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2016
ADVANCED ACCOUNTING AND

FINANCIAL REPORTING
STUDY SUPPORT MATERIAL
ICAP
Advanced accounting and
financial reporting
First edition published by
Emile Woolf International
Bracknell Enterprise & Innovation Hub
Ocean House, 12th Floor, The Ring
Bracknell, Berkshire, RG12 1AX United Kingdom
Email: info@ewiglobal.com
www.emilewoolf.com
© Emile Woolf International, May 2016
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording, scanning or otherwise, without the prior permission in writing of Emile Woolf
International, or as expressly permitted by law, or under the terms agreed with the
appropriate reprographics rights organisation.
You must not circulate this book in any other binding or cover and you must impose the
same condition on any acquirer.
Notice
Emile Woolf International has made every effort to ensure that at the time of writing the
contents of this study text are accurate, but neither Emile Woolf International nor its directors
or employees shall be under any liability whatsoever for any inaccurate or misleading
information this work could contain.
© Emile Woolf International ii The Institute of Chartered Accountants of Pakistan

Certified Finance and Accounting Professional
Advanced accounting and financial reporting
C
Contents
Page
Syllabus objective and learning outcomes v
Chapter
1 Regulatory framework 1
2 Accounting and reporting concepts 25
3 Presentation of financial statements
(IAS 1, IAS 34, IAS 24, IFRS 8, IAS 10) 53
4 IAS 8: Accounting policies, changes in accounting estimates
and errors 81
5 IFRS 15: Revenue from contracts with customers 103
6 IAS 16: Property, plant and equipment 117
7 Non-current assets: sundry standards
(IAS 23, IAS 20 and IAS 40) 149
8 IAS 38: Intangible assets 173
9 IAS 36: Impairment of assets 195
10 IFRS 5: Non-current assets held for sale and discontinued
operations 213
11 IFRS 16: Leases 235
12 IAS 37: Provisions, contingent liabilities and contingent assets 292
13 IAS 19: Employee benefits 323
14 IFRS 2: Share based payments 349
15 Financial instruments: Recognition and measurement 395
16 Financial instruments: Presentation and disclosure 457
© Emile Woolf International iii The Institute of Chartered Accountants of Pakistan

Page
17 IFRS 13: Fair value measurement 475
18 IAS 12: Income taxes 493
19 Business combinations and consolidation 535
20 Consolidated statements of profit or loss and other
comprehensive income 577
21 Associates and joint ventures 589
22 Business combinations achieved in stages 607
23 Complex groups 625
24 Disposal of subsidiaries 659
25 Other group standards (IAS 27 and IFRS 12) 687
26 Foreign currency 697
27 IAS 7: Statements of cash flows 729
28 IAS 33: Earnings per share 771
29 Analysis and interpretation of financial statements 811
30 Sundry standards and interpretations
(IAS 2, IAS 41, IFRS 6, IFRS 14, IFRIC 12, SIC 7) 853
31 IFRS 1: First time adoption of IFRS 879
32 Specialised financial statements 891
33 International public sector accounting standards (IPSAS) 933
34 Accounting for hyperinflation 949
35 Islamic accounting standards 963
36 Ethical issues in financial reporting 977
Index 995
© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

S
Syllabus objective
and learning outcomes
CERTIFIED FINANCE AND ACCOUNTING PROFESSIONAL

ADVANCED ACCOUNTING AND FINANCIAL REPORTING
Objective
To develop an in-depth understanding of, and the ability to apply the requirements of
international pronouncements, the Companies Ordinance, 1984, and other applicable
regulatory requirements in respect of financial reporting and the presentation of financial
statements.
Learning Outcome
On the successful completion of this paper candidates will be able to:

1 prepare financial statements in accordance with the international pronouncements
and under the Companies Ordinance, 1984.
2 evaluate and analyse financial data in order to arrive at firm decisions on the
accounting treatment and reporting of the same.
3 exercise professional judgment and act in an ethical manner (that is in the best
interest of society and the profession).
4 prepare financial statements of specialized entities (including small and medium
sized entities in accordance with the Companies Ordinance, 1984 and the
applicable reporting framework, retirement benefit funds in accordance with
international pronouncements) and be able to demonstrate an understanding of
reporting requirements under the laws specific to insurance, banking companies
and mutual funds.
© Emile Woolf International v The Institute of Chartered Accountants of Pakistan

Grid Weighting
A Presentation of financial statements including public 30-35
sector accounting
B Financial reporting (including ethics) 50- 60
C Specialized financial statements 10-15
Total 100
Contents Chapter
A Presentation of financial statements including public sector

accounting
1 Presentation of financial statements (IAS 1, IAS 7 and Companies 2, 3, 25
Ordinance 1984)
2 IAS 27: Separate financial statements 23
3 IFRS 10: Consolidated financial statements 18, 19, 22
4 IAS 28: Accounting for associates and joint ventures 20
5 IFRS 11: Joint arrangements 20
6 IFRS 12: Disclosure of interests in other entities 22
7 IAS 34: Interim financial reporting 3
8 IAS 29: Financial Reporting in Hyperinflationary Economies 33
9 IFRS 5: Non-current assets held for sale and discontinued 10, 22
operations
10 IFRS 8: Operating segments 3
11 Overview of IPSASs and the conceptual framework for general 32
purpose financial reporting by public sector entities
12 IPSAS 1 Presentation of financial statements 32
13 IPSAS Financial reporting under the cash basis of accounting (this 32
IPSAS has not been given any number).
B Financial reporting and ethics
a Financial reporting
1 The Conceptual Framework for the preparation and presentation of 2
financial statements
2 IFRS 1: First-time adoption of international financial reporting 30
standards
3 IFRS 2: Share-based payment 15
4 IFRS 3: Business combinations 18, 19, 21
5 IFRS 4: Insurance contracts 31
6 IFRS 6: Exploration for and evaluation of mineral resources 29
© Emile Woolf International vi The Institute of Chartered Accountants of Pakistan

Syllabus objective and learning outcomes
Contents Chapter
B Financial reporting and ethics (continued)

a Financial reporting (continued)
7 IFRS 7: Financial instruments: disclosures 17
8 IFRS 9: Financial Instruments 16
9 IFRS 13: Fair value measurement 2, 16
10 IFRS 14: Regulatory deferral accounts 29
11 IFRS 15: Revenue from contracts with customers 5
12 IAS 2: Inventories 29
13 IAS 8: Accounting policies, changes in accounting estimates and 4
errors
14 IAS 10: Events after the reporting date 3
15 IAS 12: Income Taxes 13
16 IAS 16: Property, plant and equipment 6
17 IFRS 16: Leases 11
18 IAS 19: Employee benefits 14
19 IAS 20: Accounting for government grants and disclosure of 7
government assistance
20 IAS 21: The effects of changes in foreign exchange rates 24
21 IAS 23: Borrowing costs 7
22 IAS 24: Related party disclosures 3
23 IAS 32: Financial instruments: Presentation 17
24 IAS 33: Earnings per share 26
25 IAS 36: Impairment of assets 9
26 IAS 37: Provisions, contingent liabilities and contingent assets 12
27 IAS 38: Intangible assets 8
28 IAS 39: Financial instruments: recognition and measurement 16
29 IAS 40: Investment property 7
30 IAS 41: Agriculture 29
31 IFRIC 1: Changes in existing decommissioning, restoration and 6
similar liabilities
32 IFRIC 2: Members’ shares in co-operative entities and similar 17
instruments
© Emile Woolf International vii The Institute of Chartered Accountants of Pakistan

Contents Chapter

a Financial reporting (continued)
33 IFRIC 5: Rights to interests arising from decommissioning, restoration 12
and environmental rehabilitation funds
34 IFRIC 6: Liabilities arising from participating in a specific market – 12
waste electrical and electronic equipment
35 IFRIC 7: Applying the restatement approach under IAS 29 financial 33
reporting in hyperinflationary economies
36 IFRIC 10: Interim financial reporting and impairment 9
37 IFRIC 12: Service concession arrangements 29
38 IFRIC 14: IAS 19 – The limit on a defined benefit asset, minimum 14
funding requirements and their interaction
39 IFRIC 16: Hedges of a net investment in a foreign operation 16
40 IFRIC 17: Distributions of non-cash assets to owners 17
41 IFRIC 19: Extinguishing financial liabilities with equity instruments 17
42 IFRIC 20: Stripping costs in the production phase of a surface mine 6
43 IFRIC 21: Levies 21
44 SIC 7: Introduction of the euro 29
45 SIC 10: Government assistance – no specific relation to operating 7
activities
46 SIC 25: Income taxes – changes in the tax status of an enterprise or 13
its shareholders
47 SIC 29: Disclosure – service concession arrangements 29
48 SIC 32: Intangible Assets – web site costs 8
© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

