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Preparation and presentation of

company financial statements

ACCG923/ACCG612 Seminar 8
Learning objectives

1.Describe what constitutes a complete set of financial statements (p. 736)


2.Describe the eight general features of a complete set of financial statements
(p. 737)
3.Explain the information to be presented either in the statement of financial
position or in the notes (p. 741)
4.Explain the information to be presented either in the statement of profit or
loss and other comprehensive income or in the notes (p. 751)
5.Explain the information to be presented either in the statement of changes in
equity or in the notes (p. 764)
6.List the information required by AASB 101 to be presented in the notes (p.
767)
7.Explain the future developments in financial reporting, including extensible
business reporting language (XBRL) and corporate social responsibility (CSR)
(p. 772)
A Complete set of financial statements

Per AASB 101, a complete set of financial statements


comprises:

Statement of Financial Position


Statement of Profit or Loss and Other Comprehensive
Income
Statement of Changes in Equity
Statement of Cash flows
Notes
General features of financial statements

Per AASB 101, the following considerations must be


followed in the presentation of a financial report:
1. Fair presentation and compliance with International
Financial Reporting standards (IFRSs)
2. Going concern
3. Accrual basis of accounting
4. Materiality and aggregation
5. Offsetting
6. Frequency of reporting
7. Comparative information
8. Consistency of presentation
General features of financial statements

Fair presentation & compliance with IFRSs


A set of financial statements are required to present fairly
an entitys financial performance, financial position and
cash flows

Applying IFRSs (with additional disclosures where


necessary) is presumed to result in a fair presentation

Entities must explicitly state their compliance with AASB


and IFRS accounting standards in a note to the financial
statements
General features of financial statements

Going concern
There is an assumption that all entities adopt the going
concern basis of accounting
Exception applies where management intends to
liquidate or cease trading
In such cases a liquidity basis is adopted

Accrual basis of accounting


Except for cash flow information, the financial
statements are required to be presented using the
accruals basis of accounting
General features of financial statements

Materiality and aggregation


Each material class of similar items must be presented
separately
Items of a dissimilar nature or function must be presented
separately, unless they are immaterial
Offsetting
Assets/liabilities and income/expenses are not to be offset,
unless required or permitted by another accounting
standard
Offsetting detracts from the ability of the users to understand
the entitys transactions
Offsetting is appropriate when netting any income with
related expenses arising from the same transaction eg
gains/losses on the sale of non-current assets
General features of financial statements

Comparative information
Comparative information for the immediately preceding
reporting period must be disclosed for all amounts
(including narrative discussion)
Consistency of presentation
Financial information must be consistently presented from
one period to the next unless:
There has been a significant change in the entitys
operations
A change in presentation or classification will provide
more relevant information
A change in presentation or classification is required
by another accounting standard
Identification of the financial
statements

AASB 101 requires the following information to be


disclosed separately in the financial report
name of the entity
Whether the financial report relates to a single entity or
a group of entities
reporting period
presentation currency
rounding used
Statement of Financial Position (SOFP)

The SOFP is the prime information source about an entitys financial


position
Information to be presented in the SOFP

Assets
Liabilities
Equity
No prescribed format in AASB 101, but assets and liabilities to be
classified on basis of:
Current/non-current
In order of their liquidity (commonly by banks)
Current assets are those realised or consumed within an entitys
operating cycle
Current liabilities are those expected to be settled within an entitys
operating cycle.
An operating cycle is the time taken from acquisition of goods
to the receipt of cash or cash equivalents and can be greater
than 12 months
Statement of Financial Position (SOFP)

Property, plant and equipment Trade and other payables


Investment property Provisions
Intangible assets Financial liabilities
Financial assets Current tax liabilities (assets)
Equity accounted investments Deferred tax liabilities (assets)
Biological assets Liabilities included in disposal groups
Inventories classified as held for sale
Trade & other receivables Non-controlling interests presented
Cash and Cash equivalents within equity
Assets classified as held for sale Issued capital and reserves attributable
to owners of the parent

AASB 101 para. 54 requires


these line items as a minimum
Statement of Financial Position (SOFP)

Requires inclusion of additional items, headings and sub-totals, if


relevant, based on assessment of:
The nature and liquidity of assets
The function of assets
The amounts, nature and timing of liabilities
Further sub-classifications needed for some items
Inventories must be broken down into appropriate
classifications
PP&E must be disaggregated into classes (chapter 5)
Further sub-classifications may also be required due to the
size, nature and function of the amounts involved e.g.
splitting out provisions
Specific share capital disclosures are also prescribed by AASB
101.
May be disclosed either in the statement of financial
position or in the notes.
Statement of Financial Position
(SOFP)
Illustrative statement of financial position

