ACCG 907 Financial Reporting

Module Two
Presentation of Financial Statements

1
Part A – Presentation
of Financial
Statements

NOTE: Please check assumed knowledge on page 96.

2
 Complete set of Financial Statements
SG p98- 100

Source: CPA Australia 2016.

If the entity is listed (eg on the ASX) it must include a ‘segment note’
(page 100) as part of the notes to the financial statements.

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 Fair presentation and compliance with IFRS
SG p 101

• IAS 1 requires fair presentation of financial statements

• Fair presentation requires faithful representation in accordance with
Conceptual Framework.
• IAS 1 para 15 considers that compliance with IFRS will result in fair
presentation
• IAS 1 para 16 requires a positive statement of compliance with IFRS in
notes
• Review Note 2 KPMG IFRS Guide (p.16)

4
 General features of presentation of
financial statements per IAS 1
SG p 102 - 104
• Going concern
• Accruals basis
• Materiality and aggregation
• Offsetting
Note similarity with
• Frequency of reporting terminology used in
Conceptual Framework
• Comparative information in Module 1

• Consistency

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 Accounting policies
SG p 104

• IAS 8 Accounting Policies, Changes in Accounting Estimates

and Errors

6
 Selecting and applying accounting policies
SG p 105
Level IAS 8 Details Example
para ref

1 7 A standard (or interpretation) dealing with

the specific transaction or event

2 10 and A standard (or interpretation) dealing with a

11(a) similar transaction or event

3 10 and Definition of the financial statements

11(b) elements from the Conceptual Framework to
try to determine the treatment

4 10 and A standard (or interpretation) from other

12 standard setting bodies (most likely FASB)

5 10 and Industry practice

12

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 Disclosing accounting policies
SG p 106

• IAS 1 paras 112 -127 contain requirements in relation to disclosure of

an entity’s accounting policies in the notes to the financial statements.
• Requires measurement bases used and details necessary to
understand the financial statements
• Refer KPMG note 44 (pp 111-125)

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Disclosing accounting policies
SG p 106

9
Disclosing accounting policies
SG p 106

10
 Changing accounting policies
SG p 107 - 110

• Accounting policies can only be changed if:

(1) The change is required by a Standard/Interpretation (that is, the
change is mandatory)
– The entity shall account for the change in accordance with the
transitional provisions set out in that standard (normally these
provisions allow prospective application).
– If no transitional provisions are set out, change must be applied
retrospectively (that is, as if the new policy had always applied)

(2) The change will provide reliable and more relevant information
(that is, the change is voluntary)
– All voluntary changes must be applied retrospectively
• See Example 2.1

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 Revisions of accounting estimates
SG p 110 - 113

• Changes in accounting estimates are adjustments to the carrying

amount of items in the financial statements resulting from new
information.
• Revisions of accounting estimates are common.
• Changes in accounting estimates require prospective application.
• Example
• The useful life assessment of non-current assets change due to
technological advancements – i.e. actual useful life is shorter
than original estimate of useful life.
• Depreciation expense recognised in prior periods is not
changed, but the remaining carrying amount of the asset is
written off over its remaining (shorter) useful life

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 Accounting policies vs
accounting estimates

• Accounting policies
– Principles or conventions applied in statement preparation
– eg valuation of inventory at lower of cost or NRV is an
accounting policy
• Accounting estimates
– A judgement applied in determining the carrying amount of
an item in the financial statements
– eg estimating inventory obsolescence in line with the policy
re inventory valuation, estimating allowance for doubtful
debts, useful life estimates for non-current assets
• Refer IAS 8 para 35

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 Accounting policies vs
accounting estimates

One of the following is a change in an accounting policy

and the other is a revision of an accounting estimate by
Cole Ltd. Which is which?
(a)Raw material inventory has always been valued
using the FIFO method. Cole Ltd has decided that
inventory would be better presented if it were valued
using the weighted average cost method.
(b)The depreciation of an asset over 10 years on a
straight line basis has been changed to diminishing
value to match the costs with the benefits earned.

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 Accounting policies vs
accounting estimates

(1)Change from FIFO to WAC

(2)Change from SL to DV

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 Correcting prior period errors
SG p 110- 113

• Omissions from, and misstatements in, entity’s financial

statements for one or more prior period
• Discovered errors (where material) must be corrected
retrospectively by:
– Restating comparative amounts for each prior period
presented in which error occurred
– Restating opening balances of assets, liabilities and
equity for earliest prior period presented
– Including any adjustment to opening equity in SOCE
– See Example 2.3

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 Correcting prior period errors
SG p 110- 113

• Trip Co is preparing its financial statements for the year ended 31 Oct
X8 when it discovers a fraud has taken place in the previous year.
• An employee who left in Sep X7 has taken a total of $12m from the
business, diverting funds into their private bank account.
• Trip Co does not know how to account for this and wishes to disclose
it as an exceptional item in the statement of profit or loss and other
comprehensive income as it will have a material effect on the result
for the year.
• The profit for the period before adjusting for the fraud is $30m and
opening retained earnings are $265m.
Required: Determine how to account for the fraud in the
31 Oct X8 financial statements.