Syllabus objective and learning outcomes
Contents Chapter

b Ethics
1 Professional misconduct under the Chartered Accountants Ordinance 35
1961
2 Code of Ethics issued by the Institute of Chartered Accountants of 35
Pakistan
C Specialised financial statements
1 Small and medium sized entities 31
2 Banks 31
3 Mutual funds 31
4 Insurance companies 31
5 IAS 26: Accounting and reporting by retirement benefit plans 31
6 Overview of Islamic accounting standard issued by ICAP 34
© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

CHAPTER
1
Regulatory framework
Contents
1 Regulatory framework for accounting in Pakistan
2 Companies’ Ordinance 1984: Fourth Schedule
3 Companies’ Ordinance 1984: Fifth Schedule
© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

INTRODUCTION
Objective
statements.
Learning outcomes
LO 1 Prepare financial statements in accordance with international
pronouncements and under the Companies Ordinance, 1984.
PRESENTATION OF FINANCIAL STATEMENTS INCLUDING PUBLIC SECTOR

ACCOUNTING
A1 Presentation of financial statements (Companies Ordinance 1984)

Chapter 1: Regulatory framework
1 REGULATORY FRAMEWORK FOR ACCOUNTING IN PAKISTAN
Section overview
Accounting regulation in Pakistan

Companies’ Ordinance 1984: Introduction to accounting requirements
Companies’ Ordinance 1984: Introduction to the fourth and fifth schedules
Applicability of accounting standards in Pakistan
Accounting standards: Three tier approach
International Financial Reporting Standards
1.1 Accounting regulation in Pakistan

The objective of financial statements is to provide information about the financial
position (balance sheet), financial performance (profit and loss) and cash flows of
an entity that is useful to a wide range of users in making economic decisions.
The Securities and Exchange Commission of Pakistan
The Securities and Exchange Commission of Pakistan (SECP) was established
by the Securities and Exchange Commission of Pakistan Act, 1997 and became
operational in 1999.
It is the corporate and capital market regulatory authority in Pakistan. Its stated
mission is “To develop a fair, efficient and transparent regulatory framework,
based on international legal standards and best practices, for the protection of
investors and mitigation of systemic risk aimed at fostering growth of a robust
corporate sector and broad based capital market in Pakistan” (SECP website).
One of the roles of the SECP is to decide on accounting rules that must be
applied by companies in Pakistan.
Companies must prepare financial statements in accordance with accounting
standards approved as applicable and notified in the official gazette by the
Securities and Exchange Commission of Pakistan (SECP) and in accordance
with rules in the Companies’ Ordinance 1984.
The Institute of Chartered Accountants in Pakistan (ICAP)
ICAP regulates the Chartered Accountancy profession. It is the body responsible
for recommending accounting standards for notification by the Securities and
Exchange Commission of Pakistan. The process is explained later.
1.2 Companies’ Ordinance 1984: Introduction to accounting requirements

The Companies Ordinance 1984 is the primary source of company law in
Pakistan. Amongst other things it establishes the requirements for financial
reporting by all companies in Pakistan.
General requirements
Every company must prepare annual accounts (financial statements) that provide
a true and fair view on the performance and activities of the company during the
year.
The financial statements comprise:
a balance sheet (statement of financial position): a structured
representation of the financial position of an entity;

an income statement (statement of comprehensive income): a structured

representation of the financial performance of an entity.
a statement of changes in equity;
a cash flow statement;
notes to the accounts which contain a summary of significant accounting
policies and other information that sets out explanations of figures in the
main statements and provides supplementary information.
Section 234
Section 234 requires that every balance sheet (statement of financial position)
must give a true and fair view of the state of affairs of the company as at the end
of its financial year, and every profit and loss account or income and expenditure
account of a company must give a true and fair view of the profit and loss of the
company for the financial year.
All items of expenditure must be recognised in the profit or loss account unless it
may be fairly charged over several years. In such cases the whole amount must
be stated with the reasons why only part is charged against the income of the
financial year.
Other requirements
Assets and liabilities must be classified under headings appropriate to the
company's business.
The period reported on in the accounts is called the financial year.
1.3 Companies’ Ordinance 1984: Introduction to the fourth and fifth schedules
The Companies Ordinance 1984 contains a series of appendices called
schedules which set out detailed requirements in certain areas.
The fourth schedule to the Companies Ordinance 1984
This schedule sets out the detailed requirements that must be complied with in
respect of the balance sheet and profit and loss account of a listed company. It
also applies to private and non-listed public companies that are a subsidiary of a
listed company.
The schedule specifies that listed companies must follow International Financial
Reporting Standards as notified for this purpose in the Official Gazette.
The fifth schedule to the Companies Ordinance 1984
This schedule applies to the balance sheets and profit and loss accounts of all
other companies.
This schedule defines and applies to public interest companies, medium sized
companies and small sized companies. These categories determine which
accounting standards are followed. The three categories are defined in the next
section.
1.4 Applicability of accounting standards in Pakistan

Listed companies are subject to the requirements of the fourth schedule which
specifies the use of International Financial Reporting Standards as notified for
this purpose in the Official Gazette.

The requirements of the fifth schedule that apply to other companies are more
complicated. The fifth schedule identifies different classes of companies and then
specifies the standards which must be applied by each class. The classes are as
follows:
Public interest companies which are non-listed companies which are either
x A public sector company as defined in the Public Sector Companies
(Corporate Governance) Rules 2013; or
x A public utility or similar company carrying on the business of
essential public service; or
x A company that holds assets in a fiduciary capacity for a broad group
of outsiders (this class includes banks, insurance companies, pension
funds and mutual funds). (Note that accounting rules in addition to
those set out in the fourth and fifth schedules might apply to such
companies. This is covered in a later chapter).
Large sized companies which are non-listed companies which have:
x paid-up capital of Rs. 200 million or more: or
x turnover of Rs. 1 billion or more.
Medium sized companies which are non-listed companies which are not:
x a public interest company; or
x a large sized company; or
x small sized company (other than a non-listed public company).
Small sized companies which are non-listed companies (other than a non-
listed public company) which have:
x paid-up capital not exceeding Rs. 25 million: or
x turnover not exceeding Rs. 100 million.
Accounting standards apply to these classes as follows.
Class Criteria
Public interest companies IFRS as approved and notified by SECP
Large sized companies IFRS as approved and notified by SECP
Medium sized companies IFRS for Small and Medium Entities as adopted in
Pakistan by council of ICAP (or IFRS as approved
and notified by SECP if they elect to do so).
Small sized companies Revised Accounting and Financial Reporting
Standards for Small-Sized Entities (AFRS for
SSEs) as approved by the council of ICAP (or
IFRS as approved and notified by SECP if they
elect to do so).
All other companies including foreign companies which do not fall into any of the
above categories must follow Full IFRS as approved and notified by SECP.
The SECP may upon application made to it, grant an exemption to any company
or class of company from compliance with all or any of the requirements of the
standards.

The SECP encourages medium sized companies and small sized companies to
follow IFRS as approved and notified by SECP.
Specific rules apply to companies formed under section 42 of the Companies’
Ordinance (associations not for profit) and section 43 of the Companies’
Ordinance (companies limited by guarantee). This guidance is not in the syllabus
but IFRS as approved and notified by SECP would apply to many of these
companies.
1.5 Accounting standards: Three tier approach

As can be seen from the above, the regulatory framework in Pakistan uses a
three tier approach to specify which accounting standards must be followed by an
organisation.
Tier 1: Publically accountable entities
This includes:
Any entity that has filed, or is in the process of filing, its financial statements
with the Securities and Exchange Commission of Pakistan.
Public interest companies;
Large sized companies.
Any entity in this category must apply IFRS as approved as applicable and
notified in the official gazette by the Securities and Exchange Commission of
Pakistan.
For clarity:
A listed company must follow the fourth schedule and apply IFRS (as
specified and notified by the SECP).
Unlisted public interest companies and large sized companies must follow
the fifth schedule and apply IFRS (as specified and notified by the
SECP).
If there is a conflict between IFRS and any SECP guidance or decision the SECP
view must be applied.
Tier 2: Medium Sized Companies
Any company in this category must apply the IFRS for SMEs as adopted in
Pakistan by council of ICAP and follow the requirements of the fifth schedule.
Tier 3: Small Sized Companies
Any company in this category must apply the Revised Accounting and
Financial Reporting Standards for Small-Sized Entities (a single document
drafted and issued by ICAP) and follow the requirements of the fifth schedule.
The AFRS is not examinable.
1.6 International Financial Reporting Standards