Figure 15.2 Illustrative example from IAS 1


Current / Non-current presentation
Total Assets = Total Liabilities + Total Equity

Figure 15.3 Harvey Norman Holdings Ltd


Current / Non-current presentation
Total Assets Total Liabilities = Net Asset = Equity

Figure 15.4 Australia and New Zealand Banking Group Ltd


Liquidity order
Total Assets Total Liabilities = Net Asset = Equity
Statement of Profit or Loss and Other
Comprehensive Income

A prime source of information about an entitys


performance
Income, expenses and other comprehensive income are
included.
Total comprehensive income has two components:
1. PROFIT OR LOSS (P&L)
2. OTHER COMPREHENSIVE INCOME (OCI)
Statement of Profit or Loss and Other
Comprehensive Income

Profit or loss
AASB101 adopts an all-inclusive approach to the
determination of a companys profit or loss
All items of income and expense recognised into period
must be included in the companys profit or loss. The only
exclusions relate to
CORRECTIONS OF ERRORS AND THE EFFECTS OF CHANGES IN
ACCOUNTING POLICIES
PROVISIONS WITHIN OTHER AASBS THAT REQUIRE OR PERMIT
COMPONENTS OF OTHER COMPREHENSIVE INCOME TO BE
EXCLUDED FROM PROFIT OR LOSS.
Statement of Profit or Loss and Other
Comprehensive Income

Other Comprehensive Income (OCI)


OCI comprises items of income and expense that are not
recognised in profit or loss.
Components of OCI comprise
CHANGES IN A REVALUATION SURPLUS
ACTUARIAL GAINS AND LOSSES ON DEFINED BENEFIT PLANS
GAINS AND LOSSES ARISING FROM THE TRANSLATION OF
FINANCIAL STATEMENTS OF FOREIGN OPERATIONS
GAINS AND LOSSES ON REMEASURING AVAILABLE-FOR-SALE
FINANCIAL ASSETS
THE EFFECTIVE PORTION OF GAINS AND LOSSES ON
HEDGING INSTRUMENTS IN A CASH FLOW HEDGE
Statement of Profit or Loss and Other
Comprehensive Income

Income tax relating to each component of OCI is required


to be disclosed.
These disclosures may be either on the statement or in the
notes.
Reclassification adjustments relating to components of OCI
are also required to be disclosed.
Reclassification adjustments are amounts that were
recognised in OCI in previous years but are reclassified (or
recycled) to the current period profit or loss when the
relevant item is derecognised.
Reclassification adjustments to not arise on changes in a
revaluation surplus.
Statement of Profit or Loss and Other
Comprehensive Income
AASB 101 prescribes line items to appear on the statement.
Minimum line items required on face of statement are as follows:
Revenue
Finance cost (commonly referred to as borrowing costs &/or interest
expense)
Share of profits/(losses) of associates and JVs accounted for under the
equity method
Tax expenses
Profit/(loss) after tax from sale of discontinuing operations
Profit/(loss)
Each component of OCI, classified by nature
Share of OCI of associates and JVs accounted for under the equity
method
Total comprehensive income update
Profit /(loss) attributed to non-controlling interests and the parent
Total comprehensive income attributed to non-controlling interests and
the parent.
Statement of Profit or Loss and Other
Comprehensive Income

Additional items, headings and totals can be included in


the statement if considered relevant to understanding
(based on materiality and nature/function of items)
Income comprises
Revenue inflows from ordinary activities, e.g. sale of
goods, provisions of services
Gains inflows from activities outside ordinary trading,
e.g. sale of non-current assets
Where material, revenue and gains may require separate
disclosure
Statement of Profit or Loss and Other
Comprehensive Income

To enhance understandability of the statement AASB 101


requires separate disclosure of the nature and amount of
certain material income and expense items including:
Inventory and PPE write-downs
Cost of restructuring
Disposals of PPE & other investments
Profit/(losses) re discontinuing operations
Litigation settlements
Reversals of provisions
Such disclosures can be made either in the statement or
in the notes
Statement of Profit or Loss and Other
Comprehensive Income

Entities are required to present expenses, classified by


nature or function, whichever provides the more relevant
and reliable information
Nature Function
Purchases of material Cost of sales
Employee benefits Costs of distribution
Depreciation Administrative costs
Advertising costs
AASB 101 encourages, but does not require this
analysis to be presented on the face of the statement
Statement of Profit or Loss and
Other Comprehensive Income
Figure 15.9 an example of a single statement of profit or loss
and other comprehensive income

