FINANCIAL STATEMENTS 

❑ Financial statements are the means by which the  

information accumulated and processed in financial  
accounting is periodically communicated to the users. 

❑ Financial statements are a structured representation  of the financial position and financial
performance of an  
entity. 

❑ Financial statements also show the results of  

management’s stewardship of the resources entrusted to  
it.

General Purpose Financial  

Statements 

❑ General purpose Financial Statements are those  

statements intended to meet the needs of users who are  
not in a position to require an entity to prepare reports  
tailored to their particular information needs. 

❑ Reports prepared at the request of an entity’s  

management or bankers are not general purpose financial  statements because they are prepared
specifically to meet  the needs of management or bankers.

Limitations of General Purpose Financial  Reporting 

a) General purpose financial reports do not and cannot provide all of  the information that
existing and potential investors, lenders and  other creditors need. 
b) General Purpose financial reports are not designed to show the  value of a reporting entity but
these reports provide information to  help the primary users estimate the value of the entity. 
c) General Purpose financial reports are intended to provide common  information to users and
cannot accommodate every specific  request for information 
d) To a large extent, financial reports are based on estimate and  judgement rather than exact
depiction.

Types of Financial Statements 

Depending on the reporting entity, the financial  statements are called: 
a) Consolidated – a reporting entity comprises both the  
parents and its subsidiaries. 
b) Unconsolidated – a reporting entity is the parent alone. c) Combined – a reporting entity
comprises two or more  entities that are not all linked by a parent-subsidiary  
relationship.

Components of FINANCIAL STATEMENTS

A complete set of Financial Statements comprises  the following components: 
1. Statement of Financial Position 
2. Statement of Profit or Loss and Other Comprehensive  Income  
3. Statement of Changes in Equity 
4. Statement of Cash Flows 
5. Notes, comprising summary of significant accounting  policies and other explanatory
information. 
6. Comparative information prescribed by PAS 1.

Structure and content of financial statements: •Each of the financial statements shall be
presented with equal  prominence and shall be clearly identified and distinguished from  other
information in the same published document. 
•The following information shall be displayed prominently and  repeatedly whenever relevant to
the understanding of the information  presented: 
1. The name of the reporting entity 
2. Whether the statements are for the individual entity or for the  group of entities 
3. The date of the end of the reporting period or the period  covered by the financial statements 
4. The presentation currency 
5. The level of rounding used (e.g. thousands, millions etc)

Objective of Financial Statements 

The objective of general purpose financial statements is to provide  information about the
financial position, financial performance and  cash flows of an entity that is useful to a wide
range of users in making  economic decisions. 
To meet the objective, financial statements provide information about  the following:

As per PAS 1, Entity can use other titles of the  financial statements other than those used in
the  Standard. e.g.

Suggested Title  Alternative Title 

Statement of Financial Position  Balance Sheet

Statement of Profit or Loss and Other  Statement of Comprehensive Income Statement

Comprehensive Income of Financial Performance 

Statement of Profit or Loss  Income Statement

Statement of Cash Flows  Cash Flow Statement

‘Third’ Statement of Financial Position
A third Statement of Financial Position is required when an entity: 
a) Applies an accounting policy retrospectively. 
b) Makes retrospective restatement of items in the financial statements. 
c) Reclassifies items in the financial statements. 
Under the circumstances, an entity shall present, three statements of financial position as at: 
1. The end of the current period 
2. The end of the previous period 
3. The beginning of the earliest comparative period 

Financial Reporting 

❑ Financial Reporting is the provision of financial information  about an entity to external users
that is useful to them in making  economic decisions and for assessing the effectiveness of the 
entity’s management. 

❑ The principal way of providing financial information to  external users is through annual
financial statements 

❑ Financial reporting encompasses not only financial  

statements but also other means of communicating information  that relates directly or indirectly
to the financial accounting  process. 

❑ Financial reports include not only financial statements but  also other information such as
financial highlights, summary of  important financial figures, analysis of financial statements
and  significant ratios.

Specific Objectives of Financial  

Reporting: 
1. To provide information useful in making investing and credit  decisions about providing
resources to the entity. 
2. To provide information useful in assessing the cash flow  prospects of the entity. 
3. To provide information about entity resources, claims and  changes in resources and claims.
Responsibility for Financial Statements 

❑ The management of an entity has the primary responsibility  for the preparation and
presentation of financial statements. 

❑ The Board of Directors in discharging its responsibilities  reviews and authorizes the financial
statements for issue  
before these are submitted to the shareholders of the entity. 

❑ Management is accountable for the safekeeping of the  resources and their proper, efficient
and profitable use.