The International Accounting Standards Committee (IASC) was established
in 1973 to develop international accounting standards with the aim of
harmonising accounting procedures throughout the world.
The first International Accounting Standards (IASs) were issued in 1975. The
work of the IASC was supported by another body called the Standing
Interpretation Committee. This body issued interpretations of rules in standards

when there was divergence in practice. These interpretations were called

Standing Interpretation Committee Pronouncements or SICs.
In 2001 the constitution of the IASC was changed leading to the replacement of
the IASC and the SIC by new bodies called the International Accounting
Standards Board (IASB) and the International Financial Reporting
Interpretations Committee (IFRIC).
The IASB adopted all IASs and SICs that were extant at the time but said that
standards written from that time were to be called International Financial
Reporting Standards (IFRS). Interpretations are known as IFRICs.
The term IFRS is also used to refer to the whole body of rules (i.e., IAS and IFRS
in total).
Thus IFRS is made up as follows:
Published by the IASC Published by the IASB

(up to 2001) (from 2001)
Accounting standards IASs IFRSs
Interpretations SICs IFRICs
Note that many IASs and SICs have been replaced or amended by the IASB
since 2001.
International accounting standards cannot be applied in any country without the
approval of the national regulators in that country. All jurisdictions have some
kind of formal approval process which is followed before IFRS can be applied in
that jurisdiction.
Adoption process for IFRS in Pakistan
The previous sections refer to the approval of IFRS by the SECP and notification
of that approval in the Official Gazette
Adoption of an IFRS involves the following steps:
As a first step the IFRS/IAS is considered by ICAP’s Accounting
Standards Committee (ASC), which identifies any issues that may arise
on adoption.
The ASC refers the matter to the Professional Standards and Technical
Advisory Committee (PSTAC) of ICAP. This committee determines how
the adoption and implementation of the standard can be facilitated. It
considers issues like how long any transition period should be and whether
adoption of the standard would requires changes in regulations.
If the PSTAC identifies the need for changes to regulations it refers the
matter to the Securities and Exchange Commission of Pakistan (SECP)
(and/or the State Bank of Pakistan (SBP) for matters affecting banks and
other financial institutions). This process is managed by the Coordination
Committees of ICAP and SECP (SBP).
After the satisfactory resolution of issues the PSTAC and the Council
reconsider the matter of adoption.
ICAP recommends the adoption to the SECP (SBP) by decision of the
Council. The decision to adopt the standard rests with the SECP and SBP.
IFRSs are adopted by the Securities and Exchange Commission of
Pakistan by notification in the Official Gazette. When notified, the
standards have the authority of the law.
A full list of all IFRSs is given in the preliminaries section of this text.

2 COMPANIES’ ORDINANCE 1984: FOURTH SCHEDULE
Section overview
Fixed assets (non-current assets)

Long term investments
Long term loans and advances
Long term deposits and prepayments
Current assets
Share capital and reserves
Non-current liabilities
Current liabilities
Contingencies and commitments
Profit and loss account
Other disclosures
These requirements must be followed in addition to those in IFRS.
2.1 Fixed assets (non-current assets)

Fixed assets (other than investments) must be classified as follows:
property, plant and equipment:
x land (distinguishing between freehold and leasehold);
x buildings (distinguishing between building on freehold land and those
on leasehold land);
x plant and machinery;
x furniture and fittings;
x vehicles;
x office equipment;
x capital work in progress;
x development property; and
x others (to be specified)
intangible:
x goodwill;
x brand names;
x computer software;
x licences and franchises;
x patents, copyright, trademarks and designs;
x intangible assets under development; and
x others (to be specified).

2.2 Long term investments

The aggregate amount (under separate sub-headings) in respect of the following:
 investments in related parties; and
 other investments.
The investments must be shown under the heading long term investments,
indicating separately:
 at cost;
 using the equity method;
 held to maturity investments, which are not due to mature within next
twelve months; and
 available for sale investments which are not intended to be sold within the
next 12 months.
This section introduces several terms which require further explanation. They are
covered in more detail in certain international accounting standards. However,
the Companies’ Ordinance 1984 is in your syllabus and refers to these.
Therefore, they will be explained briefly.
Related parties
A related party is an entity or person with the ability to control the company or
exercise significant influence over the company in making financial and operating
decisions or an entity over which the company has ability to control or exercise
significant influence.
IAS 24 Related Party Disclosures includes a list of related parties and specifies
disclosures.
The equity method
The equity method is a method of accounting where an investment is initially
recognised at cost and the carrying amount is increased or decreased to
recognise the investor’s share of the profit or loss of the investee after the date of
acquisition.
IAS 28: Investments in Associates and Joint Ventures specifies the use of the
equity method in accounting for associates and joint ventures.
Held to maturity investments
This is a type of asset defined in IAS 39: Financial Instruments: Recognition and
Measurement.
Held to maturity investments are financial assets with fixed or determinable
payments and fixed maturity that an entity has the positive intention and ability to
hold to maturity.
They are measured at amortised cost. The amortised cost of a financial asset is
the amount invested initially plus interest recognised at the effective rate less any
cash received in respect of the asset.

Available for sale investment

This is also a type of asset defined in IAS 39: Financial Instruments: Recognition
and Measurement.
An available for sale investment is one that is not a loan or receivable, nor held to
maturity nor held for trading purposes.
IAS 39 requires that available for sale investments are remeasured to fair value
at each reporting date. Any difference is recognised as other comprehensive
income (see chapter 2) and accumulated as a separate reserve in equity.
2.3 Long term loans and advances

The following must be shown (under separate sub-headings) distinguishing
between considered good and considered bad or doubtful.
 Loans and advances to related parties and disclosing:
 Details of each borrower (name, amount, terms and details of security
held if any);
 Maximum amount outstanding since the later of the date of
incorporation or the date of the previous balance sheet.
 Other loans and advances disclosing in respect of amounts to those other
than suppliers the name of the borrower and the terms of repayment if the
amount is material with particulars of security.
Illustration: Long term loans and advances

A disclosure note might look like this.
Statement of financial position (extract) 2013 2012
Non-current assets Rs. Rs.
Loans and advances 237,900 158,750
Note to the accounts: 2013 2012

Rs. Rs.
To employees – secured, considered good 197,026 167,952
To supplier – unsecured, considered good 98,736 28,734
295,762 196,686
Less current portion shown under current assets (57,862) (37,936)
237,900 158,750
Loans to employees are interest free loans for the purpose of cars. They
are repayable within 3 years and are secured on the vehicles. The
maximum amount of the loans during the year was Rs. 201,345 (2012:
174,321).
The loan to supplier is an unsecured loan given to the TZ Electric Company
to fund the development of electrical supply infrastructure at our Lahore
depot. The loan is repayable in equal instalments over. Mark-up is charged
at 2% per annum.

2.4 Long term deposits and prepayments

Long-term deposits and long-term prepayments must be stated separately.
Any material item must be disclosed separately.
2.5 Current assets

Current assets must be classified in a way appropriate to the company's affairs,
including the following:
stores, spare parts and loose tools distinguishing each from the other
where practicable;
stock-in-trade, distinguishing between appropriate classifications (for
example, raw materials and components, work in progress, finished
products etc.).
trade debts (other than loans and advances) showing separately:
x debts considered good and debts considered doubtful or bad must be
separately stated;
x debts considered good must be distinguished between secured and
unsecured;
x the aggregate amount due from directors, chief executive and
executives; and
x the aggregate amount due from related parties with the names of
those related parties.
loans and advances due for repayment within a period of twelve months
from the reporting date showing separately:
x loans and advances considered good and those considered doubtful
or bad;
executives;
those related parties;
trade deposits and short term prepayments and current account balances
with statutory authorities;
interest accrued;
other receivables specifying separately the materials items;
financial assets other than any included above showing separately:
executives;
those related parties;
tax refunds due from the Government, showing separately different types of
tax;
cash and bank balances, distinguishing between current and deposit
accounts.
Any provision made for a fall in value of any current asset is shown as a
deduction from the gross amount of that asset.

Definition
Executive: An employee, other than the chief executive and directors, whose basic
salary exceeds five hundred thousand rupees in a financial year.
Illustration: Stock in trade

Current assets Rs. Rs.
Stock in trade 547,132 523,890

Rs. Rs.
Raw materials 139,950 153,856
Work in progress 178,434 163,433
Finished goods 179,100 162,121
Goods purchased for sale 51,962 48,261
549,446 527,671
Less: Provision for slow moving items (2,314) (3,781)
547,132 523,890
Illustration: Trade debts

Current assets Rs. Rs.
Trade debts 493,657 472,010

Rs. Rs.
Considered good – secured 19,247 15,652
Considered good – unsecured 474,410 456,358
Considered doubtful – unsecured 10,192 8,763
503,849 480,773
Less: Provision for doubtful debts (10,192) (8,763)
493,657 472,010
The considered good – unsecured trade debts include Rs. 47, 438 (2012
Rs. 26,342) from X Limited, a related party.

