understanding the fs

7/30/2019 Understanding the FS

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UNDERSTANDING OF FINANCIAL STATEMENT

International Accounting Standard Board Framework

International Financial Reporting Standards (IFRS) are based on the IASB framework for the

sake of preparation and presentation of financial statement.

Role of IASB framework

IASB framework provides facility of consistent and logical formulation of IFRSs. It also

provides platform for resolving accounting issues. Hence, framework enjoys the status of

conceptual base for development of IFRSs.

Elements of financial statement:

The framework defines elements of financial statement. Definition of these elements reduces

confusion over which item is to be recognized and which should not. An item which does notfulfill the features of definition of an element should not be recognized.

There are five elements of financial statement:

Asset, Liability, Equity, Income and Expense.

Asset:

A resource controlled by an entity as a result of past events and from which future economic

benefits are expected to flow to the entity.

Liability:

A present obligation of the entity arising from past events, the settlement of which is expected toresult in an outflow of resources.

Equity:

The residual interest in the assets of an entity after deducting all its liabilities.

Income:

Increase in economic benefits in the form of enhancement of assets or decrease in liability that

result in increase in equity.

Expense:

Decrease in economic benefits in the form of depletion of assets or increase in liability that resultin decrease in equity.

The framework definitions demonstrate that IFRS is based on balance

sheet approach to recognition i.e. income and expenses are defined as

changes in assets and liabilities rather than other way round.

Recognition of the elements of the FS:

An item is to be recognized in the FS when it meets the definition of an element, the item has avalue which can be measured reliably and it isprobable to inflow or outflow of the resources.


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Presentation of Financial Statement (IAS-1)

Objective of IAS-11. The objective of IAS-1 is to prescribe the basis for presentation of general purpose

financial statement to ensure comparability. The general purpose financial statements are

those intended to serve users who are not in a position to require financial reports for

their particular purpose.2. IAS-1 sets out overall requirement of presentation and minimum requirement of contents.Objective of financial statement

Objectives of general purpose financial statements is to provide information about the financialposition, financial performance, change in equity and cash flow of an entity that is useful to a

wide range of users in making economic decisions.

Component of financial statementA complete set of financial statement should include:

1. A statement of financial statement at the end of the period.2. A statement of comprehensive income for the period.3. A statement of changes in equity for the period.4.

A statement of cash flow for the period.5. Notes, comprising a summary of accounting policies and detail of the elements offinancial statement.

Principles for financial statement1. An entity preparing IFRS financial statement is presumed to be a going concern. If

management has significant concerns about the entity ability to continue as a going

concern, the uncertainties must be disclosed.2. IAS-1 requires that an entity prepare its financial statements, using the accrual basis of

accounting except for cash flow statement.

3. The presentation and classification of items in the FS shall be consistent.4. Each material class of similar items must be presented separately in the FS and

dissimilar items may be aggregated only if they are individually immaterial.

5. Assets and Liabilities, Income and Expense may not be offset unless required by theIFRS.

6. IAS-1 requires that comparative information of the previous period shall be disclosedfor all the amounts reported in the financial statement, both at face and notes.

Structure and Content of FS in General1. Name of the financial statement component2. Name of the reporting enterprise3. The date or period covered4. Presentation currency5. Level of precision (thousand, millions etc.)6. Whether the statement is for the enterprise or for a group

Notes Disclosures required by IAS-1The following notes disclosures are required by IAS-1 if not disclosed elsewhere information

published with the financial statements:

1. Domicile and legal form of the country2. Country of incorporation3. Address of registered office or principal palace of business4. Description of the entitys operations and principal activities


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5. Information regarding the length of life.6. Name of the parent company and ultimate parent of the group.7. Disclosure about dividend8. Disclosure about capital

Performa of Cash flow Statement

A.