General Features of Financial Statements 

1. Fair presentation and compliance with PFRS 
2. Going Concern 
3. Accrual Basis 
4. Materiality and Aggregation 
5. Offsetting 
6. Frequency of reporting 
7. Comparative Information 
8. Consistency of presentation

Fair Presentation and Compliance  

with PFRS 
Fair presentation requires an entity: 
a) To select and apply accounting policies in accordance  with PFRS. 
b) To present information, including accounting policies, in  a manner that provides relevant and
faithfully  
represented financial information. 
c) To provide additional disclosures necessary for the users  to understand the entities financial
statements.
Compliance with PFRS: 

❑ An entity whose financial statements comply with PFRSs  shall make an explicit unreserved
statement of such  
compliance in the notes.  

❑ An entity shall not describe financial statements as  

complying with PFRSs unless they comply with all the  
requirements of PFRSs.
Departure from Standard 
An entity is permitted to depart from a standards: 
1. In extremely rare circumstances. 
2. When management concludes that compliance with the  standard would be misleading. 
3. When the departure from the standard is necessary to  achieve fair presentation. 
4. When the regulatory Conceptual Framework requires or  otherwise does not prohibit such a
departure.

Accrual Basis
 An entity shall prepare the financial statements, using the
accrual basis of accounting except for cash flow information
 Under accrual basis the effects of transactions and other
events are recognized when they occur and not as cash or cash
equivalent is received or paid, and they are recorded and
reported in the financial statements of the periods to which
they relate.
 Accrual accounting means that income is recognized when
earned regardless of when received and expenses is recognized
when incurred regardless of when paid.
Materiality and Aggregation
 An entity shall present separately each material class of similar
items
 An entity shall present separately items of dissimilar nature or
function unless they are immaterial.
 The final stage in the process of aggregation and classification is
the presentation of condensed and classified data which form
Line Items in the financial statements.
 If a Line Item is not individually material, it is aggregated with
other items either in those statements or in the notes.
 Materiality of an item depends on relative size rather than
absolute size.

Factors of Materiality
In the exercise of judgment in determining materiality, the
following factors may be considered:
1. Relative size of the item in relation to the total group to which
the item belongs.
2. Nature of the item – an item may be inherently material
because by its very nature it affects economic decision.

Offsetting
 Assets and Liabilities, and Income and Expenses, when
material, shall not be offset against each other.
 Offsetting may be done when it is required or permitted by
another PFRS.
Frequency of Reporting
An entity shall present a complete set of financial statements at
least annually.
When an entity changes the end of the reporting period and
presents financial statements for a period longer or shorter than
one year, the entity shall disclose:
1. The period covered by the financial statements
2. The reason for using a longer or shorter period
3. The fact that amounts presented in the financial statements
are not entirely comparable.

Frequency of Reporting 

❑An entity shall present a complete set of financial statements at  least annually. 

❑When an entity changes the end of the reporting period and  presents financial statements for a
period longer or shorter than  one year, the entity shall disclose: 
1. The period covered by the financial statements 
2. The reason for using a longer or shorter period 
3. The fact that amounts presented in the financial statements  are not entirely comparable.
Comparable Information 

❑ Except when permitted or required otherwise by PFRS, an   entity shall disclose comparative
information in respect of the   previous period for all amounts reported in the current period’s  
financial statements. 

❑ The financial statements of the current period shall be   presented with comparative figures of
the financial statements   of the immediately preceding year/period. 

❑ Comparative information shall be included for narrative and   descriptive information when it
is relevant to an understanding   of the current period’s financial statements.

Minimum Comparative Information 

❑ An entity shall present, as a minimum, two of each of the  statements included in the complete
set of financial statements and  related notes. 

❑ For example, an entity that uses calendar year as its accounting  period will present the
following financial statements as a  minimum: 

Statement Date or Period Covered (Current Period)  Date or Period Covered

(Previous Period) 

Financial Position Dec. 31, 2021 Dec. 31, 2020 

Financial Performance Year Ended Dec. 31, 2021 Year Ended Dec. 31, 2020 Changes in Equity
Year Ended Dec. 31, 2021 Year Ended Dec. 31, 2020 Cash Flows Year Ended Dec. 31, 2021
Year Ended Dec. 31, 2020
Consistency of Presentation 

❑ The principle of consistency requires that the accounting   methods and practices shall be
applied on a uniform basis from   period to period. 

❑ The presentation and classification of financial statement items   shall be uniform from one
accounting period to the next. 

❑ Consistency is desirable and essential to achieve comparability   of financial statements.

Consistency of Presentation 

❑ The principle of consistency requires that the accounting   methods and practices shall be
applied on a uniform basis from   period to period. 

❑ The presentation and classification of financial statement items   shall be uniform from one
accounting period to the next. 