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Correcting prior period errors
SG p 110- 113

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Correcting prior period errors
SG p 110- 113

• Review Note 43 KPMG

IFRS guide

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 Summary of retrospective and
prospective application guidance
Issue Retrospective or
prospective?
Accounting policy change – mandatory –
where transitional provisions are included in
standard
Accounting policy change – mandatory –
where transitional provisions are NOT
included in standard
Accounting policy change – voluntary
Change in an accounting estimate
Prior period error – where material
Prior period error – where NOT material

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 Events after the reporting period
SG p 113 - 119

• Financial statements should reflect conditions that

existed at the end of the reporting period.
• IAS 10 Events after the Reporting Period deals with
how post-reporting-date events must be considered.

Source: CPA Australia based on IAS 10.

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 Events after the reporting period
SG p 113 - 119

Source: CPA Australia 2016.

• Adjustable events: provides further evidence of conditions that existed

at the reporting date.
• Non-adjustable events: arise after the reporting events for the first time.
• See figure 2.4 Page 116

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 Events after the reporting period
SG p 113 - 119

Adjusting events Non-adjusting events

+ Settlement after the reporting period of + Fall in market value of investments

a court case ongoing at year end

+ Bankruptcy of a customer requiring + Plans to discontinue operations after

adjustment to amounts receivable the reporting period

+ Sale of inventories after the reporting + Major purchases of assets

period providing evidence about NRV

+ Subsequent determination of purchase + Losses as a result of catastrophes (eg

price or sale proceeds of assets fire, flood)
purchased/sold before end of the
reporting period

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 Events after the reporting period
SG p 113 - 119
Review Note 41 KPMG IFRS guide (p.108)

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Part B – Statement of
profit or loss and
other comprehensive
income
(SPLOCI)
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 Introduction
SG p 121

• One of the key indicators of a business entity’s performance

is its reported profit figure.
• How profit is determined and the information disclosed
concerning various aspects of profit are central accounting
issues.
• IAS 1 deals with these matters.

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 Presentation of comprehensive income
SG p 122

• IAS 1 requires an entity to present:

Source: Based on IAS 1.

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 Presentation of
comprehensive
income
A proforma of the single statement
approach.

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Presentation of
comprehensive
income

Another example of the

single statement
approach as presented in
the KPMG IFRS guide
(p.10)

29
 Presentation of comprehensive income

An example of the dual statement approach as presented in the KPMG

IFRS guide (p. 129-130)

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The concept of other comprehensive income
SG p 122 - 123

• Other comprehensive income (OCI) is income and expense not

recognised in profit or loss
• In other words – movements in equity that are not related to
transactions with owners
• Examples of OCI:
– increases/decreases in asset revaluation surplus
– gains/losses on cash flow hedges **
– gains/losses on equity instruments measured at FV through OCI **
– exchange differences on translating foreign operations.

** covered in Module 6

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 Disclosure and classification
SG p 124 - 130

• IAS 1.81A sets out key sections and subtotals required

Key profit and loss disclosures

• IAS 1.82 prescribes minimum line items for the profit and loss
section
• IAS 1.85 allows additional items (discretionary)
• IAS 1.97 requires separate disclosure of material items**
• IAS 1.99-103 require disclosure of expenses on basis of nature
or function**

** These last two disclosures may either be on face of statement OR in the notes

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 Disclosure and classification
SG p 124 - 130

Key OCI disclosures

•Under IAS 1.82A each item of OCI must be grouped into those that:
– will not be reclassified subsequently to profit or loss; and
– will be reclassified subsequently to profit or loss when specific
conditions are met
•IAS 1-90-91 requires that tax related to OCI is also reported in OCI.
It may be reported in aggregate or each element of OCI may be
presented net of tax.
•IAS 1.92 requires that certain gains or losses in OCI subsequently be
reclassified to profit or loss when specific conditions are met.

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 Disclosure and classification

• On 31 Dec 20X2, Stratford Ltd sold the whole of its investment in

Lea Ltd, a foreign operation.
• At 1 Jan 20X2, the consolidated equity of Stratford Ltd included
accumulated net exchange losses of $45,000 which has arisen
when Stratford Ltd translated the financial statements of Lea Ltd into
its own functional currency so that they could be included in the
consolidated financial statements of the group.
• During the year ended 31 Dec 20X2 an exchange gain of $2 500
arose on translation.