Expenses classified by function


OCI items listed as those that will / will not be reclassified

Tax on OCI items shown as a separate item


AASB 9 Financial Instruments applied
Figure 15.10 Tabcorp Holdings
Expenses by nature
Figure 15.11 Sigma Pharmaceuticals
Expenses by function
Statement of Changes in Equity
(SOCE)
The following is disclosed on the SOCE:
Total comprehensive income for the period attributable to:
Equity holders of parent; and
Non controlling interests
For each component of equity
Changes in accounting policies; and
Corrections of errors required by AASB 108
For each component of equity a reconciliation between opening and
closing balances showing changes resulting from
Profit/(Loss)
OCI
Transactions with equity holders, showing separately distributions
to equity holders
Statement of Changes in Equity
(SOCE)
Dividends
An entity must disclose, in the statement of changes in equity
or the notes, both:
THE AMOUNT OF DIVIDENDS RECOGNISED DURING THE PERIOD AND
THE RELATED AMOUNT PER SHARE

Figure 15.12 provides an Illustrative example of the SOCE

Figure 15.13 provides the Sigma Pharmaceuticals SOCE


Example

Question 15.17 Statement of profit or loss and other comprehensive


income (classify expenses by nature), statement of
financial position and statement of changes in equity
The summarised trial balance of Star Ltd as at 30 June 2017 is shown below.
Debit Credit
Ordinary share capital (1 500 000 shares) $1 062 500
General reserve (1/7/16) 175 000
Revaluation surplus (1/7/16) 60 000
Retained earnings (1/7/16) 104 500
Bank loan (long-term) 43 500
Deferred tax liability (1/7/16) 3 000
Mortgage (long-term) 50 000
Accounts payable 132 000
Provision for employee benefits (long-term) 75 000
Allowance for doubtful debts 37 500
Accumulated depreciation:
Plant 9 500
Office furniture 850
Buildings 2 500
Land (at cost) $ 211 500
Factory buildings (at cost) 250 000
Accounts receivable 542 950
Plant (at cost) 90 000
Inventory 651 100
Office furniture (at cost) 6 000
Goodwill 200 000
Cash at bank 278 800
Employee benefits expense 12 500
Sales 1 730 500
Raw materials and consumables used 1 083 100
Changes in inventories of finished goods and 3 100
work in progress
Other expenses (excluding depreciation but
including interest expense $31 000 on bank loan 163 500
and mortgage)
$3 489 450 $3 489 450
Example Cont
The accountant for the company seeks your assistance in preparing the financial
statements for external reporting purposes and advises you of the following information
that needs to be taken into account before finalising the financial statements.
Additional information
(a) Depreciation is to be provided for:
Plant $9 000
Office furniture 800
Buildings 2 500
(b) The estimated total income tax expense relating to profit or loss items only for 2017 is
$200 000, consisting of $150 000 for the current liability and $50 000 as a deferred tax
liability.
(c) Final dividends of 2 cents per share were declared by directors.
(d) Directors decided to transfer $10 000 from retained earnings to general reserve.
(e) Following expert advice, the directors decided on 30 June 2017 to revalue the land and
factory buildings to reflect current fair values. Consequently, directors placed a value
of $300 000 on land and $350 000 on the buildings.
(f) Company tax rate is 30%.

Required
Based on the ledger balances and the additional information provided, prepare a
statement of profit or loss and other comprehensive income (classify expenses by nature),
a statement of financial position and a statement of changes in equity for Star Ltd for the
year ended 30 June 2017, to comply with AASB 101.

[Comparative information must be disclosed in respect of the preceding period for all
amounts reported in the current period's financial statements in accordance with AASB 101
paragraph 38. However this information is not provided in the question].
Example Cont

Statement of Profit or Loss and Other Comprehensive Income


for the year ended 30 June 2017
Revenue $ 1 730 500
Changes in inventories of finished goods and
work in progress 3 100
Raw materials and consumables used (1 083 100)
Employee benefits expense (12 500)
Depreciation* (12 300)
Other expenses** (132 500)
Finance costs (31 000)
Profit before income tax 462 200
Income tax expense (200 000)
Profit for the period 262 200
Other comprehensive income
Items that will not be reclassified to profit or loss
Gain on revaluation of land*** 88 500
Gain on revaluation of buildings*** 105 000
Income tax relating to items not reclassified (58 050)
Other comprehensive income for the year, net of tax 135 450
Total comprehensive income for the year $ 397 650

Workings:
*Depreciation:
Plant $ 9 000
Office furniture 800
Buildings 2 500
12 300
**Other expenses:
Other expenses $ 163 500
Less interest expense (31 000)
132 500
***Gain arising during the year on revaluation of:
Land (300 000 211 500) $ 88 500
Buildings (350 000 (250 000 (2 500 acc. dep. + 2 500 dep.))) 105 000
Example Cont