2.6 Share capital and reserves

Share capital and reserves must be classified under the following sub-heads:
 issued, subscribed and paid up capital, distinguishing in respect of each
class between:
 shares allotted for consideration paid in cash;
 shares allotted for consideration other than cash; and
 shares allotted as bonus shares; and
 reserves (distinguishing between capital reserves and revenue reserves).
Definition
Capital reserve: A reserve not regarded free for distribution by way of dividend.
(Includes capital redemption reserve, capital repurchase reserve account, share
premium account, profit prior to incorporation).
Revenue reserve: A reserve that is normally regarded as available for distribution.
Illustration: Share capital

Rs. 000 Rs. 000
Issued subscribed and paid-up capital
(Ordinary shares of Rs. 10 each) 41,800 38,000
Note to the accounts: 2013 2012 2013 2012

Rs. 000 Rs. 000 Number of Number
shares of shares
Authorised share
capital (Ordinary
shares of Rs. 10
each) 50,000 50,000 5,000,000 5,000,000
Issued subscribed
and paid-up capital
(Ordinary shares of
Rs. 10 each)
Fully paid in cash 35,000 35,000 3,500,000 3,500,000
Fully paid for
consideration other
than cash 3,000 3,000 300,000 300,000
Bonus issue 3,800 nil 380,000 nil
41,800 38,000 4,180,000 3,800,000

2.7 Non-current liabilities

Non-current liabilities must be classified under the following sub-headings:
long term financing;
debentures;
liabilities against assets subject to finance lease;
long term murabaha;
long term deposits; and
deferred liabilities.
Long term loans must be classified as secured and unsecured, and the following
must be shown separately under each class:
loans from banking companies and other financial institutions, other than
those as specified below;
loans from related parties; and
other loans.
Long-term deposits must be classified according to their nature.
2.8 Current liabilities

Current liabilities and provisions must be classified under the following sub-
headings:
trade and other payables, which shall be classified as:
x creditors;
x murabaha;
x accrued liabilities;
x advance payments;
x payable to employee retirement benefit funds;
x unpaid and unclaimed dividend; and
x others ( to be specified, if material);
interest, profit, return or mark-up accrued on loans and other payables;
short term borrowings which shall be classified as:
x short-term borrowings, distinguishing between secured and
unsecured and between loans taken from:
banking companies and other financial institutions other than
related parties;
related parties; and
others;
x short-term running finance, distinguishing between secured and
unsecured;
current portion of long term borrowings;
current portion of long term murabaha; and
provision for taxation, showing separately income tax and other taxes.

Illustration: Trade and other payables

Current liabilities Rs. Rs.
Trade and other payables 316,715 268,803

Rs. Rs.
Trade creditors 275,102 228,869
Accrued liabilities 13,610 14,599
Advance payments 23,457 22,222
Others 4,546 3,113
316,715 268,803
2.9 Contingencies and commitments

The following must be shown separately as a footnote to the balance-sheet:
the aggregate amount of any guarantees given by the company on behalf
of any related party and where practicable, the general nature of the
guarantee;
where practicable the aggregate amount or estimated amount, if it is
material, of contracts for capital expenditure, so far as not provided for or a
statement that such an estimate cannot be made; and
any other commitment, if the amount is material, indicating the general
nature of the commitment.
2.10 Profit and loss account

The profit and loss account must disclose separately the manufacturing, trading
and operating results.
A manufacturing concern must show the cost of goods manufactured.
The profit and loss account must disclose all material items of income and
expenses including the following:
The turnover (sales) showing the gross sales figure with trade discount and
sales tax as a deduction.
Expenses, classified according to their function under the following sub-
heads (along with additional information on their nature):
x cost of sales;
x distribution cost;
x administrative expenses;
x other operating expenses; and
x finance cost.

Other operating income:

x income from financial assets;
x income from investments in and debts, loans, advances and
receivables to each related party; and
x income from assets other than financial assets.
Finance cost must show separately the amount of interest on borrowings
from related parties (if any).
Other information:
x debts written off as irrecoverable distinguishing between trade debts,
loans, advances and other receivables; and
x provisions for doubtful or bad debts distinguishing between trade
debts, loans, advances and other receivables.
x In each case the company must disclose:
debts due by directors, chief executive, and executives of the
company and any of them severally or jointly with any other
person; and
debts due by other related parties.
The aggregate amount of auditors’ remuneration, showing separately fees,
expenses and other remuneration for services rendered as auditors and for
services rendered in any other capacity and stating the nature of such other
services. (Amounts must be shown separately for joint auditors).
If a donation is made and any director or his spouse has interest in the
donee, the company must disclose the names of such directors, their
interest in the donee and the names and address of all donees.
Illustration: Turnover
Profit and loss account (exxtract) 2013 2012
Rs. Rs.
Turnover 578,554 533,991

Rs. Rs.
Gross sales 673,669 611,670
Less:
Sales tax (83,839) (74,566)
Trade discounts (11,276) (3,113)
578,554 533,991

Payments to senior management

A company must disclose the aggregate amount charged in the financial
statements in respect of the directors, chief executive and executives by the
company as fees, remuneration, allowances, commission, perquisites or benefits
or in any other form or manner and for any services rendered.
The company must give full particulars of the aggregate amounts separately for
the directors, chief executive and executives together with the number of such
directors and executives, under appropriate headings such as:
fees;
managerial remuneration;
commission or bonus, indicating their nature;
reimbursable expenses which are in the nature of a perquisite or benefit;
pension, gratuities, company's contribution to provident, superannuation
and other staff funds, compensation for loss of office and in connection with
retirement from office;
other perquisites and benefits in cash or in kind stating their nature and,
where practicable, their approximate money values; and
the amounts, if material, by which any items shown above are affected by
any change in an accounting policy.
Illustration: Remuneration of chief executive, directors and executives

Note to the accounts Chief Executive
executive directors Executives
Rs.000 Rs.000 Rs.000
Fees 1,650 5,478
Managerial remuneration 11,225 33,675 323,280
Bonus 2,000 6,000 12,000
Retirement benefits 2,000 4,800 37,900
Housing 8,666
Transport 2,345 6,734 26,778
27,886 56,687 399,958
Number of persons 1 4 48
Sale of fixed assets

For sale of fixed assets where the book value of the asset or assets exceeds in
aggregate fifty thousand rupees, a company must disclose particulars of the
assets and in aggregate:
cost or valuation, as the case may be;
the book value;
the sale price and the mode of disposal (e.g. by tender or negotiation); and
particulars of the purchaser.

2.11 Other disclosures

A company must disclose the following:
The general nature of any credit facilities available to the company under
any contract (other than trade credit) and not used as at the date of the
balance sheet.
Any penalty imposed under any law by any authority.
The fact of any reduction, enhancement or waiver of a penalty.
Where any property or asset, acquired with the funds of the company, is not held
in the name of the company, or is not in the possession and control of the
company, this fact must be disclosed together with a description and value of the
property or asset and the person in whose name and possession or control it is.
Note: In the exam, you may be required to make any or all of these disclosures
therefore their knowledge and presentation is expected at this level.

3 COMPANIES’ ORDINANCE 1984: FIFTH SCHEDULE
Section overview
Sundry requirements
Fixed assets (non-current assets)
Long term investments
Long term loans and advances
Long term deposits and prepayments
Current assets
Share capital and reserves
Non-current liabilities
Current liabilities
Contingencies and commitments
Profit and loss account
Other disclosures
3.1 Sundry requirements

The figures in the financial statements may be rounded to the thousands of
rupees.
Financial statements must disclose:
all material information necessary to make the financial years statements
clear and understandable;
any change in an accounting policy that has a material effect in the current
year or may have a material effect in the subsequent year together with
reasons for the change and the financial effect of the change, if material.
3.2 Fixed assets (non-current assets)

Fixed assets (other than investments) must be classified as follows:
property, plant and equipment:
x land (distinguishing between free-hold and leasehold);
x buildings (distinguishing between building on free-hold land and those
on leasehold land);
x plant and machinery;
x furniture and fittings;
x vehicles;
x office equipment
x capital work in progress:
x development property; and
x others (to be specified)

intangible:
x goodwill;
x brand names;
x computer software;
x licences and franchises;
x patents, copyright, trademarks and designs; and
x others (to be specified).
3.3 Long term investments

The aggregate amount (under separate sub-headings) in respect of the following:
investments in related parties; and
other investments.
A company that is not a small sized company must also disclose investments
under the heading long term investments, indicating separately:
held to maturity investments, which are not due to mature within next
twelve months; and
available for sale investments which are not intended to be sold within the
next 12 months.
market value of listed securities and book value of unlisted securities as per
their latest available financial statements.
3.4 Long term loans and advances

The following must be shown (under separate sub-headings) distinguishing
between considered good and considered bad or doubtful.
Loans and advances to related parties and disclosing:
Other loans and advances.
Any provision made for bad or doubtful loans and advances is shown as a
deduction under each sub-heading above.
Information on terms and conditions, securities obtained and any other material
information must be disclosed.
3.5 Long term deposits and prepayments

Long-term deposits and long-term prepayments must be stated separately.
3.6 Current assets

