Chapter 2

The Presentation of
Financial Statement (IAS 1) 1
Chapter’s objectives

• Explain the structure and content of financial statement.

• Explain the structure of financial position statement,
comprehensive incomes statement, statement of changes in
equity, statement of cash flows and notes of financial statement
in according to IAS 1.

2
• Topic 2.1: Structure and content of financial
statement
• Topic 2.2: Financial position statement,
comprehensive incomes statement,
statement of changes in equity, statement of
cash flows and notes of financial statement
in according to IAS 1.
3
 Topic 2.1
Structure and content of
financial statement
4
 3. IAS 1 Presentation of financial statements
Introduction
o IAS 1 Presentation of Financial Statements is important as it deals with
the structure and content of the financial statements.
o There are prescribed formats that are recommended (although not
compulsory).
o IAS 1 Presentation of Financial Statements states that a set of financial
statements comprises:
• A statement of financial position (SOFP)
• A statement of profit or loss and other comprehensive income (SOPL&OCI  SOCI)
(separated or combined)
• A statement of changes in equity (SOCE)
• A statement of cash flow (SOCF)
• Accounting policies and explanatory notes.
3. IAS 1 Presentation of financial statements

Objective of IAS 1 Presentation of Financial Statements

o The stated purpose of IAS 1 Presentation of Financial Statements is to ensure
comparability through prescribing the basis for presentation of general-purpose
financial statements.
o The objective of financial statements is to provide a summary of the accounting
transactions for a period.
3. IAS 1 Presentation of financial statements

Fair presentation
IAS 1 Presentation of Financial Statements requires that the financial statements should
present fairly the:
o financial position
o financial performance
o cash flows of the entity.
Fair presentation requires the faithful representation of the effects of transactions in
accordance with the requirements of the Conceptual Framework.
Application of IFRS Standards is presumed to achieve such fair presentation.
3. IAS 1 Presentation of financial statements

Departures from International Accounting Standards

o IAS 1 Presentation of Financial Statements states that:
• An entity whose financial statements comply with International Accounting
Standards should disclose that fact.
• In extremely rare circumstances management may conclude that
compliance with International Accounting Standards may be misleading
therefore a departure from a requirement is necessary to achieve a fair
presentation.
• Such a departure requires disclosure in the accounts with an explanation
of the circumstances together with an estimation of the financial impact.
3. IAS 1 Presentation of financial statements

Comparative information
o IAS 1 Presentation of Financial Statements requires that:
• The financial statements include comparative information
(previous period figures) for all amounts – this includes
narrative and descriptive information where relevant.
• Where the presentation or classification of items in the
financial statements is amended the comparative amounts
should be reclassified where practical.
• This comparative information ensures that the users of the
financial statements are able to compare the position and
performance of a company year on year.
4. Accounting concepts and conventions

Accruals concept
o The accruals (or matching) concept requires that transactions and
events are recognised when they occur, not when cash is received
or paid for them.
o This means that the costs incurred in generating income are
matched against the revenues they have generated.
IAS 1

• Accrual basis of accounting

✓Entity shall prepare its financial statements, except for cash
flow information, using the accrual basis of accounting

11
4. Accounting concepts and conventions

Going concern concept

o The going concern concept requires that:
• the entity is viewed as continuing its operations for the
foreseeable future (at least 12 months)
• an assumption is made that there is no intention or necessity
to liquidate or curtail materially its operations.
 IAS 1
• Materiality and aggregation
• Entity shall present separately
each material class of similar
items.
• Entity shall present separately
items of a dissimilar nature or
function unless they are
immaterial.
13
IAS 1

• Offsetting
✓Entity shall not offset
assets and liabilities
or income and
expenses, unless
required or permitted
by an IFRS.