❑ Consistency is desirable and essential to achieve comparability   of financial statements.

Notes to Financial Statements 

❑ Notes to Financial Statements are integral part of the financial   statements. 

❑ In general, entities make these notes to help users better   understand the information
presented in the financial statements. ❑ The notes shall: 
a) Present information about the basis of preparation of the  financial statements and specific
accounting policies used; b) Disclose the information required by PFRS that is not  presented
elsewhere in the financial statements; and 
c) Provide information that is not presented elsewhere in the  financial statements, but is relevant
to a understanding of any  of them.
Disclosure of Accounting Policies 

❑ An entity shall disclose its significant accounting policies  comprising : 

a) The measurement basis used in preparing the financial  statements; and 
b) The other accounting policies used that are relevant to an  understanding of the financial
statements.

LESSON 2
STATEMENT OF FINANCIAL POSITION

❑ A Statement of Financial Position is a formal statement  showing the three elements

comprising financial position,  namely Assets, Liabilities and Equity. 

❑ The information provided in the statement of financial  position can help users: 
▪ Identify the reporting entity’s financial strengths and weaknesses. ▪ Assess the reporting
entity’s liquidity and solvency. 
▪ Assess the reporting entity’s needs for additional financing and how  successful it is likely to be
in obtaining that financing. 
▪ Assess management’s stewardship of the entity’s economic  resources. 
▪ Predict how future cash flows will be distributed among those with  a claim against the
reporting entity.

 The statement of financial position shows the entity’s financial condition as at  a certain
date, it includes line items that present the following amount:
a) Property, plant and equipment 
b) Investment property 
c) Intangible Assets 
d) Financial assets (excluding (e), (h) ad (i); 
e) Investments accounted for using the equity method 
f) Biological Assets 
g) Inventories 
h) Trade and other receivables 
i) Cash and Cash Equivalents 
j) Assets held for sale, including disposal groups 
k) Trade and other payables 
l) Provisions 
m) Financial Liabilities 
n) Current Tax liabilities and current tax assets 
o) Deferred Tax liabilities and deferred tax assets 
p) Liabilities included in disposal groups 
q) Non-controlling interests; and 
r) Issued capital and reserves attributable to owners of the parent (PAS  1.54)

PRESENTATION OF STATEMENT OF FINANCIAL POSITION

❑ Manners of presentation of Statement of Financial  Position: 

1. Classified Presentation – shows distinctions between  current and noncurrent assets, and
current and  noncurrent liabilities. 
2. Unclassified Presentation – shows no distinction  between current and noncurrent items.

❖A classified presentation shall be used except when an unclassified  presentation provides

information that is reliable and more relevant.

FORMS OF PRESENTATION OF STATEMENT OF FINANCIAL POSITION

 In practice there are two customary forms in  presenting the statement of Financial Position: 1.
Report Form 
 This form sets forth the three major sections in a downward  sequence of assets, liabilities and
equity. 
2. Account Form 
 The assets are shown on the left side and the liabilities and  equity on the right side of the
statement of financial position
PRESENTATION OF FINANCIAL ASSETS AND FINANCIAL LIAILITIES
The carrying amounts of each of the following  categories, as specified in PFRS 9, shall be
disclosed  either in the statement of financial position or in the  notes: 
a) Financial assets measured at fair value through profit or loss,  showing separately: 
i. Those designated as such upon initial recognition or  subsequently in accordance with
paragraph 6.7.1 of PFRS 9.  ii. Those measured as such in accordance with the election in 
paragraph 3.3.5 of PFRS 9. 
iii. Those measured as such in accordance with the election in  paragraph 33A of PAS 32; and 
iv. Those mandatorily measured at fair value through profit or loss 
b) Financial assets measured at fair value through other  comprehensive income, showing
separately: 
i. Financial assets that are measured at fair value through other  comprehensive income in
accordance with paragraph 4.1.2A of  PFRS 9. and 
ii. Investments in equity instruments designated as such upon  initial recognition in accordance
with paragraph 5.7.5 of PFRS 9. c) Financial assets measured at amortized cost. 
d) Financial liabilities at fair value through profit or loss,  showing separately: 
i. Those designated as such upon initial recognition or  
subsequently in accordance with paragraph 6.7.1 of PFRS 9.  ii. Those that meet the definition of
held for trading in PFRS 9.
e) Financial liabilities measured at amortized cost.