Current assets must be classified in a way appropriate to the company's affairs,
including the following:
stores, spare parts and loose tools distinguishing each from the other
where practicable;
stock-in-trade, distinguishing between appropriate classifications (for
example, raw materials and components, work in progress, finished
products etc.).

trade debts (other than loans and advances) showing separately:

x debts considered good and debts considered doubtful or bad must be
separately stated;
x debts considered good must be distinguished between secured and
unsecured;
executives (does not apply to small sized companies); and
those related parties (does not apply to small sized companies).
loans and advances due for repayment within a period of twelve months
from the reporting date showing separately:
x loans and advances considered good and those considered doubtful
or bad;
executives (does not apply to small sized companies);
those related parties (does not apply to small sized companies);
trade deposits and short term prepayments and current account balances
with statutory authorities;
interest accrued;
other receivables specifying separately the materials items;
financial assets other than any included above showing separately:
executives (does not apply to small sized companies);
those related parties (does not apply to small sized companies);
tax refunds due from the Government, showing separately different types of
tax;
cash and bank balances, distinguishing between current and deposit
accounts.
Any provision made for a fall in value of any current asset is shown as a
deduction from the gross amount of that asset.
3.7 Share capital and reserves

Share capital and reserve must be classified under the following sub-heads:
issued, subscribed and paid up capital, distinguishing in respect of each
class between:
x shares allotted for consideration paid in cash;
x shares allotted for consideration other than cash; and
x shares allotted as bonus shares; and
reserves by distinguishing between capital reserves and revenue reserves.

3.8 Non-current liabilities

A company which is not a small company must classify non-current liabilities
under the following sub-headings:
long term financing;
debentures;
liabilities against assets subject to finance lease;
long term murabaha;
long term deposits; and
deferred liabilities.
Long term loans must be classified as secured and unsecured, and the following
must be shown separately under each class:
loans from banking companies and other financial institutions, other than
those as specified below;
loans from related parties; and
other loans.
Long-term deposits must be classified according to their nature.
3.9 Current liabilities

Current liabilities and provisions must be classified under the following sub-
headings:
trade and other payables, which shall be classified as:
x creditors;
x murabaha;
x accrued liabilities;
x advance payments;
x payable to employee retirement benefit funds;
x unpaid and unclaimed dividend; and
x others ( to be specified, if material);
interest, profit, return or mark-up accrued on loans and other payables;
short term borrowings which shall be classified as:
x short-term borrowings, distinguishing between secured and
unsecured and between loans taken from:
banking companies and other financial institutions other than
related parties;
related parties; and
others;
x short-term running finance, distinguishing between secured and
unsecured;
current portion of long term borrowings;
current portion of long term murabaha; and
provision for taxation, showing separately income tax and other taxes.

3.10 Contingencies and commitments

The following must be shown separately as a footnote to the balance-sheet:
the aggregate amount of any guarantees given by the company on behalf
of any related party and where practicable, the general nature of the
guarantee;
where practicable the aggregate amount or estimated amount, if it is
material, of contracts for capital expenditure, so far as not provided for or a
statement that such an estimate cannot be made; and
any other commitment, if the amount is material, indicating the general
nature of the commitment.
3.11 Profit and loss account

The profit and loss account must disclose separately the manufacturing, trading
and operating results.
A manufacturing concern must show the cost of goods manufactured.
The profit and loss account must disclose all material items of income and
expenses including the following:
The turnover (sales) showing the gross sales figure with trade discount and
sales tax as a deduction.
Expenses, classified according to their function under the following sub-
heads (along with additional information on their nature):
x cost of sales;
x distribution cost;
x administrative expenses;
x other operating expenses; and
x finance cost.
Other operating income:
x income from financial assets;
x income from investments in and debts, loans, advances and
receivables to each related party; and
x income from assets other than financial assets.
Finance cost must show separately the amount of interest on borrowings
from related parties (if any). This does not apply to a small sized company.
Other information:
x debts written off as irrecoverable distinguishing between trade debts,
loans, advances and other receivables; and
x provisions for doubtful or bad debts distinguishing between trade
debts, loans, advances and other receivables.
x In each case the company must disclose:
debts due by directors, chief executive, and executives of the
company and any of them severally or jointly with any other
person; and
debts due by other related parties.

x Number of employees at the year-end and the average number of

employees during the year.
Payments to senior management
This does not apply to a small sized company.
A company must disclose the aggregate amount charged in the financial
statements in respect of the directors, chief executive and executives by the
company as fees, remuneration, allowances, commission, perquisites or benefits
or in any other form or manner and for any services rendered.
The company must give full particulars of the aggregate amounts separately for
the directors, chief executive and executives together with the number of such
directors and executives, under appropriate headings such as:
fees;
managerial remuneration;
commission or bonus, indicating their nature;
reimbursable expenses which are in the nature of a perquisite or benefit;
pension, gratuities, company's contribution to provident, superannuation
and other staff funds, compensation for loss of office and in connection with
retirement from office;
other perquisites and benefits in cash or in kind stating their nature and,
where practicable, their approximate money values; and
the amounts, if material, by which any items shown above are affected by
any change in an accounting policy.
3.12 Other disclosures

A company must disclose the following:
The general nature of any credit facilities available to the company under
any contract (other than trade credit) and not used as at the date of the
balance sheet.
Any penalty imposed under any law by any authority.
The fact of any reduction, enhancement or waiver of a penalty.
Where any property or asset, acquired with the funds of the company, is not held
in the name of the company, or is not in the possession and control of the
company, this fact must be disclosed together with a description and value of the
property or asset and the person in whose name and possession or control it is.
If any loan or advance has been granted on terms softer than those generally
prevalent in trade or any relief allowed in matters of interest, repayment, security
or documentation, details with reasons for this must be disclosed along with the
nature of interest of the company or its directors or other officers.
Note: In the exam, you may be required to make any or all of these disclosures
therefore their knowledge and presentation is expected at this level.

CHAPTER
2
Accounting and reporting concepts
Contents
1 A conceptual framework for financial reporting
2 The IASB Conceptual Framework
3 Qualitative characteristics of useful financial
information
4 The elements of financial statements
5 Recognition in the financial statements
6 Accounting concepts
7 Measurement and capital maintenance
8 Fair presentation

INTRODUCTION
Objective
statements.
Learning outcomes
LO 1 Prepare financial statements in accordance with the international
pronouncements and under the Companies Ordinance, 1984.
LO 2 Evaluate and analyse financial data in order to arrive at firm decisions
on the accounting treatment and reporting of the same.
FINANCIAL REPORTING AND ETHICS

Financial reporting
B (a) 1 The Conceptual Framework for the preparation and presentation of financial
statements
B (a) 9 IFRS 13: Fair value measurement

Chapter 2: Accounting and reporting concepts
1 A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
Section overview
The meaning of GAAP

The meaning of a conceptual framework
The purpose of a conceptual framework
The alternative to a conceptual framework
1.1 The meaning of GAAP

The preparation and presentation of financial statements is based on a large
number of concepts, principles and detailed rules. Some of these are contained
in law, and others are in financial reporting standards. Many of the most
fundamental concepts are not contained in any law or regulation or standard, but
are simply accepted accounting principles and conventions.
All the concepts, principles, conventions, laws, rules and regulations that are
used to prepare and present financial statements are known as Generally
Accepted Accounting Principles or GAAP.
‘Generally accepted accounting principles’ vary from country to country, because
each country has its own legal and regulatory system. The way in which
businesses operate also differs from country to country. (For example, there is
US GAAP, UK GAAP and Pakistan GAAP).
Many countries have now adopted International Financial Reporting Standards or
IFRSs, sometimes called international accounting standards. It is now fairly
common to refer to the totality of the rules as IFRS or IAS.
1.2 The meaning of a conceptual framework

A conceptual framework is a system of concepts and principles that underpin the
preparation of financial statements. These concepts and principles should be
consistent with one another.
The International Accounting Standards Committee (the predecessor of the
IASB) issued a conceptual framework document in 1989. This was called the
Framework for the Preparation and Presentation of Financial Statements and
was adopted by the IASB. It is comprised of the following sections:
The objective of financial statements (now replaced – see below)
Underlying assumptions of financial statements
Qualitative characteristics of financial statements (now replaced – see
below)
The elements of financial statements
Recognition of the elements of financial statements
Measurement of the elements of financial statements
Concepts of capital and capital maintenance.