14
IAS 1
• Frequency of reporting
✓An entity shall present FS at least
annually.
✓When an entity changes its
reporting period, disclose:
oThe reason for such period, and
oThe fact that amounts presented
in the financial statements are not
entirely comparable. 15
IAS 1
• Comparative information
✓Entity shall present:
oComparative information in respect of the preceding
period
oMinimum:
❑Two statements of financial position,
❑Two statements of profit or loss and other
comprehensive income
❑Two statements of cash flows;
❑Two statements of changes in equity; and
❑Related notes.
16
 IAS 1
• Consistency of presentation
✓An entity shall retain the presentation and
classification of items in the financial
statements unless:
oA significant change in the nature of the
entity’s operations
oAnother presentation or classification
would be more appropriate
oIFRS requires a change in presentation.
17
Structure of financial statement

• Entity shall clearly identify:

✓The financial statements and distinguish them from other
information.
✓The name of the reporting entity and any change in the
name
✓Whether the financial statements are a group of entities or
an individual entity
✓Information about the reporting period
✓The presentation currency
✓The level of rounding used 18
 Topic 2.2
Financial position statement, comprehensive incomes statement,
statement of changes in equity, statement of cash flows and
notes of financial statement in according to IAS 1

19
 Objectives

• Explain the structure of

financial position statement,
comprehensive incomes
statement, statement of
changes in equity, statement of
cash flows and notes of
financial statement in
according to IAS 1

20
Content

Statement of profit or loss and other comprehensive income

Statement of changes in equity

Statement of financial position

Statement of cash flows

Notes of financial statement

21
Statement of profit or loss and other
comprehensive income
Profit or loss
• The total of income less expenses, excluding the components
of other comprehensive income

Other comprehensive income (OCI)

• (IAS1): Incomes & Expenses (include adjustments due to
reclassify) are not allowed to record in Profit or Loss report as
prescribed or allowed by other IFRS.

Total comprehensive income = Profit or loss + OCI

22
Statement of profit or loss and other
comprehensive income
✓Profit and loss section shall present:
➢Revenue
➢Gains and losses from the derecognition of financial assets
➢Finance costs
➢Impairment losses
➢Share of the profit or loss of associates and joint ventures
accounted for using the equity method
➢Certain gains or losses associated with the reclassification of
financial assets
➢Tax expense
➢A single amount for the total of discontinued operations 23
Statement of profit or loss and other comprehensive income

Statement of profit or loss for XYZ Ltd for the year ended 31 December 20XX
$m
Revenue X
Cost of sales (X)
–––
Gross profit X
Other operating income X
Distribution costs (X)
Administrative expenses (X)
–––
Profit from operations X
Finance cost (X)
Investment income X
–––
Profit before tax X
Taxation (X)
–––
Profit for the period from continuing operation X
OCI for the year X
–––
Total comprehensive income for the year X
SOPL

Revenue
o Revenue is income arising from the ordinary activities of an entity.
o Generally for the purposes of this exam, revenue is recognized when the entity has transferred
the promised goods or services to the customer.
o In reality, IFRS 15 Revenue from Contracts with Customers sets out 5 steps for the recognition
of revenue:
5 steps of Revenue recognition (IFRS15)
Identify contract with customer
To understand what has been agreed.

Identify separate performance obligations

Each separate performance obligation (supply of goods or services) should be accounted for separately if it could be sold
separately.

Determine the transaction price

Amount of consideration expected in exchange for goods or services.

Allocate the transaction price to the performance obligations

Allocate in proportion to the stand alone selling price of the goods or services underlying each performance obligation.

Recognise revenue when a performance obligation is satisfied

Revenue recognised when customer obtains control of the promised goods or services. This can occur at a point in time
or over time.
SOPL
Statement of profit or loss expenses
o Note that all expenses are classified under one of three headings:
• Cost of sales
Cost of Sales represents the cost of the goods/service
being sold.
• Distribution costs
These are all expenses relating to selling or delivering
products or services.
• Administrative expenses
This includes all expenses not classified within cost of
sales or distribution costs.
SOPL

Statement of profit or loss expenses

Some expenses such as depreciation and wages and salaries will be split across all three
expense categories.
You will notice a company shows a tax expense on its statement of profit and loss which a
sole trader doesn’t. This is because the company is a separate legal entity to the owners
and will have its own tax liability. A sole trader business is not a separate legal entity to
the owner and thus does not have its own tax liability. The owner is taxed on the profits
the business makes along with other income they have personally.
 SOPL
Cost of sales Distribution costs Administrative expenses