Cash flow from operating activitiesNet profit before income tax

Less/ Add: interest income/ expense (take from IS)

Operating profitAdjustment of non-cash items

Depreciation

Amortization of GoodwillWarranty provisions

Loss on disposal of asset

Foreign exchange loss

Bad debts

Operating profit before working capitalWorking capital adjustment

Dec/ Inc in inventory (Dec-add & Inc-less)Dec/ Inc in receivables (Dec-add & Inc-less)

Dec/ Inc in payables (Dec-less & Inc-add)

Cash Generated from operation

Add: Interest receivedLess: Interest paid

Add: Dividend received

Less: Dividend paidAdd: Tax refund

Less: Tax paid

Net Cash flow from operating activities

B. Cash flow from investing activitiesPurchase of PPE and IP

Less: proceed from sale of PPE and IP

Net cash flow from investing activities

C. Cash flow from financing activitiesProceed from issue of shares

Proceed from long term borrowingLess: Payment of finance lease

Less: payment of long term loan

Net cash flow from financing activities

Net Inc/ Dec in cash and cash equivalent (A+B+C)

Cash and cash equivalent opening balance

Cash and cash equivalent closing balance


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Events after reporting period (IAS-10)

Objective of IAS-10 is when an entity should adjust it financial statement for events after thereporting period.

Suppose, financial year of 2012 starts from 1st

January 2012 and ends on 31st

December 2012.

Approval of the accounts by the management was provided on 31

st

March 2013 whereasaccounts are submitted in AGM for the approval of shareholders on 30 th April 2013, after which

reports are authorized to issue. IAS-10 is applicable for the events which are occurred after the

balance sheet date but to the date of approval by the management i.e. 31st

December 2012 to 31st

March 2013. Event may be adjusting or non-adjusting.Adjusting events are those which provideadditional evidence of their existence at the balance sheet date. Adjusting events are required to

be recognized in the FS. Non-adjusting events are those which do not provide additional

evidence of their existence at the balance sheet date. Non-adjusting events are required to be

disclosed in the notes of the financial statement.

Special consideration:

1.

An entity shall not prepare its financial statement on a going concern basis, ifmanagement determines after the end of reporting period about liquidate the entity or

cease trading.2. Dividend is to be recorded in that year in which it is proposed, therefore it is non-

adjusting event. Hence, dividend declared after the reporting date but before authorized

for issue is non-adjusting event.

3. Abnormal loss / natural calamities do not provide additional evidence, therefore non-adjusting events.

4. Amalgamation/ reconstruction/ acquisition do not provide additional evidence, thereforenon-adjusting events.

Illustration:

1. Reduction in value of closing stock is an adjusting event and provides additionalevidence of their existence at the balance sheet date.

2. A court case was settled confirming the obligation at the end of reporting period.3. Major litigation due to the events occurred after the reporting period.4. Costs of assets purchased before the end of reporting period were determined after the

reporting period.

5. Errors or fraud affecting financial statements at the end of reporting period werediscovered after the reporting period.


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Property, Plant and Equipment (IAS-16)

Tangible Assets:According to IAS-16, tangible assets mean that which are held by an entity for use in production

or supply of goods and services, for rentals to others or for administrative purposes. Tangible

assets are expected to be used more than one accounting period.

Recognition of NCA:NCA are to be recognized when cost of the asset can be measured reliably and there is a probable

that future economic benefit will flow to the entity.

Measurement of NCA:

a. Initial Measurement:Initially, NCA is required to be recognized at cost. Cost includes purchase price of the asset,

import duties, non-refundable taxes, directly attributable cost (installation cost, site preparationcost) less trade discounts. However, asset acquired in exchange of another asset, cost should be

measured at fair value.

b. Subsequent Measurement:Subsequently, NCA is required to be recognized either at cost model or at revaluation

model. Cost model means asset is to be carried at book value. Book value means cost ofthe asset less accumulated depreciation and impairment. Revaluation Model means asset

is to be carried at fair value. Fair value is an amount for which an asset could be

exchanged, between knowledgeable willing parties in an arms length transaction.

Accounting for Revaluation Model:

When an asset is to be revalued, there may be revaluation gain or revaluation loss. Revaluation

gain appears when the fair value of an asset is greater than the net book value of the asset at thedate of revaluation. Revaluation loss appears when the fair value of an asset is lesser than the net

book value of the asset at the date of revaluation.