The IASB has been working closely with FASB (the US standard setter) on a
wide range of projects with the aim of converging IFRS and US GAAP. One of
the projects has had the aim of producing a conceptual framework common to
each GAAP.
The new conceptual framework is being developed on a chapter by chapter
basis. Each chapter is being released as an exposure draft and then, subject to
comments received, released as the final version. To date, two chapters have
been finalised and these replace the sections on “The objective of financial
statements” and “Qualitative characteristics of financial statements” from the
original document.
To avoid confusion the IASB has published a new document called ”The
conceptual framework for financial reporting” which includes the new chapters
and those retained from the original framework.
The new document is made up of the following sections:
Chapter 1 – The objective of general purpose financial statements.
Chapter 2 – The reporting entity (to be added – currently in release as an
exposure draft).
Chapter 3 – Qualitative characteristics of financial information.
Chapter 4 – The Framework (1989): The remaining text (These sections
are unchanged as of yet).
x Underlying assumptions of financial statements.
x The elements of financial statements.
x Recognition of the elements of financial statements.
x Measurement of the elements of financial statements.
x Concepts of capital and capital maintenance.
The original document was known as The Framework. This text will describe the
new document as The Conceptual Framework. Note that the changes are not
fundamental in terms of their impact on IFRS.
1.3 The purpose of a conceptual framework

Most preparers and users of financial statements recognise that there is a need
for a formal conceptual framework and that this can be useful in a number of
ways.
Where there is a formal conceptual framework for accounting, accounting
practice and accounting standards are based on this framework.
Lack of a formal framework often means that standards are developed randomly
or only to deal with particular problems. The result is that standards are
inconsistent with each other or with legislation.
Lack of a conceptual framework may also mean that accounting standards fail to
address important issues. For example, until the IASB developed its Framework,
there was no proper definition of terms such as ‘asset’, ‘liability’, ‘income’ and
‘expenses’.

The business environment is becoming increasingly complex. It is unlikely that

accounting standards can cover all possible transactions. Where an entity enters
into an unusual transaction and there is no relevant accounting standard, it can
refer to the framework and apply the principles in it.
It can also be argued that a conceptual framework strengthens the credibility of
financial reporting and the accounting profession in general.
1.4 The alternative to a conceptual framework

The alternative to a system based on a conceptual framework is a system based
on detailed rules.
Accounting standards based on detailed rules are open to abuse. ‘Creative
accounting’ is the name given to techniques which enable management to give a
biased impression (usually favourable) of the company’s performance while still
complying with accounting standards and other regulations. During the 1980s
there were a number of scandals in which investors were misled by the financial
statements of apparently healthy companies which then collapsed. This was one
of the original reasons why the IASB and other standard setters developed their
conceptual frameworks. Principles are normally much harder to evade than rules.
Another disadvantage of a rule-based system is that standard setters are more
likely to be influenced by ‘vested interests’ such as large companies or a
particular business sector. The existence of a conceptual framework is an
important safeguard against this kind of political pressure.
Despite these problems, some preparers and regulators still appear to favour rule
based standards. Standards based on principles may require management to
use its judgement (and to risk making a mistake), while rules simply need to be
followed. This can be important where management can face legal action if an
investor makes a poor decision based on the financial statements.
The use of a conceptual framework can lead to standards that are theoretical and
complex. They may give the ‘right answer’ but be very difficult for the ordinary
preparer to understand and apply. However, a system of extremely detailed rules
can also be very difficult to apply.

2 THE IASB CONCEPTUAL FRAMEWORK
Section overview
Introduction
Underlying assumption
Users and their information needs
Objective of general purpose financial statements
2.1 Introduction
Financial reports are based on estimates, judgements and models rather than
exact depictions. The Conceptual Framework establishes the concepts that
underlie those estimates, judgements and models.
The Conceptual Framework deals with:
the objective of financial reporting;
the qualitative characteristics of useful financial information;
the definition, recognition and measurement of the elements from which
financial statements are constructed; and
concepts of capital and capital maintenance.
The Conceptual Framework sets out the concepts that underlie the preparation
and presentation of financial statements for external users. Its purpose is:
to assist the IASB in the development of future IFRSs and in its review of
existing IFRSs;
to assist the IASB in promoting harmonisation of regulations, accounting
standards and procedures relating to the presentation of financial
statements by providing a basis for reducing the number of alternative
accounting treatments permitted by IFRSs;
to assist national standard-setting bodies in developing national standards;
to assist preparers of financial statements in applying IFRSs and in dealing
with topics that have yet to form the subject of an IFRS;
to assist auditors in forming an opinion on whether financial statements
comply with IFRSs;
to assist users of financial statements in interpreting the information
contained in financial statements prepared in compliance with IFRSs; and
to provide those who are interested in the work of the IASB with information
about its approach to the formulation of IFRSs.
This Conceptual Framework is not an IFRS and nothing in the Conceptual
Framework overrides any specific IFRS.

On very rare occasions there may be a conflict between the Conceptual

Framework and an IFRS. In those cases, the requirements of the IFRS prevail
over those of the Conceptual Framework.
2.2 Underlying assumption

The going concern basis of accounting is the assumption in preparing the
financial statements that the entity will continue to operate for the foreseeable
future, and does not intend to go into liquidation and will not be forced into
liquidation. The going concern assumption is particularly relevant for the
valuation of assets.
This is found in chapter 4 of The Conceptual Framework.
2.3 Users and their information needs

Many existing and potential investors, lenders and other creditors cannot require
reporting entities to provide information directly to them and must rely on general
purpose financial reports for much of the financial information they need. These
are the primary users to whom general purpose financial reports are directed.
General purpose financial reports cannot provide all the information needed
and users also need to consider pertinent information from other sources.
General purpose financial reports do not show the value of a reporting
entity; but they provide information to help users estimate a value.
Individual primary users have different information needs. The aim of IFRSs
is to provide information that will meet the needs of the maximum number
of primary users.
Other users
Regulators and members of the public other than investors, lenders and
other creditors may also find general purpose financial reports useful but
these reports are not primarily directed to these groups.
A company’s management is interested in financial information but the
management does not need to rely on general purpose financial reports.
2.4 Objective of general purpose financial statements
The objective of general purpose financial reporting forms the foundation of the
Conceptual Framework. Other aspects of the Conceptual Framework flow
logically from the objective.
The objective
The objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing
resources to the entity.
Those decisions involve buying, selling or holding equity and debt instruments,
and providing or settling loans and other forms of credit.

In order to make these decisions the users need information to help them
assess the prospects for future net cash inflows to an entity.
In order to assess an entity’s prospects for future net cash inflows, users
need information about:
x the resources of the entity;
x claims against the entity; and
x how efficiently and effectively the entity’s management have
discharged their responsibilities to use the entity’s resources. (This
information is also useful for decisions by those who have the right to
vote on or otherwise influence management performance).
Information provided
General purpose financial statements provide information about:
the financial position of the entity which is information about economic
resources and the claims against them; and
changes in its financial position which could be due to:
x financial performance; and/or
x other events or transactions (e.g. share issues).
Economic resources and claims
Information about the nature and amounts of economic resources and claims can
help users to:
identify the financial strengths and weaknesses of a reporting entity;
to assess a reporting entity’s liquidity and solvency and its needs for
additional financing;
Information about priorities and payment requirements of existing claims helps
users to predict how future cash flows will be distributed among those with a
claim against the reporting entity.
Changes in economic resources and claims – Financial performance
Accrual accounting depicts the effects of transactions and other events and
circumstances on a reporting entity’s economic resources and claims in the
periods in which those effects occur, even if the resulting cash receipts and
payments occur in a different period.
This is important because such information provides a better basis for assessing
the entity’s past and future performance than information solely about cash
receipts and payments during that period.
Importance of information about a reporting entity’s financial performance:
It helps users to understand the return generated from its economic
resources. This in turn provides an indication of how well management has
discharged its responsibilities to make efficient and effective use of these
resources.

It shows the capacity of a reporting entity to generate net cash inflows

through its operations rather than by obtaining additional resources directly
from investors and creditors.
It gives an indication of the extent to which events such as changes in
market prices or interest rates affect its ability to generate net cash inflows.
Information about the variability and components of return is also important,
especially in assessing the uncertainty of future cash flows.
Information about past financial performance is helpful in predicting the
entity’s future returns on its economic resources.
Another aspect of performance is management of cash flow. Information about a
reporting entity’s cash flows during a period helps users to assess the entity’s
ability to generate future net cash inflows. It indicates how the reporting entity
obtains and spends cash, including information about its borrowing and
repayment of debt, cash dividends or other cash distributions to investors, and
other factors that may affect the entity’s liquidity or solvency. Information about
cash flows helps users understand a reporting entity’s operations, evaluate its
financing and investing activities, assess its liquidity or solvency and interpret
other information about financial performance.
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why then has it become so like a fish? For the same reason that the
penguin’s wings have become so fin-like, and the seal’s arms and legs
have become flippers, namely, that during the long time in which the
whales have taken to a watery life, those which could swim best and
float best in the water have been the most successful in the struggle
for existence; and as a fish’s shape is by far the best for this purpose
the warm-blooded milk-giver has gradually imitated it, though
belonging to quite a different order of animals.
Fig. 85.
The Humpback Whale187 suckling her young (after