Purchases plus carriage Wages of administrative

Wages etc. of marketing and distribution staff.
inwards adjusted for staff.
opening and closing Sales commission.
Depreciation of non-current
inventory, and any Distribution expenses such as vehicle running costs assets used by non-
substantial losses of and carriage outwards. production and non-
inventory. Depreciation of motor vehicles used for distribution, distribution operations, and
In a manufacturing and marketing costs such as advertising and any loss on disposal of such
company wages of promotion, and any loss on disposal of such assets. assets.
production staff, and Depreciation of other non-current assets used by Amortisation of intangible
maintenance and distribution operations and any loss on disposal of assets.
depreciation expenses of such assets.
production non-current Expense of substantial loss
The cost of advertising and selling activities, since of inventory.
assets, plus losses on
these are a part of distributing goods and services to Irrecoverable debts
their disposal, are also
customers. expense.
included.
Accounting Company financial statements
OCI

✓Other comprehensive income section shall present:

➢Items of other comprehensive income in accordance with other IFRSs.
➢The share of the other comprehensive income (OCI) of associates and joint ventures
accounted for using the equity method.
➢A several of gains and losses which are recorded in SOCI:

❑Gains or losses on revaluation of PPE and other financial

investments
❑Foreign currency adjustments
❑Unrealized gains or losses on available-for-sale securities
❑Unrealized gains or losses on pension and retirement benefit
plans (pension fund) _ not yet applied in Vietnam
Statement of change in equity (SOCE/ SOCIE)

Statement of changes in equity

The Statement of changes in equity shows how the balances
making up equity in the Statement of financial position have
changed over the course of the year. Movements would include:
o Profit in the year
o Dividends paid
o Transfers between reserves
o Share issues
Statement of change in equity (SOCE/ SOCIE)

Statement of changes in equity (SOCIE)

Share Share General Retained Total
capital premium reserve earnings
£000 £000 £000 £000 £000

Balance at 1 Jan X X X X X

Profit/(loss) for the year X/(X) X/(X)

Dividends paid (X) (X)

Transfer to general reserve X (X) Nil

Issue of share capital X X X

–––– –––– –––– –––– ––––

Balance at 31 December X X X/(X) X/(X) X

–––– –––– –––– –––– ––––

Statement of Financial Position (SOFP)
Statement of financial position for XYZ Ltd at 31 December 20XX
£m £m
Assets
Non-current assets
Property, plant and equipment X
Goodwill X
Investments X
––– X
Current assets
Inventories X
Trade and other receivables X
Prepayments X
Cash and cash equivalents X
––– X
Total assets X
Statement of Financial Position (SOFP)
Statement of financial position for XYZ Ltd at 31 December 20XX
£m £m
Equity and liabilities
Capital and reserves
Ordinary share capital X
Irredeemable preference share capital X
Share premium account X
Reserves X
Retained earnings X
––– X
Non-current liabilities
Loan notes X
Current liabilities
Trade and other payables X
Short term borrowings X
Tax payable X
––– X
–––
Total equity and liabilities X
–––
Share capital, reserves and long term liabilities

Ordinary shares
o Ordinary shareholders own the share capital and reserves of the company.
o Voting rights are attached to the shares.
o Ordinary shareholders may receive a dividend out of profits, which can vary.
o Ordinary dividends are expressed in terms of pence per share.
o No dividend may be paid on ordinary shares until the preference share dividend has been paid
in full.

Preference shares
o Preference shareholders own the preference share capital of the company.
o Preference shares do not generally carry voting rights.
o Shareholders receive a fixed dividend calculated as a % of the nominal value.
o The preference dividend is paid in priority to ordinary dividends.
Share capital, reserves and long term liabilities
Special categories of preference shares include:
o Redeemable preference shares
• The terms of issue specify that they are repayable by the company. These
are classified as debt rather than equity in the statement of financial
position. Dividends are classified as finance costs in the statement of profit
or loss.
o Irredeemable preference shares
• The company is not entitled to buy back/redeem the shares.
They are classed as equity.
In an exam, you will always be told whether preference shares are
redeemable or irredeemable.
Share capital, reserves and long term liabilities

