ACC803 Advanced

Financial Reporting

Week 2: Financial Statement Preparation and Presentation

2.1 Financial Statements

2.2 Preparation and Presentation of financial statements
 Changes in accounting estimates
Many items in the financial statements cannot be
measured with accuracy and are thus estimated. This is
due to uncertainties inherent in business activities.

Common examples of accounting estimates include

-Bad debts
-Inventory obsolescence
-Useful lives of PPE
-Fair Value of financial assets and financial liabilities
-Provision for warranty obligation
 Adjusting and Non Adjusting events
(after the reporting period)
Typical example of adjusting events
- The bankruptcy of a customer after reporting period usually suggest a loss of trade
receivables at the end of the reporting period.
-The sale of inventory at a price substantially lower than its cost after the reporting period
confirms its net realizable value at the end of reporting period
- The sale of property, plant and equipment for a net selling price that is lower than the
carrying amount is indicative of impairment before the end of the reporting period.
-The determination of an incentive or bonus payment after the reporting period when an
entity has a constructive obligation at the end of the reporting period.
- A deterioration in the financial position (recurring losses) and operating results( working
capital deficiencies) of an entity that has a bearing on the entity's continuance as a going
concern in the foreseeable future.

Examples of non adjusting events include:

- Declaration of an equity dividend
- decline in the market value of an investment after the reporting period
- Entering into major purchase commitments in the form of issuing guarantees after the
reporting period
-Classification of assets as held for sale under IFRS5 and the purchase, disposal of assets after
reporting period
-Commencing a lawsuit relating to events that occurred after reporting period.
Illustrative statement of Comprehensive Income using the single
statement format with classification of expense by function

XYZ Group- Statement of Comprehensive Income

for the year ended 31s December 20X7
20X7 20X6
$$$ $$$
Revenue 390000 355000
Cost of sales -245000 -230000
Gross Profit 145000 125000
Other Income 20667 11300
Distribution costs -9000 -8700
Administrative expenses -20000 -21000
Other expenses -2100 -1200
Finance costs -8000 -7500
Share of profit of associates 35100 30100
Continued
Profit before tax 161667 128000
Income tax expense -40417 -32000
Profit for the year from continuing operations 121250 96000
Loss for the year from discontinued operations 0 -30500
PFOFIT for the year 121250 65500
Other comprehensive income:
Exchange differnece on traslating foreign operations 5334 10667
Available for sale financial assets -24000 26667
Cash flow hedges 667 4000
Gains on property revaluation 933 3367
Acturial gains (losses) on defined benefit pension plans -667 1333
Share of other comprehensive income of associates 400 -700
Income tax relating to components of other comprehensive income 4667 -9334
Other comprehensive income for the year, net of tax -14000 28000
Total Comprehensive Income for the year 107250 93500
Profit attributable to:
Owners of the parent 97000 52400
Non- controlling interests 24250 13100
121250 65500
Total comprehensive income attributable to:
Owners of the parent 85800 74800
Non- controlling interests 21450 18700
107250 93500
 Illustrative statement of comprehensive Income using the two statement
format with classification of expense by Nature
XYZ Group- Income Statement
for the year ended 31s December 20X7
20X7 20X6
$$$ $$$
Revenue 390000 355000
Other Income 20667 11300
Changes in inventories of finished goods and WIP -115100 -107900
Work performed by the entity and capitalised 16000 15000
Raw material and consumables used -96000 -92000
Employee benefits expense -45000 -43000
Depreciation and amortisation expense -19000 -17000
Impairment of PPE -4000 0
Other expenses -6000 -5500
Finance costs -15000 -18000
Share of profit of associates 35100 30100
Profit before tax 161667 128000
Income tax expense -40417 -32000
Profit for the year from continuing operations 121250 96000
Loss for the year from discontinued operations 0 -30500
PFOFIT for the year 121250 65500
Profit attributable to:
Owners of the parent 97000 52400
Non- controlling interests 24250 13100
121250 65500
Earnings per share (in currency units):
Basic and diluted 0.46 0.3
Continued
XYZ Group- Statement of Comprehensive Income
for the year ended 31s December 20X7
20X7 20X6
Profit for the year $$$ $$$
Other comprehensive income: 121250 65500
Exchange differnece on traslating foreign operations 5334 10667
Available for sale financial assets -24000 26667
Cash flow hedges 667 4000
Gains on property revaluation 933 3367
Acturial gains (losses) on defined benefit pension plans -667 1333
Share of other comprehensive income of associates 400 -700
Income tax relating to components of other comprehensive income 4667 -9334
Other comprehensive income for the year, net of tax -14000 28000
Total Comprehensive Income for the year 107250 93500

Total comprehensive income attributable to:

Owners of the parent 85800 74800
Non- controlling interests 21450 18700
107250 93500
 Statement of Changes in Equity
This example illustrates the reconciliation of the movements
in each element of equity attributable to equity holders of
the parent and the non-controlling interests and total equity
for the current and the prior year.
 XYZ Group Statement of changes in equity for the year ended 31 December 20X7
Translati Availabl
on of e for Non
foreign sale Cash Revaluat Controlli
Share Retained operatio financial flow ion ng Total
Capital earnings ns assets hedges surplus Total interests equity
Balance at 1st January 20X6 600000 118100 -4000 1600 2000 - 717700 29800 747500
Changes in accounting policy - 400 - - - - 400 100 500
Restated balance 600000 118500 -4000 1600 2000 - 718100 29900 748000
Changes in equity for 20X6
Dividends - -10000 - - - - -10000 - -10000
Total Comprehensive Income
for the year - 53200 6400 16000 -2400 1600 74800 18700 93500

