Presentation of Financial Statements

OBJECTIVE

The objectives of IAS 1 are to:

  • Provide the formats for the presentation of Financial Statements, such as Statement of Comprehensive Income and Statement of Financial Position.
  • Ensure that the Financial Statements are comparable year on year for the entity and comparable to competitors.
  • Set out the disclosure required by management relating to the judgements they have made in selecting the entity’s accounting policies.
  • Set out the disclosure to be made in relation to estimating uncertainty at the Statement of Financial Position date, in particular where there is a significant risk of causing a material adjustment to the carrying amounts at which assets and liabilities will be presented in the next financial year.

 PURPOSE OF FINANCIAL STATEMENTS

The objective of general purpose financial statements is to provide information about the financial position of an entity. Financial statements also show the results of management’s stewardship of the entity’s resources.

 COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements comprises a:

  • Statement of Financial Position
  •  Statement of Comprehensive Income
  • A statement showing either:
  • All changes in equity or
  • Changes in equity other than capital transactions/distributions to owners
  • Cash (or Funds) Flow Statement
  • Notes to the accounts comprising a summary of significant accounting policies and explanatory notes.

FINANCIAL REVIEW BY MANAGEMENT

In addition to the Financial Statements identified in Section C above, management may present a Financial Review outside the Financial Statements. The Financial Review explains the main features of the entities financial performance and financial position as well as the main areas of uncertainty. This Financial Review typically includes:

  • An outline of the main factors affecting performance including changes in the business environment in which the entity operates. How the entity has reacted to those changes and the effect.
  • Entity’s policy for investment and its dividend policy.
  • How the entity is financed.
  • Any resources that the entity uses that are not disclosed on the Statement of Financial Position in accordance with IFRSs.

Other reports which may be included are:

  • Environmental Reports – Particularly in industries where environmental issues are of significance.
  • Value Added Statements.

 

Any reports provided in addition to the Financial Statements are outside the scope of the IASs.

STRUCTURE, CONTENT AND REPORTING

  • The financial statements shall be identified clearly and distinguished from other information.
  • The financial statements should show:

−      The name of the reporting entity

− The Statement of Financial Position date or the period covered by the Statement of Comprehensive Income

  • The currency in which the financial statements are presented
  • The level of rounding used in presenting amounts e.g. RWF’000, RWFm or the like.
  • The financial statements shall be presented at least annually.

 DEFINITIONS

Material – “Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users taken on the basis of the Financial Statements. Materiality depends in the size and nature of the omission or misstatement judged in the circumstances. The size or nature of the item, or a combination of both, could be the determining factor.”

 STATEMENT OF FINANCIAL POSITION FORMAT

 It is important before attempting a Statement of Financial Position clearly to understand the split between current and non-current assets and liabilities

Current Assets

An asset shall be classified as current when it satisfies any of the following criteria:

  • It is expected to be realised or is intended for sale or use in the entity’s normal operating cycle;
  • It is held primarily for the purpose of being traded;
  • It is expected to be realised within 12 months after the Statement of Financial Position date, or
  • It is cash or a cash equivalent (as defined by IAS 7 Cash Flow Statements) All other assets shall be classified as non-current.

Current Liabilities

A liability shall be classified as current when it satisfies any of the following criteria:

  • It is expected to be settled in the entity’s normal operating cycle;
  • It is held primarily for the purpose of being traded;
  • It is due to be settled within 12 months after the Statement of Financial Position date. All other liabilities shall be classified as non-current liabilities.

THE STATEMENT OF COMPREHENSIVE INCOME

There are two different layouts for the Statement of Comprehensive Income .  One format presents an analysis of expenses based on their function within the entity, the other format uses a classification based on the nature of expenses.

FUNCTION OF EXPENDITURE METHOD

This form of analysis classifies expenses according to their function as part of cost of sales or for example the costs of distribution or administrative activities.  This method can provide more relevant information to users than the classification of expenses by nature but the allocation of costs to functions may require arbitrary allocations and involve considerable judgement.

NATURE OF EXPENDITURE METHOD

Expenses are combined in the Statement of Comprehensive Income  according to their nature, for example depreciation, purchase of materials, employee benefits and advertising costs.  The method is simple to apply because no allocations of expenses to functions are required.

The choice between the two methods depends on historical and industry factors and the nature of the entity.  Management is required to select the most relevant and reliable presentation.

However, because information on the nature of expenses is useful in predicting future cash flows additional disclosure is required when the function of expense classification is used.

 CHANGES IN INVENTORIES OF FINISHED GOODS AND WORK-IN-PROGRESS

This represents the difference between the opening and closing inventories of finished goods and work-in-progress. If Closing Stock (in total for both Finished Goods and Work in Progress) is lower in value than opening stock then you add this figure to the other expenses being deducted from Sales Revenue to give you Profit from operations. If Closing Stock (in total for both Finished Goods and Work in Progress) is higher in  value than opening stock then you deduct this figure from the total expenses being deducted from Sales Revenue to give you Profit from operations.

RAW MATERIALS AND CONSUMABLES USED

This represents opening inventories of raw materials and consumables plus purchases of these minus closing inventories of raw materials and consumables

INFORMATION TO BE PRESENTED EITHER ON THE FACE OF THE STATEMENT OF COMPREHENSIVE INCOME  OR IN THE NOTES

When items of income and expense are material, their nature and amount shall be disclosed separately.  Examples of these would include:

  • The write down of inventories to net realisable value
  • The write down of property, plant and equipment to recoverable amount
  • Gains/losses on disposal of property, plant and equipment
  • Gains/losses on disposal of investments
  • Legal settlements

An entity shall not present any items of income and expenses as extraordinary items.  The description extraordinary item was used in the past to represent income and expenses arising from events outside the ordinary activities of the business.  IAS 1 has abolished this classification of items

STATEMENT OF CHANGES IN EQUITY

An entity shall present a statement of changes in equity showing on the face of the statement:

  • Profit or loss for the period
  • Each item of income and expense for the period that is recognised directly in equity e.g. a revaluation surplus on the revaluation of property
  • The effects of changes in accounting policies and correction of errors recognised in accordance with IAS8
  • The amounts of transactions with equity holders e.g. issue of shares, any premium thereon and dividends to equity holders.
  • The balance of retained earnings (accumulated profit) at the start of the year, changes during the year and the balance at the end of the year.
  • The balance on each reserve account at the start of the year, changes during the year and the balance at the end of the year.

STATEMENT OF RECOGNISED INCOME AND EXPENSE

 The Statement of Recognised Income and Expense (formerly known as Statement of Recognised Gains and Losses) represents the total income and expenses of the entity for the period. It includes income and expenses that are taken directly to Reserves, for example Revaluation of Non-Current assets and Foreign Currency Translation as well as the profit / loss generated by the entity for the period.

DISCLOSURE OF SIGNIFICANT ACCOUNTING POLICIES

An entity shall disclose the significant accounting policies used in preparing the financial statements.

 

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