ORDER OR FORMAT OF PRESENTATION

 PAS 1 doest not prescribe the order or format in which an  entity present items. PAS 1 simply
provided a list of items  that are sufficiently different in nature or function to  warrant separate
presentation in the statement of financial  position. In addition: 
A. Line items are included when the size, nature or function of an  item or aggregation of similar
items is such that separate  
presentation is relevant to an understanding of the entity’s  
financial position; and 
B. The descriptions used and the ordering of items or aggregation of  similar items may be
amended according to the nature of the  entity and its transaction, to provide information that is
relevant  to an understanding of the entity’s financial position.

CURRENT AND NON CURRENT DISTINCTION

CURRENT ASSETS – ARE ASSETS THAT are:

a. Expected to be realized, sold or
consumed in the entity’s normal
operating cycle.
b. Held primarily for trading
c. Expected to be realized within 12
months after the reporting period; or
d. Cash or cash equivalent, unless
restricted from being exchanged or
used to settle a liability for at least
twelve months after the reporting
period.

Current Liabilities – are liabilities

that are:
a. Expected to be settled in the
entity’s normal operating cycle.
b. Held primarily for trading.
d. Due to be settled within 12
months after the reporting period; or
e. The entity does not have an
unconditional right to defer
settlement of the liability for at least
twelve months after the reporting
period.

OPERATING CYCLE

❑ The operating cycle of an entity is the time between  the acquisition of assets for processing
and their  realization in cash or cash equivalents. 

❑ When the entity’s normal operating cycle is not clearly  identifiable, it is assumed to be twelve
months.

EVENTS AFTER THE REPORTING PERIOD

 Events after reporting period are those events, favorable  and unfavorable, that occur between
the end of the  reporting period and the date when the financial statements  are authorized for
issue. 
 Events after the Reporting Period provides guidance as to  which events should lead to
adjustments in the financial  statements and which events shall be disclosed in the notes  to
financial statements. 
 Two types of events can be identified: 
1. Those that provide evidence and conditions that existed at the end  of the reporting period
(adjusting events after the reporting  period); and 
2. Those that are indicative of conditions that arose after the  reporting period (non-adjusting
events after the reporting period)
ADJUSTING EVENTS AFTER THE REPORTING PERIOD
 If any events occur after the end of the reporting period that  provide further evidence of
conditions that existed at the end  of reporting period (i.e. Adjusting Events), then the financial 
statements must be adjusted accordingly. 
 Examples of Adjusting Events include: 
◦ Settlement of litigation against the entity after the reporting date, in  respect of events that
occurred before the end of reporting period,  may provide evidence of the existence and amount
of liability at the  reporting date. A liability in respect of the litigation may be recorded in  the
financial statements if not recognized initially or the amount of  liability may be . 
◦ Declaration of bankruptcy by a long outstanding receivable after the  reporting date may
provide evidence that the receivable was impaired  at the reporting date. Impairment may be
recognized in the financial  statements by reducing the amount of receivable to its recoverable 
amount, if any. 
◦ Detection of fraud or errors after the reporting period may indicate  that the financial statements
are misstated. Financial statements may  be adjusted to reflect accounting for those errors or
frauds that relate  to the present or prior reporting periods.

NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD

 Entity shall not adjust the financial statements in  respect of those events after the end of
reporting  period that reflect conditions that arose after the end  of reporting period (i.e. Non-
Adjusting Events). 
 For each material category of non-adjusting event after  the reporting period, an entity shall
disclose the  following: 
1. The nature of the event; and 
2. An estimate of its financial effect, or a statement that such  an estimate cannot be made.
 Examples of Non-Adjusting Events include: 
◦ Declaration of dividends after the reporting date does not  indicate existence of liability to pay
dividends at the reporting  date and shall not therefore trigger the recognition of liability  in
financial statements.  
◦ Destruction of assets of the entity by floods occurring after  the reporting period does not
indicate that the assets of the  entity were impaired at the end of reporting period. Hence,  the
financial statements should not be adjusted to account  for the impairment loss that arose after
the end of reporting  period. 
◦ Initiation of litigation against the company arising out of  events that occurred after the
reporting period does not  indicate the existence of liability at the reporting date and  shall not
therefore trigger the recognition of liability in the  financial statements.

REFINANCING AGREEMENT
 A long-term obligation that is maturing within 12 months,  after the reporting period is
classified as current, even if a  refinancing agreement to reschedule payments on a long term basis is completed after the
reporting period but  before the financial statements are authorized for issue. 
 The Obligation is classified as noncurrent, if the entity  expects and has the discretion to refinance it on a long term
basis under an existing loan facility.  If the refinancing is not at the discretion of the entity, the 
financial liability is current. 
 Refinancing refers to the replacement of an existing debt  with a new one but with a different
terms, e.g. extended  maturity date. 
 A refinancing where the debtor is under financial distress is  called “troubled debt
restructuring”. 
 Loan facility refers to a credit line.