Scammon).
We saw this imitation already beginning in the seals, with their

bodies sloping off towards the tail and their legs fastened back in a line
with the body; but they have not gone so far in this direction as the
whales have, since they still have hind legs and furry bodies. The sea
cows, on their line, have gone a little farther, for they have lost their
hind legs, and their skin is smooth, with very few hairs upon it. But it
remained for the whales to take up the best fish-form, the old spindle-
shape, thinning before and behind, with the strong fleshy tail ending in
two tail lobes, which act like a screw in driving the body along.
Any good drawing of a whale shows at once how admirably these
animals are fitted for gliding through the water (see Fig. 85). True,
many of them have enormous heads, but these always have long face-
bones ending in a rounded point, and even the huge head of the
sperm whale (see Fig. 87), eighteen feet long, six feet high, and six
feet wide, is rounded off above, and gradually thins away below, like
the cutwater of a ship. The eyes are very tiny and so little exposed,
that it is difficult to find them; there are no outer ears, though the bones
within are large and probably very useful for hearing in water; the
bones of the neck are seven, as is the rule among milk-givers, but they
are so flattened and firmly soldered together, and so covered with
blubber, that there is not even a hollow between the head and the
body; while to crown all, the skin is perfectly smooth so as to offer no
resistance to the water. Here, however, would be a disadvantage in the
loss of the furry covering, since most of the whales travel into cold
seas, were it not compensated by the great mass of oily fat or blubber
which fills the cells in the under part of the skin, and keeps the whole
body warm; and thus the whale, by a covering of fat often as much as
a foot and a half thick, solves the problem of a warm-blooded animal,
with a smooth gliding body, living in icy water without having its blood
chilled.
In every essential for swimming, then, whales are as well provided
as any fish, while their immensely strong backbone, and the long cords
or tendons running from the mass of muscle on the body to the tail,
give them such tremendous power that a large whale makes nothing of
tossing a whole boat’s crew into the air and breaking the boat in two.
But, though they are so far true water-animals, yet they cannot live
entirely below as fish can, for they have no apparatus for water-
breathing. The outside of their body takes on the appearance of a fish,
but inside they have the true lungs, the four-chambered heart, and all
the complicated machinery of a warm-blooded animal. Therefore,
though a whale may dive deep and remain below to seek its food, yet
before an hour has passed even the largest of them must come
floating up to the top again, to blow out the bad air through the nostrils
at the top of the head, and fill the capacious lungs with a fresh supply.
It is then that, partly because of the water which has run into the
blowhole, and partly because the rush of breath throws up spray from
the sea, we see those magnificent spouts of water which tell that a
whale is below. The older naturalists thought that these spouts were
caused by the water which the whale had taken into its mouth; but this
is not so, and Scoresby, the great Arctic traveller, states distinctly that if
the blowhole of the whale is out of the water only moist vapour rises
with the breath, while when it makes a large spout this comes from its
blowing under water and so throwing up a jet.
If, however, the whale is a simple air-breather and yet swims under
water with its mouth open, how comes it that this water does not run
down the windpipe and choke the lungs? This is prevented by a most
ingenious contrivance. At the top of our own windpipe there is a small
elastic lid which shuts when we swallow, and prevents water and food
from running down to the lungs. Now, in the whale the gristle
answering to this lid runs up as a long tube past the roof of the mouth
into the lower portion of the nose, and is kept there tightly, being
surrounded by the muscles of the soft palate. The upper portion of the
nose cavity then opens on the forehead by means of one or two
“blowholes,” as the outside nose holes are called; so that when the
blowholes are closed the whale can swim with its mouth open and feed
under water, and yet not a drop will enter its lungs.
A large sperm whale will often remain twelve minutes or more at
the top of the water, taking in air at the single blowhole in the front of
its head, and purifying its blood, and then with a roll and a tumble it will
plunge down again, and remain for an hour below, trusting to a large
network of blood-vessels lying between the lungs and the ribs to
supply purified blood to its body and retain the impure blood till it
comes up again to breathe.
But the smaller whales and porpoises, which play about our
coasts, have to come up much more often, and even when they are
not tumbling and jumping, as they love to do, you may see them rising
at regular intervals as they swim along, their black backs appearing
like little hillocks in the water, as they “blow” strongly from their single
nose-slit, take a quick breath in, and sink again to rise a few paces
farther on and repeat the process.
Thus provided both with swimming and breathing apparatus, these
purely air-breathing animals wander over the wide ocean and live the
lives of fish, making such good use of food which cannot be reached
by land animals, or those which must keep near the shore, that we
shall not be surprised to find that the whale family is a very large one.
But it is curious that the fierce animals of prey among them should
be, not the huge whales but the smaller Dolphins, Porpoises, and
Grampuses; and this shows how different water-feeding is to land-
feeding, since, because the water is full of myriads of small and soft
creatures, the sperm whale feeding on jelly-fish, and the large
whalebone whale feeding on soft cuttle-fish and the minutest beings in
the sea, are those which attain the largest size.
Most people have at one time or another seen a shoal of porpoises
either out at sea or travelling up the mouth of some large river, where
“Upon the swelling waves the dolphins show

Their bending backs, then swiftly darting go,
And in a thousand wreaths their bodies throw;”
and though they are small creatures, only about five feet long, they are
very good examples of the whale shape, with their tapering bodies,
broad tails, and the back fin, which is found in some whales and not in
others. Sometimes they swim quietly, only rising to breathe, and then
they work the tail gently from side to side; at others they gambol and
frolic, and jump right out of the water, beating the tail up and down, and
bending like a salmon when he leaps; and whether they come quietly
or wildly, you may generally know they are near by the frightened
mackerel and herrings, which spring out of the water to avoid them.
For the porpoises have a row of sharp teeth in each jaw, more than a
hundred in all, and they bite, kill, and swallow in one gulp, without
waiting to divide their food, so that they make sad havoc among the
fish.
Fig. 86.
The Porpoise.188
They are here to-day and gone to-morrow. A few kinds wander up
into fresh water, such as the Ganges and the Amazons, but by far the
greater number range all over our northern seas, together with their
near relations the dolphins, and the bottle-nosed whales, and the
strange narwhal, with its two solitary eye teeth, one only of which
grows out as a long tusk. All these roam freely through the vast ocean
home, coming into the still bays to bring up their young ones, which
they nurse and suckle tenderly, afterwards moving off again in shoals
to the open sea. There they will follow the ships, and sport and play,
and probably we shall never know exactly where their wanderings
extend, though it seems that they prefer the northern hemisphere.
Among all the dolphin family the most voracious and bloodthirsty is
189
the Grampus or Orca, which is commonly called the “Killer Whale,”
because it alone feeds on warm-blooded animals, seizing the seals
with its strong, sharp, conical teeth, devouring even its own relations
the porpoises, and attacking and tearing to pieces the larger whales.
No lion or tiger could be more ruthless in its attacks than this large-
toothed whale, which is sometimes as much as twenty-five feet long
and has broad flippers. In vain even the mother walruses try to save
their young ones by carrying them on their backs; the cunning Orca
swims below her, and coming up with a jerk shakes the young one
from its place of safety and swallows it in a moment. Nor do they
merely fight single-handed, for many voyagers have seen them attack
large whales in a pack like wolves, and in 1858 Mr. Scammon saw
three killer whales fall upon a huge Californian Gray Whale and her
young one, though even the baby whale was three times their size.
They bit, they tore, and wounded them both till they sank, and the
conquerors appeared with huge pieces of flesh in their mouths, as they
devoured their prey. How much they can eat is shown by one orca
having been killed which had the remains of thirteen porpoises and
fourteen seals in its stomach!
How strange now to turn from this ravenous hunter to the huge
Sperm Whale, eighty feet long, with a head one-third the size of its
whole body and more than a ton of spermacetic oil in its forehead, and
to think that this monster swims quietly along in the sea, drops its long
thin lower jaw, and with wide-open mouth simply gulps in jelly-fish,
small fish, and other fry, thus without any exertion or fuss slaying its
millions of small and soft creatures quietly, as the orca does the higher
creatures with so much battle and strife!
For the sperm whale (Fig. 87) must need a great deal of food to
feed its huge body. Though it has forty-two teeth in the lower jaw it
never cuts those in the upper one, and seems to depend more on
sweeping its prey into its mouth than on attacking it. And this perhaps
partly explains the use of that curious case of spermaceti which lies in
its huge forehead over the tough fat of its upper jaw. For this oil gives
out a powerful scent, which, when the whale is feeding below in the
deep water, most probably attracts fish and other small animals, as
they are also certainly attracted nearer the surface by the shining white
lining of its mouth. This light mass is also, however, useful in giving the
head a tendency to rise, so that when the whale wishes to swim
quickly it has only to rise to the top, so that the bulk of its head will
stand out of the water, the lower and narrow part cutting the waves. In
this position he can go at the rate of twelve to twenty miles an hour.
But if the sperm whale is curious, as it carries its oil-laden head
through all seas from pole to pole, chiefly in warmer latitudes, how
much more so are the whalebone whales, which are monarchs of the
colder and arctic seas, where they feed on the swarms of mollusca,
crustaceans, and jelly animals which live there. For these large
whales, though they have teeth in their gums, never cut them, but in
their place they have large sheets of whalebone hanging down from
the upper jaw (see Fig. 84), smooth on the outside, fringed with short
hairs on the inside, and crowded together so thickly, only about a
quarter of an inch apart, that as many as three hundred sheets hang
down on each side of the mouth of the great Greenland whale.
Fig. 87.
The Sperm Whale.
It is easy to see the use of these whalebones when we remember