Share capital values

o Each share has a nominal or par value.
o Shares are issued by the company at an issue price. This is at
least equal to the nominal value of the share, but often exceeds
it.
o The market value of a share fluctuates according to the success
and perceived expectations of a company. If a company is listed
on the stock exchange, the value is determined by reference to
recent transactions between buyers and sellers of shares. This
value does not feature in the financial statements.
2. Share capital, reserves and long term liabilities

Issue of ordinary shares

A company will generally issue shares at above par (nominal) value.
The double entry to record a share issue is:
o Dr Cash Issue Price × No. shares
o Cr Share capital Nominal value × No. shares
o Cr Share premium Excess over nominal value × No. of shares
o Both the share capital and share premium accounts are shown on the statement
of financial position within the ‘Share Capital and Reserves’ section.

Accounting Company financial statements

2. Share capital, reserves and long term liabilities

Rights issue
A rights issue is the offer of new shares to existing
shareholders in proportion to their existing shareholding
at a stated price (normally below market values but
always above nominal value).
A rights issue is accounted for in the same way as a
normal share issue.
Share capital, reserves and long term liabilities

Bonus issue
A bonus (or capitalisation or scrip) issue is the issue of new
shares to existing shareholders in proportion to their existing
shareholding. No cash is received from a bonus issue.
o As no cash is received from a bonus issue, the issue must be funded from
reserves. Any reserve can be used, though a non-distributable reserve such
as the share premium account would be used in preference to reserves
which can be distributed. Should the Share Premium account balance be
insufficient, any excess would normally be debited to Retained earnings.
• Dr Share premium (or other reserve) Nominal value
• Cr Share capital Nominal value
 Share capital, reserves and long term liabilities

Share capital terminology

o Authorised share capital is the nominal value of the maximum number of
shares that a company can have in issue at any particular point in time.
o Issued share capital is the nominal value of the shares that have actually
been issued to shareholders. The number of issued shares is used in the
calculation of dividends.
o Called up share capital is the amount of the nominal value of the issued
share capital which has been requested from shareholders.
o This is what will be shown on the statement of financial position for the
company.
o Paid up share capital is the amount of the nominal value of the called up
share capital that has been paid by the shareholders.
Any differences between called up and paid up are a receivable on the
company’s statement of financial position.
Share capital, reserves and long term liabilities

Other reserves
Capital and reserves
Share capital X
Share premium X
Retained earnings X
General reserve X
–––
X
–––
Share capital, reserves and long term liabilities

Other reserves
Retained earnings
o This reserve includes all the retained profits of the company up to the statement of financial
position date.
o The balance is calculated as:
£
Retained earnings b/f (last year’s SFP) X
Net profit (this year’s statement of profit or loss) X
Dividends (X)
–––
Retained earnings c/f (this year’s SFP) X
–––
2. Share capital, reserves and long term liabilities

Other reserves
General reserve
o This reserve is an extension of retained earnings.
o A company may choose to transfer some of their retained earnings into a separate general
reserve.
Continued…

Statement of
cash flows
1. The importance of cash and the need for a statement of cash flow

Introduction
o Businesses must aim to make profit – we see this profit in the Statement of profit or loss.
o However, a business must also be able to pay its way with cash.
o Often, very profitable businesses can face cash shortages due to the fact that profit and cash
are two different things.
o Net cash flow is:
o All cash received by a company in a period less all cash paid out.
o Profit is:
o The result of recording income and expenses in the period to which they relate, whether or not
cash has been received or paid (i.e. application of accruals concept)
o reached after charging non-cash expenses such as depreciation.
o Therefore net cash flow ≠ profit.
1. The importance of cash and the need for a statement of cash flow

Although profit is a key performance indicator, it can be argued that cash flow is more
important in terms of ascertaining the Going Concern status of a company.
Without cash, credit suppliers and other amounts owing cannot be paid and a company
may be wound up.
The users of financial statements need to see that the business has generated positive
cash flows during the year, therefore IAS 7 requires companies to produce a statement of
cash flows.