Required: Explain how the translation differences should be

recognised in the consolidated SPLOCI for the year
ended 31 Dec 20X2.

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Disclosure and classification

35
 Tips on how to analyse the SPLOCI
SG p 130 - 131

1. Review the components of revenue.

2. Review the components of expenses.
3. Review the profit result for the period.
4. Review the other comprehensive income result.
5. Overall performance.

Make sure you access and work through the Learning Task on
MYOL under the Module 2 folder relating to the SPLOCI

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Part C – Statement of
changes in equity
(SOCE)

37
 Statement of changes in equity
SG p 132 - 133

• Shows movements on equity balances – share capital, retained

earnings, revaluation surplus and other reserves
• Should explain and reconcile the movement in net assets of an
entity over a reporting period.
• IAS 1.106 requires disclosure of each component of equity with
separate disclosure of changes from:
– profit or loss
– movements in OCI
– Transactions with owners

38
 Statement of changes in equity
SG p 132 - 133

A proforma SOCE.

39
 Statement of changes in equity
SG p 132 - 133
Another example of the SOCE as presented in the KPMG IFRS guide (p.12)

40
 Statement of changes in equity
SG p 132 - 133

The balances of Ed Co’s equity and reserves on 1 January 20X8 were

as follows:
Share capital - $75m
Revaluation surplus - $5m
Retained earnings - $105m
During the year ended 31 December 20X8, Ed Co reported total
comprehensive income of $86m, of which $16m related to the
revaluation of land and buildings.
Dividends of $40m were paid.
Required: Prepare the statement of changes in equity
for the year ended 31 December 20X8.

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 Statement of changes in equity
SG p 132 - 133

Share Revaluation Retained Total

Capital Surplus Earnings Equity

Opening balance 1 Jan X8

Profit or loss
Other comprehensive income
Dividends
Closing balance 31 Dec X8

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Part D – Statement of
financial position
(SFP)

43
 Statement of financial position
SG p 134 - 137

• IAS 1 provides suggested format for statement of financial position (SFP)

• Distinction between current and non current items
– Current assets: expected to be realised / held for sale in normal
course of entity’s operating cycle, held for trading purposes to be
realised within 12 months
– All other assets are non-current
– Current liabilities: expected to be settled in normal operating cycle,
held for trading, due to be settled within 12 months
– All other liabilities are non-current
• If SFP not presented with current/non-current distinction, present in order
of liquidity

44
 Statement of financial position
SG p 134 - 137

• IAS 1.54 minimum line items required on the

face of the statement of financial position:
Assets Liabilities Equity

• Cash and cash equivalents • Trade and other payables • Issued capital
• Trade and other receivables • Financial liabilities • Reserves
• Inventories • Provisions • Retained earnings
• Financial assets • Current tax liabilities • Non-controlling interests
• Non-current assets classified • Liabilities directly associated
as held for sale with non-current assets
• Investments accounted for classified as held for sale
using the equity method • Deferred tax liabilities
• Property, plant and equipment
• Investment property
• Intangible assets
• Biological assets
• Current tax assets
• Deferred tax assets

45
 Statement of financial position
SG p 134 - 137

An example of the SFP as presented in the KPMG IFRS guide (p.8-9)

46
 Disclosures in the notes to the financial
statements
SG p 137

• Many line items contained in the statement of financial position require

additional subclassifications and disclosures, usually in the notes, as a
result of other accounting standards (IAS 1, para. 77).
• Furthermore, although IAS 1 prescribes disclosures to appear on the
face of the various financial statements, it does not prescribe detailed
disclosures for each of the various line items.
• IAS 1 specifies additional disclosures for equity items, including shares
issued, rights attaching to shares and details of reserves.

47
 Tips on how to analyse the SFP
SG p 138

1. Review the value of total assets.

2. Review the value of total liabilities.
3. Review the value of total equity (or net assets).
4. Analyse the relationship between current assets and
current liabilities.

48
 Part E – IAS 7:
Statement of cash
flows
(SCF)

49
 Assumed knowledge
SG p 140

• Explain why information in a statement of cash flows may be useful for decisions by users of
financial statements.
• Explain the meaning of the term ‘cash’ and ‘cash equivalent’, and identify items that normally
would fall within the definition of cash and cash equivalents.
• Explain the meaning of the terms ‘operating activities’, ‘financing activities’ and ‘investing
activities’.
• Identify cash flows that normally would be classified as cash flows from operating activities.
• Identify cash flows that normally would be classified as cash flows from investing activities.
• Identify cash flows that normally would be classified as cash flows from financing activities.
• Determine cash inflows and outflows from reconstructing ledger accounts.
• Apply the direct and indirect methods of presenting cash flows from operations.
• Prepare a simple reconciliation of net cash flows provided by operating activities to profit for
the period.
• Prepare a simple statement of cash flows.

