ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Paper F7 (INT)
Financial reporting
CHAPTER
5
The financial statements
of a single company
Contents
1 The components of financial statements
2 Structure and content of the statement of
financial position
3 Structure and content of the statement of
comprehensive income
4 Statement of changes in equity (SOCIE)
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The components of financial statements
Preparing financial statements
The format of published accounts
Fair presentation and compliance with IFRSs
Comparative information
Identification of financial statements
Reporting period
1 The components of financial statements
1.1 Preparing financial statements
You should already have studied the basic rules of financial accounting, so you
ought to be reasonably familiar with how a statement of financial position and an
income statement are prepared. The basic rules can be summarised as follows.
The balances on all the accounts in the main ledger (nominal ledger or general
ledger) are extracted. These provide the balances on all the ledger accounts for
assets, liabilities, capital, income and expenses.
Adjustments have to be made for ‘year-end’ items, such as:
− depreciation charges for non-current assets
− accruals and prepayments for expense items
− adjusting the allowance for bad (irrecoverable) debts.
The adjusted income and expense balances are entered into an income statement
to establish the profit or loss for the period.
The adjusted asset, liability and capital balances, together with the retained
profit for the year, are entered into a statement of financial position as at the end
of the reporting period.
This process can be used to prepare the income statement and statement of financial
position of a single company.
However, other published financial statements should also be prepared by entities
that comply with international accounting standards. These are set out in IAS1
Presentation of Financial Statements, which was revised in 2007.
1.2 The format of published accounts
IAS1 Presentation of Financial Statements specifies what published ‘general-
purpose’ financial statements should include, and provides a format for a statement
of financial position, income statement, statement of comprehensive income, and
statement of changes in equity.
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IAS1 begins by stating the objective of general-purpose financial statements. This is
to provide information about the financial position of the company, and its financial
performance and cash flows, that is useful to a wide range of users in making
economic decisions.
A complete set of financial statements consists of:
a statement of financial position as at the end of the period
a statement of comprehensive income for the period income statement
a statement of changes in equity for the period
a cash flow statement (cash flow statements are dealt with in a later chapter)
notes to these statements, consisting of a summary of significant accounting
policies used by the entity and other explanatory notes.
In addition, when an entity applies a new accounting policy retrospectively, or if it
makes a retrospective re-statement of items or re-classifies items in its financial
statements, the financial statements should also include a statement of financial
position as at the beginning of the earliest comparative period. When this occurs,
the entity will present three statements of financial position, as at:
the end of the current period
the end of the previous period, and
the beginning of the earliest comparative period.
1.3 Fair presentation and compliance with IFRSs
Financial statements should present fairly the financial position, financial
performance and cash flows of the entity. The application of IFRSs, with additional
disclosure when necessary, is presumed to result in financial statements that achieve
a fair presentation.
When the financial statements of an entity comply fully with International
Financial Reporting Standards, this fact should be disclosed.
An entity should not claim to comply with IFRSs unless it complies with all the
requirements of every applicable Standard.
1.4 Comparative information
Comparative information for the previous accounting period should be disclosed,
unless an International Financial Reporting Standard permits or requires otherwise.
1.5 Identification of financial statements
IAS1 requires that each component of the financial statements should be properly
identified, and the following information should be displayed prominently:
the name of the reporting entity
whether the financial statements cover an individual entity or a group
(consolidated accounts for groups are described in later chapters)
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the date of the end of the reporting period or the period covered by the
statement, whichever is appropriate
the currency in which the figures are reported
the level of rounding used in the figures (for example, whether the figures are in
dollars, thousands of dollars or millions of dollars).
1.6 Reporting period
Financial statements should be presented at least annually. If an entity changes the
date of the end of its reporting period, and a reporting period longer or shorter than
one year is used, its financial statements should disclose:
the period covered by the financial statements
the reason why the period is not one year, and
the fact that the comparative figures for the previous year are not comparable.