Statement of cash flows

1. The importance of cash and the need for a statement of cash flow

The benefits of a statement of cash flows

Statements of cash flow are:
o Factual/objective – they are not influenced by accounting policies and accounting estimates.
o Easily understood by users who can see how cash is raised and spent.
In addition they:
o provide extra information on business activities
o allow the users of the financial statements to assess the future prospects of a business (for
example, heavy investment in non-current assets should result in increased future profitability)
o show how adaptable a company is to its circumstances i.e. the ability to respond to threats and
opportunities as they arise
o show whether a company is in a position to pay amounts as they fall due
o facilitate comparison between companies by requiring the use of standard headings.
2. The format of a statement of cash flow
In the exam the layout will be provided and you will be required to populate the figures.

Proforma statement of cash flow

The statement of cash flow must be presented using standard headings. £000 £000
Cash flows from operating activities
Cash generated from operations 1,450
Interest paid (300)
Income taxes paid (470)
–––––
Net cash from operating activities 680
Cash flows from investing activities
Purchase of property, plant and equipment (690)
Proceeds of sale of equipment 230
Interest received 34
Dividends received 19
–––––
Net cash used in investing activities (407)
––––
o In the exam the layout will be provided and you will be required to populate the figures.
2. The format of a statement of cash flow
In the exam the layout will be provided and you will be required to populate the figures.

Proforma statement of cash flow

The statement of cash flow must be presented using standard headings. £000 £000
Cash flows from financing activities
Proceeds of issue of shares 570
Repayment of loans (600)
Dividends paid (89)
–––––
Net cash used in financing activities (119)
––––
Net increase in cash and cash equivalents 154
Cash and cash equivalents at the beginning of the period 201
––––
Cash and cash equivalents at the end of the period 355
––––
o In the exam the layout will be provided and you will be required to populate the figures.
1. The importance of cash and the need for a statement of cash flow

Cash flows from operating activities

o The principal revenue producing activities of the business, including day to day trading.

Cash flows from investing activities

o The cash flows associated with the purchase and sale of non-current assets and income from
investments held.

Cash flows from financing activities

o The cash flows associated with the long term financing of a company, i.e. share capital and loan
stock, as well as dividends paid.
1. The importance of cash and the need for a statement of cash flow

Cash and cash equivalents

Cash
o Cash in hand and deposits available on demand.
Cash equivalents
o Liquid assets with a maturity date less than 3 months in the future.
The change in cash and cash equivalents is calculated as the net of all cash flows
identified in the cash flow statement.
This figure reconciles to the difference between the brought forward and carried forward
statement of financial position figure for cash and cash equivalents.
Cash equivalents are shown together with cash in order to recognise the fact that they are
highly liquid and will be converted to cash within a short timescale.
N.B. A bank overdraft is repayable on demand and is treated as a negative cash
balance in the statement of cash flows.
3. How to calculate cash flows from operating activities

Cash generated from operations

Start by calculating cash from operations
o This is the cash income from the day to day trading activities of a company.
There are two methods of calculating this figure:
1. the direct method, and
2. the indirect method.
Although IAS 7 prefers the use of the first method, you should use the indirect method in
the exam unless the question states otherwise.
3. How to calculate cash flows from operating activities
The direct method
This method uses information contained within the ledger accounts of the company:
£ £
Cash sales X
Cash received from credit customers X
–––
X
Less:
Cash purchases X
Cash paid to credit suppliers X
Cash expenses X
–––
(X)
–––
Cash generated from operations X
–––
3. How to calculate cash flows from operating activities
The indirect method
This method reconciles profit before tax (as reported in the statement of profit or loss) to
cash generated from operations as follows:
£
Profit before tax X
Finance cost X
Investment income (X)
Depreciation charge X
Loss/(profit) on disposal of non-current assets X/(X)
Amortisation charge X
(Increase)/decrease in inventories (X)/X
(Increase)/decrease in trade receivables (X)/X
Increase/(decrease) in trade payables X/(X)
––––
Cash generated from operations X
––––
3. How to calculate cash flows from operating activities
Adjustments to profit before tax:
Finance cost
o Added back to profit because it is not part of cash from operations and may include accrued (i.e.
non cash) amounts (interest is dealt with later in the statement of cash flow).
Investment income
o Deducted as it is not part of cash from operations (belongs in cash flows from investing
activities).
Depreciation charge/Amortisation charge
o Added back because it is a non-cash item
Loss/profit on disposal
o Added back/deducted because they are non-cash items.
3. How to calculate cash flows from operating activities
Adjustments to profit before tax:
Decrease in inventories
o Added on because the decrease of inventories liberates extra cash.
Increase in trade receivables
o Deducted because this income has not yet been realised as cash, it is tied up in receivables.
Decrease in trade payables
o Deducted because the reduction in payables must reduce cash. You must have paid your
suppliers if you owe less than you did at the start of the year.
3. How to calculate cash flows from operating activities