Balance at 31st December 20X6 600000 161700 2400 17600 -400 1600 782900 48600 831500
Changes in equity for 20X7
Issue of share capital 50000 - - - - - 50000 - 50000
Dividends - -15000 - - - - -15000 - -15000
Total Comprehensive Income
for the year - 96600 3200 -14400 -400 800 85800 21450 107250
Transfer to retained earnings - 200 - - -200 - - -
Balance at 31 December 20X7 650000 243500 5600 3200 -800 2200 903700 70050 973750
 Notes

Notes are an integral part of the financial statement

Their purpose is to enhance the understandability of the

financial position, statement of comprehensive income,
statement of cash flows and statement of changes in
equity.

As far as practical, each item in these statements is cross-

referenced to any related information in the notes.
e.g Notes for Inventories, Income tax, Property Plant &
Equipment etc.
 Statement of Cash flows
IAS 7 is used in preparation of cash flow statement

Purpose of cash flow

-evaluating an entity's ability to generate cash and cash equivalents and the timing and certainty of their
generation
- evaluating an entity's financial structure ( including liquidity and solvency) and its ability to meet its
obligations and to pay dividends
-understanding the reasons for the difference between profits or loss for a period and the net cash flow
from operating activities ( the reason for the difference are often helpful in evaluating the quality of
earnings of an entity
-comparing the operating performance of different entities, because net operating cash flows reported
in the statement of cash flows are unaffected by different choices and judgments under accrual
accounting used in determining the profit or loss of an entity.

Classifying cash flow activities

Operating activities- are the principal revenue producing activities of the entity

Investing activities - are the acquisition and disposal of long term assets and other investments not
included in cash equivalents

Financing activities- are activities that result in changes in the size and composition of the contributed
equity and borrowings of the entity.
 Format of the statement of Cash flows
(Direct method of reporting cash flow from operating activities)

Statement of Cashflows for the year ended 31st December XXXX

Cash flows from operating activities
cash receipts from customers $xxx
cash paid to suppliers and employees (xxx)
cash generated from operations xxx
Interest received xxx
Interest paid (xxx)
Income tax paid (xxx)
Net cash from operating activities XXX

Cash flows from investing activities

Acquisition of subsidiary (xxx)
Purchase of property and plant (xxx)
Proceeds from sale of plant xxx
Net cash from investing activities XXX
Continued
Cash flows from financing activities
Proceeds from share issue xxx
Proceeds from borrowings xxx
Payment of borrowings (xxx)
Dividend paid (xxx)
Net cash from investing activities XXX
Net increase (decrease) in cash and cash equivalents XXX
Cash and cash equivalents at beginning of year XXX
Cash and cash equivalents at end of year XXX
 Format of the statement of Cash flows
(Indirect method of reporting cash flow from operating activities)
Statement of Cashflows for the year ended 31st December XXXX
Cash flows from operating activities
Profit before tax $xxx
Adjustments for:
Depreciation xxx
Foreign exchange loss xxx
Loss on sale of equipment xxx
Interest Income (xxx)
Interest expense xxx
Increase in trade and other receivables (xxx)
Decrease in inventories xxx
Increase in accounts payable xxx
Decrease in accured liabilities (xxx)
cash generated from operations xxx
Interest received xxx
Interest paid (xxx)
Income tax paid (xxx)
Net cash from operating activities XXX
Continued
Cash flows from investing activities
Acquisition of subsidiary (xxx)
Purchase of property and plant (xxx)
Proceeds from sale of plant xxx
Net cash from investing activities XXX

Cash flows from financing activities

Proceeds from share issue xxx
Proceeds from borrowings xxx
Payment of borrowings (xxx)
Dividend paid (xxx)
Net cash from investing activities XXX
Net increase (decrease) in cash and cash equivalents XXX
Cash and cash equivalents at beginning of year XXX
Cash and cash equivalents at end of year XXX
 Formulas in Cash flows
Cash flow from Operating activities

Cash receipts from customers= Sales + Beginning receivables -Ending receivables- Bad debt expense +Opening provision for
doubtful debt- closing provision for doubtful debts- Discount given to customers.

Cash received from interest revenue = Interest revenue + Opening interest receivable - closing interest receivable - increase
in debentures + decrease in debentures

Cash received from dividends = Dividend income + Opening dividends receivables- closing dividends receivables

Interest paid = Interest expense+ Opening interest payable- closing interest payable- increase in bonds+ decrease in bonds

Income taxes paid = Income tax expense + Opening income tax payable- closing income tax payable + opening DTL- closing
DTL + Closing DTA - Opening DTA.

Cash payments to suppliers = Opening accounts payable- Closing accounts payable + COGS+ Closing inventory- Opening
Inventory - Discount given by suppliers+ stock written offs.

Cash flow from investing activities

Cash payments (NCA)= Closing balance of NCA- Opening balance of NCA+ Original cost of asset sold- assets acquired
through non-cash transactions- revaluation increase + Accumulated depreciation written back to revalued assets.

Cash flow from financing activities

Payment of cash dividends= Dividends paid+ dividend proposed+ Opening dividends payable- closing dividends payable
 Readings
Week 3 Reading 1- Measurement in Financial
Reporting: Half a Century of Research and
Practice