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Structure and content of the statement of financial position
Note on terminology
Current and non-current assets and liabilities
Current assets
Current liabilities
Information to be presented on the face of the balance sheet
Equity capital and reserves
2 Structure and content of the statement of financial
position
2.1 Note on IAS1 and terminology
The revised version of IAS1 in 2007 introduced a number of changes in terminology
in financial statements, which are incorporated into this study text. One of the
changes was to re-name the ‘balance sheet’ as the ‘statement of financial position’,
which is a more accurate description of what the statement actually is.
As a consequence of this change, ‘balance sheet date’ has been re-named as ‘end of
the reporting period’ and ‘post balance sheet events’ are now ‘events after the
reporting period’.
IAS1 sets out the requirements for information that must be presented in the
statement of financial position or in notes to the financial statements, and it also
provides Guidance on implementing IAS1. This Guidance includes an illustrative
format for a statement of financial position. You should learn this format and be
able to apply it for your examination.
2.2 Current and non-current assets and liabilities
Current and non-current items should normally be presented separately in the
statement of financial position, so that:
current and non-current assets are divided into separate classifications , and
current and non-current liabilities are also classified separately.
As a general rule, an amount is ‘current’ if it is expected to be recovered or settled
no more than 12 months after the end of the reporting period.
2.3 Current assets
IAS1 states that an asset should be classified as a current asset if it satisfies any of
the following criteria:
The entity expects to realise the asset, or sell or consume it, its normal operating
cycle.
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The asset is held for trading purposes.
The entity expects to realise the asset within 12 months after the reporting
period.
It is cash or a cash equivalent. (Note: An example of ‘cash’ is money in a current
bank account. An example of a ‘cash equivalent’ is money held in a term deposit
account with a bank.)
All other assets should be classified as non-current assets.
This definition allows inventory or trade receivables to qualify as current assets,
even if they may not be realised into cash within 12 months, provided that they will
be realised in the entity’s normal operating cycle or trading cycle.
2.4 Current liabilities
IAS1 also states that a liability should be classified as a current liability if it satisfies
any of the following criteria:
The entity expects to settle the liability in its normal operating cycle.
The liability is held primarily for the purpose of trading. This means that all
trade payables are current liabilities, even if settlement is not due for over 12
months after the end of the reporting period.
It is due to be settled within 12 months after the end of the reporting period.
The entity does not have the unconditional right to defer settlement of the
liability for at least 12 months after the end of the reporting period.
All other liabilities should be classified as non-current liabilities.
Changing from non-current liability to current liability
Liabilities that were originally non-current, such as a medium-term bank loan or a
liability for a finance lease, may become current in a subsequent year, when they
become repayable within 12 months.
Example
A company has a financial year end of 31 December. On 31 October Year 1, it took
out a bank loan of $50,000. The loan principal is repayable as follows:
$20,000 on 31 October Year 3
$30,000 on 31 October Year 4
Required
Show how the loan should be presented in the statement of financial position:
(a) as at 31 December Year 1
(b) as at 31 December Year 2
(c) as at 31 December Year 3.
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Answer
In the statement of financial position at 31 December Year 1, the full bank loan of
$50,000 will be a non-current liability.
In the statement of financial position at 31 December Year 2, there will be a long-term
liability of $30,000, and a current liability for the $20,000 repayable on 31 October Year 3.
In the statement of financial position at 31 December Year 3, there will be a current
liability of $30,000.
There is an exception to this rule. A liability can continue to be shown as a long-term
liability, even if it is repayable within 12 months, if the entity has the ‘discretion’ or right
to refinance (or ‘roll over’) the loan at maturity.
2.4 Information to be presented on the face of the statement of financial
position
IAS1 provides a list of items that, as a minimum, must be shown on the face of the
statement of financial position as a ‘line item’ (in other words, on a separate line in the
statement):
Assets
(a) Property, plant and equipment
(b) Investment property
(c) Intangible assets
(d) Long-term financial assets, such as long-term holdings of shares in other
companies, with the exception of item (e) below
(e) Investments accounted for using the equity method (this is explained in a later
chapter on investments in associates)
(f) Biological assets
(g) Inventories
(h) Trade and other receivables
(i) Cash and cash equivalents.