Journal entries:Revaluation gain is appeared: Revaluation loss is appeared:

For Non-depreciable and depreciable asset:

Revaluation LossNon-Current Asset

Revaluation Surplus is recognized in equity in BS

(as capital reserve), whereas Revaluation Loss is

charged as an expense in P&L.

For Non-depreciable

asset:Non-Current Asset

Rev. Surplus

For depreciable asset:

Accumulated DepreciationNon-Cur Asset

------------------------------

Non-Current Asset

Rev. Surplus

If in the previous year Revaluation loss was

occurred but in the current financial year

Revaluation surplus is appeared:Asset

P&L (Old revaluation loss)

Revaluation Surplus(BF)

If in the previous year Revaluation surplus was

occurred but in the current financial year

Revaluation loss is appeared:Revaluation Surplus (Old surplus)

P&L (balancing figure)

Asset

According to IAS-16, depreciation is a systematic allocation of depreciable amount over

the useful life of an asset. Depreciable amount means cost of an asset less residual value.Depreciation Methods:1. Straight line method= (Cost of an asset- residual value) / useful life2. Reducing balance method= (1-RV/Cost)1/n3. Sum of digit method = n (n+1)/ 24. Machine hours method = (Depreciable amount / Estimated life in hours) Actual hours

used.


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Revenue (IAS-18)

Objective:The objective of IAS-18 is to prescribe the accounting treatment for revenue arising from

certain types of transactions and events.

Revenue:

Revenue is the gross inflow of economic benefit arising from ordinary course of activitiessuch as sale of goods, sale of services, interest, royalties and dividends.

Criteria for recognition of revenue on account of sale of goods:

1. Risk and Reward has been transferred.2. No managerial involvement.3. Cost of goods measured reliably.4. Inflow of economic benefit is probable.5. Amount of revenue can be measured reliably.

All criteria must be met for recognition. Sometimes, risk & reward has

been transferred but any other criteria not met. Company has to record

goods in its own book.

Criteria for recognition of revenue on account of sale of services:1. Completion of work can be measured reliably.2. Cost of services can be measured reliably.3. Inflow of economic benefit is probable.4. Amount of revenue can be measured reliably.Criteria for recognition of Dividend Income:

When right to receive dividend established. It means when company declared thedividend.

Criteria for recognition of Interest Income:

On the basis of time by applying effective rate of interest.

Criteria for recognition of Royality Income:On the basis of accrual.

All revenues must be recognized at present value.


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Fair value measurement (IFRS-13)

NeedDifferent IFRSs recommend using fair value but every IFRS provide it own guidelines to

determine fair value. IFRS-13 states that how initial fair value is measured and how

subsequent fair value is determined.

Scope:Three things are explained in IFRS-13:

1. Fair value.2. Methods to determine fair value.3. Disclosure regarding determination of fair value.Fair value:

Fair value is the amount which can be received on account of sale of an asset or paid totransfer a liability between market participants in an ordinarily transaction at the date of

measurement. Market participant means willing independent buyer and selling having

good knowledge. Ordinarily transaction means arms length transaction.

Methods to determine fair value:

Fair value should be taken from Principal market. In the absence of principal market, fairvalue is to be taken from most advantageous market. Principal market means market with

greatest volume of activity of concerned nature. Most advantageous market meansmaximize the obtainable value of the asset and minimize the payable value of the

liability.

Assumptions:

1. Transaction cost is ignored while determining fair value of asset.2. Transportation cost included while determining fair value of asset.3. However, when identify most advantageous market consider both transaction cost and

transportation cost.

Hierarchy used for fair value:

Level-1 Quoted price from market

Level-2 If quoted price not given, price of similar asset from non-

active market

Level-3 If above both also not given, determine the fair value

through unobservable inputs i.e. valuation technique.

For determining fair value, location of asset, condition of asset and

highest best use of the asset should also be considered.

understanding the fs

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