sale and:
- Using this method, Comprehensive - Represents a separate major
income does not show COGS as line line of business
item - Is part of a single
- Increase in inventory is shown as coordinated plan to dispose
deduction to net purchases while - Is a subsidiary acquired
decrease is shown as addition to net exclusively
Nature of Function Method
- Also known as cost of sales method
 - It may be a segment, a - After tax loss due to
reporting unit, subsidiary or measurement
asset group Statement of Changes in Equity
Based on IFRS 5, component is classified - Shows events and transaction that
as discontinued operations if entity disposed that affect equity
component or held it for sale - Shows also transaction affecting
- It is held for sale if it meets the ff: various SHE accounts
- Carrying amount will be - Statement of Changes in Equity
recovered principally thru shall present:
sale transaction rather - Total Comprehensive Income
continuing use for the period
- Assets must be available for - For each component of
immediate sale equity, the effect of any
Recognition and measurement retrospective application
- Entity should apply principles of - For each component, a
recognition and measurement that reconciliation of carrying
are set by IAS 36 (Impairment of amount
assets) and IAS 37 (Provisions, - Any amounts of dividends
contingent Liabilities and contingent recognized shall be disclosed
assets) for deciding how to either on SCE or notes
recognize changes in asset, Changes in Accounting Policy
liabilities, income, expenses and - Accounting policies are principles,
cash flow related to discontinued bases, conventions, rules and
operations practices in preparing financial
- Expenses like termination cost and statements
disposal cost are reported under - Same accounting policies are used
discontinued operations from period to period for
- As well as impairment loss before comparability purposes
actual sale - An entity shall change accounting
Presentation of Discontinued Operations in policy only if:
Statement of Comprehensive Income - Required by IFRS
- In presenting, entity should disclose: (involuntary change)
- Post-tax profit or loss - If it is more relevant and
- Post-tax gain or loss reliable (voluntary change)
- if unit has been disposed, Accounting Treatment for Changes in
discontinued operation shall consist Accounting Policies
of: a. Involuntary Change in Accounting
- after tax profit or loss policy
- After tax gain or loss - If the new accounting standard
- if unit has not been disposed, provides transitional provision, entity
discontinued operation shall consist must follow transitional
of: - If new standard does not provide
- After tax profit or loss transitional provision, change shall
be treated retrospectively
 - Retrospective application means presented, restating of
restating comparative figures, the opening balances of ALOE
cumulative effect of such change - Potential current period errors before
shall be considered adjustment to issuance of FS are immediately corrected
beginning balance or retained - Example: error was made in 2016 and
earnings error was discovered 2017 when FS for
- Entity shall disclose: title of IFRS, 2016 has been issued, therefore FS for
change in policy, nature of change, 2016 shall be restated in presentation of
etc 2017 FS. The same if error was committed
b. Voluntary change in accounting on 2015, only 2016 (earliest) is restated
policy - Other than restatement, entity shall
- It shall apply change retrospectively, disclose:
adjusting each component’s opening - nature of prior period error
balance - amount correction for line item
- In here, entity shall disclose: nature affected
of change in policy, reasons why - amount of correction at beginning
applying new policy, current and of earliest prior period
prior period presented, etc Changes in Accounting Policies
Note: In all instances that require - Since there are number of
restatement of prior periods, entity shall uncertainties inherent in economic
present three set of SFP, end of current activities, some FS cannot be
period, end of previous period, and measured precisely but rather than
beginning of earliest prior period presented approximation
Errors - Example are: bad debts,
- Prior period errors are omissions depreciation, provision for
from and misstatements in entity’s warranties, impairment losses and
financial statements for one or more fair value of financial assets and
prior periods liabilities
- These errors are due to: - Estimates make financial statement
mathematical mistakes, accounting complete and reliable
policies mistakes, oversight - Effect of change in accounting policy
- Financial statement are not reliable shall be recognized prospectively by
and not complying with IFRS if they including it to profit or loss in:
contain material errors or immaterial - Period change (if it affects
errors period only)
Accounting Treatment - Period of tha change and
- Entity shall correct material error future periods (if it affects
retrospectively in first set of financial both)
statements to be issued after - For example: during this period new
discovering through: customer has a outstanding balance
- Restating the comparative which would probably affect AFDB,
amounts for prior periods thus it should be adjusted
- If the error occurred before - Depreciation is an example because
earliest prior period carrying amount is adjusted yearly