Liabilities
(j) Trade and other payables
(k) Provisions
(l) Financial liabilities, excluding any items in (j) and (k) above: (for example,
bank loans)
(m) Liabilities and assets for current tax, as required by IAS12 Income Taxes
(n) Deferred tax liabilities and deferred tax assets
Equity
(o) Issued capital and reserves attributable to the owners of the entity. (The term
‘owners’, introduced by the revised version of IAS1 in 2007, refers to the
equity holders.)
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(p) Non-controlling interest or minority interest, presented within equity.
(Minority interest or non-controlling interest might be included in a
consolidated statement of financial position for a group of companies.
Consolidated accounts are described in later chapters.)
Separate line items are also required in the statement of financial position in
accordance with the requirements of IFRS5: Non-current assets held for sale and
discontinued operations. These requirements are explained in a later chapter.
Additional line items should be included in the statement of financial position
when presenting them separately and is ‘relevant to an understanding of the entity’s
financial position’ (IAS1).
Information to be shown on the face of the statement of financial position or in
notes
Some of the line items in the statement of financial position should be sub-classified
into different categories, giving details of how the total figure is made up. This sub-
classification may be presented either:
as additional lines on the face of the statement of financial position (adding up to
the total amount for the item as a whole) or
in notes to the financial statements.
For example:
Tangible non-current assets should be divided into sub-categories, as required
by IAS16 Property, Plant and Equipment.
Receivables should be sub-classified into trade receivables, receivables from
related parties, prepayments and other amounts.
Inventories are sub-classified in accordance with IAS2 Inventories into categories
such as merchandise, materials, work-in-progress and finished goods.
Equity capital and reserves must also be sub-categorised, into categories such as
paid-up share capital, share premium and reserves.
Example: statement of financial position of an individual entity
IAS1 does not specify what the exact format of the statement of financial position
should be. However, it includes an illustrative statement of financial position in
Guidance to implementing the Standard (which is an appendix to the Standard).
The example below is based on that example. Illustrative figures are included.
StatementoffinancialpositionofABCDEntityasat31December20XX
$m $m
Assets
Non‐currentassets
Property,plantandequipment 205.1
Intangibleassets 10.7
Investments(‘availableforsalefinancialassets’) 6.8
–
–––––
222.6
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Currentassets
Inventories 17.8
Tradeandotherreceivables 15.3
Cashandcashequivalents 0.7
–
–––––
33.8
–
–––––
Totalassets256.4
–
–––––
Equityandliabilities
Equity
Sharecapital 50.0
Otherreserves 31.9
Retainedearnings(accumulatedprofits) 60.6
–
–––––
142.5
Totalequity
Non‐currentliabilities
Long‐termborrowings 30.0
Deferredtax 4.5
Totalnon‐currentliabilities 34.5
–
–––––
Currentliabilities
Tradeandotherpayables 67.1
Short‐termborrowings(bankoverdraft) 3.2
Currentportionoflong‐termborrowing 5.0
Currenttaxpayable 4.1
–
–––––
Totalcurrentliabilities 79.4
–
–––––
113.9
Totalliabilities
–
–––––
Totalequityandliabilities256.4
–
–––––
2.5 Equity capital and reserves
Certain information about equity capital and reserves must be shown either on the
face of the statement of financial position or in a note to the financial statements.
This information includes:
the number of shares authorised
the number of shares issued and fully paid, and issued but not fully paid
the par value of each share
a reconciliation between the number of shares ‘outstanding’ (shares in issue) at
the beginning and at the end of the year
the rights and restrictions attached to each class of shares (if any)
a description of the nature and purpose of each reserve.
Note on the presentation of dividends
Before the revision of IAS1, it was permissible to include ‘dividends payable’ in the
statement of financial position, provided that the dividend payment was declared
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before the end of the reporting period but the dividends had not yet been paid. This
method of presentation is no longer allowed.
Dividend payments (‘distributions’ of dividends) during the period must not be
shown in the income statement or the statement of comprehensive income.
Dividends paid during the financial year are shown as an item in:
the statement of changes in equity, and
the statement of cash flows.
Any ‘dividends payable’ at the year-end must not be shown in the statement of
financial position, but should be shown, together with the amount per share, in a
note to the financial statements.