Other cash from operating activities

Cash outflows may include:
o interest paid
o income taxes paid.
Calculation of Interest/Income taxes paid
o The cash flow should be calculated by reference to:
• the charge to profits for the item (shown in the
statement of profit or loss), and
• any opening or closing payable balance shown on
the statement of financial position.
o A T account working may be useful
o If there is no opening or closing statement of financial position payable amount, it follows that
the charge to profits is the cash outflow.
3. How to calculate cash flows from operating activities

Other cash from operating activities

Calculation of Interest/Income taxes paid

Interest payable/Tax payable

£ £
Payable b/f X
Cash paid (ß) X Statement of profit or loss expense X
Payable c/f X
––– –––
X X
––– –––
A T account working
4. Investing activities
Cash inflows may include:
o Interest received
o Dividends received
o Proceeds of sale of equipment.
Cash outflows may include:
o Purchase of Property, Plant and Equipment.
4. Investing activities

Calculation of Interest and Dividends received

Again, the calculation should take account of both the income receivable, shown in the
statement of profit or loss, and any relevant receivables balance from the opening and
closing statement of financial position.
Once again, a T account working may be useful:

Interest receivable
£ £
Interest receivable b/f X
Statement of profit or loss income X Cash received (ß) X
Interest receivable c/f X
––– –––
X X
––– –––
4. Investing activities

Calculation of purchase of property, plant and equipment

and proceeds of sale of equipment
o These amounts are often the trickiest to calculate within a statement of cash flow. It is therefore
recommended that T account workings are used.
o The following T accounts will be required:

• Cost account
• Accumulated depreciation account
• Disposals account (where relevant).
o Data provided in the source financial statements should then be entered into these T accounts
and the required cash flows found – often as balancing figures.
4. Investing activities
In some cases, insufficient detail is provided to produce separate cost and accumulated
depreciation accounts. Instead, a carrying amount account should be used:

PPE carrying amount

£ £
CA b/f X
Additions X Disposals at CA X
Depreciation charge for year X
CA c/f X
––– –––
X X
Note: We only include cash additions in
–––the statement of cash flows therefore remove–––
any
non-cash additions from this figure.
5. Financing activities
Cash inflows may include:
o proceeds of issue of shares
o proceeds of issue of loans/debentures.
Cash outflows may include:
o repayment of loans/debentures
o dividends paid.
6. Chapter summary
NEED FOR A STATEMENT OF CASH FLOW
• Profit ≠ cash
• Cash is as important as profit
Cash flow = fact
Cash needed to pay amounts as they fall due

IAS 7 STATEMENT OF CASH FLOWS

CASH FLOWS
CASH FLOWS FROM
CASH FLOWS FROM FROM FINANCING
INVESTING ACTIVITIES
OPERATING ACTIVITIES ACTIVITIES
Purchase of PPE
• Cash generated from operations • Issue of shares
Sale of PPE
• Interest paid • Issue of loans
Interest received
• Income taxes paid • Repayment/receipt of loans
Dividends received
• Dividends paid
Notes of financial statement

• Notes should:
➢Present basis of preparation of the financial statements and
the specific accounting policies used.
➢Disclose the information required by IFRSs.
➢Provide relevant information to an understanding financial
statement.

66
 Notes of financial statement
• Notes should be disclosed in a systematic manner!
• Giving prominence to business’ activities that help to
understand business’ financial performance and financial
position.
• Grouping together information about items measured similarly.
• Suggesting order:
1. Statement of compliance with IFRSs.
2. Significant accounting policies applied.
3. Supporting information for items presented in financial
statement.
4. Other disclosures.
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