• Refer Assumed Knowledge review at end of module 2 SG to ensure you can do all of
the above

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Information to to
Information bebedisclosed
disclosed
SG p 141

• Disclose gross cash inflows and cash outflows (limited

reporting on net basis) and amounts of cash and cash
equivalents at the beginning and end of the reporting
period.
• Reporting cash flows on a net basis:
− cash receipts and payments on behalf of customers
− quick turnover items.
• Other information to be disclosed:
− interest and dividends, income taxes and loss of control
of subsidiaries.

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Information to to
Information bebedisclosed
disclosed
SG p 142 - 144

Classification of cash flows

• Operating activities
(cash from operations, less interest paid and income taxes paid)
Direct or indirect method – both are examinable
• Investing activities
(e.g. proceeds from sale of equipment, plus interest received and
dividends received, less purchase of equipment)
• Financing activities
(e.g. proceeds from issue of share capital and new borrowings,
less dividends paid)

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 Information to be disclosed
SG p 142 - 144

• Certain items may be classified in more than one way under IAS 7.
• Note the following classifications adopted by CPA
Cashflow CPA classification
Interest paid Operating activity
Interest received Investing activity
Dividends paid Financing activity
Dividends received Investing activity
Tax paid Operating activity

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 Information to
be disclosed
SG p 142 - 144
An example of the SCF as
presented in the KPMG IFRS
guide (p.131)

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 Information to be disclosed
SG p 142 - 144
A proforma extract of the operating activities section using the indirect
method

See also pg 14 of
the KPMG IFRS
guide for alternative
presentation of the
SCF using the
indirect method

55
Common methods adopted on how to
Common methods
prepare a statement
to prepare
of cash flows
CFS
SG p 144 - 145

• Three common methods used to prepare a statement of

cash flows:
− the worksheet method (typically prepared in a
spreadsheet tool such as Excel™);
− the formula method; and
− the ‘T’ account reconstruction method.
• CPA materials use the formula method: See page 132 of
the SG for some of the more common formulas used to
determine cash flows.

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 How does a SCF assist users of the financial
statements?
SG p 146

• ‘The economic decisions that are taken by users of financial

statements require an evaluation of the ability of an entity to
generate cash and cash equivalents, and of the timing and
certainty of their generation.
• This ability ultimately determines, for example, the capacity of
an entity to pay its employees and suppliers, meet interest
payments, repay loans and make distributions to its owners.
• Users are better able to evaluate this ability to generate cash
and cash equivalents if they are provided with information
that focuses on the financial position, financial performance
and cash flows of an entity’.

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 Tips on how to analyse the SCF
SG p 147 - 148

• Review the cash balance at the end of the reporting period.

• Review the cash flows from operating activities.
• Review the cash flows from investing activities (i.e. purchasing
and disposing of non-current assets and investments).
• Review the cash flows from financing activities (i.e. is the
business funding the acquisition of assets through debt or
equity?)
• Review the net increase or decrease in cash and cash
equivalents.

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 Statement of Cash Flows example

Nero Co has a profit before tax of $140m after charging depreciation of

$16m and interest expense of $8m for the year ended 31 December
20X8 The tax expense was $32m. Working capital balances are as
follows:
20X8 20X7
Inventories $62m $58m
Receivables $112m $125m
Payables $130m $85m
Tax payable $32m $28m

Required: Calculate the net cash from operating activities using the
indirect method.

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Statement of Cash Flows example
Profit before tax
Adjust for non cash and non operating items in profit

Operating profit before working capital changes 164

Adjust for movements in operating items in SFP

Cash generated from operations 218

Cashflows from operations 182

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Module 2 learning checklist
I am able to… Yes
(tick)
Explain and apply the requirements of IAS 1 with respect to a complete
set of financial statements and in relation to the considerations for the
presentation of financial statements;
Outline and explain the requirements of IAS 8 for the selection of accounting
policies;
Explain and apply the accounting treatment and disclosure requirements of IAS
8 in relation to changes in accounting policies, and changes in accounting
estimates and errors;
Explain and discuss the required treatment for both adjusting and non-
adjusting events occurring after the reporting period in accordance with IAS 10;
Explain and apply the requirements of IAS 7 with respect to preparing a
statement of cash flows; and
Discuss how a statement of cash flows can assist users of the financial
statements to assess the ability of the entity to generate cash and cash
equivalents.

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