STAR LTD
Statement of Financial Position
as at 30 June 2017

ASSETS
Current assets
Cash and cash equivalents $ 278 800
Trade and other receivables* 505 450
Inventories 651 100
Total curre nt assets 1 435 350

Non-current assets
Property, plant and equipment** 725 850
Goodwill 200 000
Total non-current assets 925 850
Total assets $ 2 361 200

LIABILITIES
Current liabilities
Trade and other payables*** $ 162 000
Current tax payable 150 000
Total curre nt liabilities 312 000

Non-current liabilities
Long-term borrowings**** 93 500
Deferred tax liabilities***** 111 050
Long-term provisions 75 000
Total non-current liabilities 279 550
Total liabilities $ 591 550

Net assets $ 1 769 650

EQUITY
Share capital $ 1 062 500
Reserves 380 450
Retained earnings 326 700
Total equity $ 1 769 650

Workings:

*Trade and other receivables:


Accounts receivable $ 542 950
Allowance for doubtful debts (37 500)
505 450
Example Cont

**Property, plant and equipment:


Freehold land $300 000
Factory buildings 350 000
650 000
Plant 90 000
Accumulated depreciation [9 500 + 9 000] (18 500) 71 500
Office furniture 6 000
Accumulated depreciation [850 + 800] (1 650) 4 350
725 850

***Trade and other payables:


Accounts payable $ 132 000
Dividend payable (1 500 000 shares x 2 cents per share) 30 000
162 000

****Long-term borrowings:
Bank loan $ 43 500
Mortgage 50 000
93 500

***** Deferred tax liabilities:


Balance 1/7/2016 $ 3 000
Deferred tax portion of income tax expense 50 000
Revaluation of:
Land (30% x [300 000 211 500]) 26 550
Buildings (30% x [350 000 (250 000 (2 500 + 2 500)]) )31 500 58 050
111 050
Example Cont

STAR LTD
Statement of Changes in Equity
for the year ended 30 June 2017

Share General Reval. Retained Total


capital reserve surplus earnings
Balance at 1 July 2016 $ 1 062 500 $ 175 000 $ 60 000 $ 104 500 $ 1 402 000
Total comprehensive income
for the year - - 135 450 262 200 397 650

Dividend declared ordinary - - - (30 000) (30 000)


Transfer to general reserve - 10 000 - (10 000) -
Balance at 30 June 2017 $ 1 062 500 $ 185 000 $ 195 450 $ 326 700 $ 1 769 650

Dividends: 2 cents
Notes

Notes enhance the understandability of the other statements

Each item in the statements is cross-referenced to any related information


in the notes

The usual order of notes is:


A statement of compliance with Australian Accounting Standards
Summary of accounting policies (usually Note 1)
MEASUREMENT BASIS (BASES) USED
OTHER ACCOUNTING POLICIES USED (RELEVANT TO UNDERSTANDING THE STATEMENTS)
Supporting information for items in statements
EARLY NOTES USUALLY RELATE TO THE SOPL OCI
LATER NOTES RELATE TO THE SOFP
Other disclosures:
CONTINGENCIES, COMMITMENTS AND NON-FINANCIAL DISCLOSURES
Notes

Sources Of Estimation Uncertainty

Para.125 AASB 101, an entity shall disclose in notes key


assumptions about the future of estimation uncertainty that is
material
Notes shall include details of
Their nature
Their carrying amount as at the reporting date
Examples include:
Future interest rates
Future changes in salaries or prices that affect other costs
Useful lives of non-current assets
Notes

Capital and other disclosures

Information must be disclosed to enable users to evaluate the


entitys objectives, policies and processes for managing capital
Qualitative information
Summary quantitative data about what it manages as capital
Whether the entity complied with any externally imposed capital
requirements or, if not, the consequences of such non-compliance

AASB 1054 Australian Additional Disclosures requires:


Dividends
Company details
Audit fees
Future Developments

Corporate social responsibility reporting (CSR)


Social responsibility is the responsibility of an organisation for
the impacts of its decisions and activities on society and the
environment, through transparent and ethical behaviour that:
contributes to sustainable development, including the health and the welfare
of society
takes into account the expectations of stakeholders
is in compliance with applicable law and consistent with international norms
of behaviour; and
is integrated throughout the organization and practised in its relationships
Future Developments

Corporate social responsibility reporting (CSR)


Currently there are no accounting standards requiring CSR
reporting by Australian companies
However, there has been a growth in the number of Australian
companies presenting information on socially responsible
activities
It is likely that CSR reporting will continue to be driven by
community concerns with global warming and the impact of
company activities on the environment
Hence, CSR reporting can be expected to increase in the
foreseeable future