that this huge whale feeds entirely by filling its enormous mouth with
water, and then closing it and raising its thick tongue at the back so as
to drive the water out at the sides, straining it through the fine fringes,
which fill up all the spaces between the plates and keep back every
little shell-fish and soft animal. But it is less easy to guess where these
whalebone plates come from, till we look back at the manatee, and
remember those horny ridges which it uses for biting, and which are
exaggerations of the rough fleshy ridges at the top of a cow’s mouth.
Then we have a clue, for each blade of whalebone grows from a
horny white gum, being fed by a fleshy substance below much in the
same way as our nails are, so that these blades are, as it were, a
series of hardened ridges, which grow out from the soft palate, till they
become frayed at the edges, and form that dense fringe which is the
whale’s strainer, upon which he depends entirely for his food.
Explain it as we will, however, it is a most wonderful apparatus.
Imagine a huge upper jaw forming an arch more than nine feet high, so
that if the whalebone were cleared away a man could walk about
inside, upon the thick tongue which lies in the lower jaw fastened down
almost to the tip so that it cannot be put out of the mouth. And then
remember that this enormous mouth has to be filled with food sufficient
to nourish a body fifty or more feet long. Who would ever guess that
this food is made up of creatures so small that countless millions must
go to a mouthful? Yet the whole difficulty is solved simply by these
triangular fringed plates or mouth-ridges (see section Fig. 84, p. 318),
covered with horny matter and frayed into minute threads like the
horny barbs of a feather.
Nor are we yet at the end of the wonderful adaptation, for while the
jaw is only from nine to twelve feet high, the long outside edge of the
plates is often eighteen feet long, and for this reason, that if they were
only as long as the jaw is deep, then when the whale went fishing with
his mouth open the animals would escape below the fringe, while as
they now are, he may gape as wide as he will, the long curtain will still
guard the passage of the mouth and entangle the prey in its meshes.
But what, then, is to become of this great length of whalebone when
the animal shuts his mouth? Here comes in the use of the beautiful
elasticity of the plates, for the great Arctic whaler, Captain Gray, has
shown that as the mouth shuts the lower ends of the longer plates
bend back towards the throat and fall into the hollow formed by the
short blades behind them, so that the whole lies compactly fitted in,
ready to spring open again, and fill the gap whenever the jaws are
distended.
With this magnificent fishing-net the whalebone whales go a-
fishing in all the salt waters of the world. They are not all of enormous
size,—many of them are not more than twenty feet long,—nor have
they all such a perfect mouthful of whalebone as the great Polar
Whale; but when the whalebone is shorter, as in the Rorqual, and
other whales with back fins, the stiff walls of the lower lip close in the
sides of the mouth and prevent the escape of the prey; and many of
these whales have a curious arrangement of skin folds under the lower
jaw, which stretch out and enable them to take in enormous mouthfuls
of water, so as to secure more food.
New Zealand, California, Japan, the Cape, the Bay of Biscay, and
in fact almost every shore or sea from pole to pole, has some whale
called by its name; for these gaping fishers are everywhere, and it is
not always easy to say whether the same whale is not called by
different names in various parts of the world. In the shallow bays and
lagoons they may be found with their newly-born young ones very
early in the year; while far out at sea ships meet with them travelling in
shoals, or “schools,” northwards, as the summer sets in and the Arctic
Sea is swarming with life. In fact the Californian gray whales go right
up into the ice, poking their noses up through the holes to breathe, and
then they travel far away south again into the tropics to bring up their
young ones.
And whether large or small, toothed whales or whalebone whales,
active as the dolphin and the huge fin-whales or rorquals, which dash
through the water although some are nearly a hundred feet long, or
lazy and harmless as the Greenland whale is unless attacked, in one
thing all the whale family betray their high place in the animal kingdom.
Nowhere, either on land or in the water, can mothers be found more
tender, more devoted, or more willing to sacrifice their lives for their
children than whale-mothers. Scoresby tells us that the whalers, as
means of catching the grown-up whales, will sometimes strike a young
one with harpoon and line, sure that the mother will come to its rescue.
Then she may be seen coming to the top with it encouraging it to swim
away, and she will even take it under her fin, and, in spite of the
harpoons of the whalers, will never leave it till life is extinct. Nay, she
has been known to carry it off triumphantly, for the lash of her tail is
furiously strong when she is maddened by the danger of her child, so
that a boat’s crew scarcely dare approach her.
And now there remains the question what enemies besides man
these strong-swimming milk-givers can have in their ocean home? We
have seen that the orca or killer whale will turn cannibal and devour
those of its own kind, and the swordfish is said to attack whales with its
formidable spear; but these are not their greatest enemies. With many
of the whales it is tiny creatures like those on which they feed which
hasten their death, for small parasitic crustaceans cover their head and
fins, and feed upon their fat, so that whales which have been infested
with these animals are often found to be “dry,” or to have lost nearly all
their oil. And thus we see the tables turned, and while the whale feeds
upon minute creatures, it is in its turn destroyed by them.
Nevertheless, as a rule, they probably live long lives, till their teeth
are worn, or their whalebone frayed and broken, and their blubber
wasted away; and then, it may be after eighty or one hundred years of
life, they die a natural death. Therefore they probably share with the
elephant the longest term of life of any of the warm-blooded animals;
and though their existence cannot certainly be said to be an exciting
one, yet, when undisturbed by man, it is at least peaceful, sociable,
and full of family love.
It may perhaps seem strange that we should have taken these
ocean-dwellers last in our glimpses of animal life; but in the first place,
how was it possible to show how they are truly related to the land
mammalia until we understood the structure of these last? And in the
second place, we have as our object to see how the backboned family
have won for themselves places in the world, and surely there are
none which have done this more successfully or in a more strange and
unexpected way than the whales, which, while retaining all the
qualities of warm-blooded animals, have won themselves a home in
the ocean by imitating the form and habits of fish, and so adapting
themselves to find food in the great oceans, where their land relations
were powerless to avail themselves of it.
WHEN THE COLD HAS PASSED AWAY
CHAPTER XII.
A BIRD’S-EYE VIEW OF THE RISE AND
PROGRESS OF BACKBONED LIFE.
We have now sketched out, though very roughly, the history of the
various branches of the great backboned family, and we have found
that, as happens in all families, they have each had their successes
and their downfalls, their times of triumph, and their more sober days,
when the remaining descendants have been content to linger on in the
byways of life, and take just so much of this world’s good as might fall
to their share.
We have seen also that, as in all families of long standing, many
branches have become extinct altogether; the great enamel-plated
fish, the large armour-covered newts, the flying, swimming, and huge
erect-walking reptiles, the toothed and long-tailed birds, the gigantic
marsupials, the enormous ground-loving sloths, and many others,
have lived out their day and disappeared; their place being filled either
by smaller descendants of other branches of the group, or by new
forms in the great armies of fish, birds, and milk-givers which now have
chiefly possession of the earth.
Still, on the whole, the history has been one of a gradual rise from
lower to higher forms of life; and if we put aside for a moment all
details, and, forgetting the enormous lapse of time required, allow the
shifting scene to pass like a panorama before us, we shall have a
grand view indeed of the progress of the great backboned family.
First, passing by that long series of geological formations in which
no remains of life have been found, or only those of boneless or
invertebrate animals, we find ourselves in a sea abounding in stone-
190
lilies and huge crustaceans, having among them the small forms of
the earliest fish known to us, those having gristly skeletons. Then as
the scene passes on, and forests clothe the land, we behold the
descendants of these small fish becoming large and important,
wearing heavy enamelled plates or sharp defensive spines; some of
them with enormous jaws, two or three feet in length, wandering in the
swamps and muddy water, and using their air-bladder as a lung. But
these did not turn their air-breathing discovery to account; they
remained in the water, and their descendants are fish down to the
present day.
It is in the next scene, when already the age of the huge extinct
fishes is beginning to pass away, and tree ferns and coal forest plants
191
are flourishing luxuriantly, that we find the first land animals, which
have been growing up side by side with the fish, and gradually learning
to undergo a change, marvellous indeed, yet similar to one which goes
on under our eyes each year in every country pond. For now, mingling
with the fish, we behold an altogether new type of creatures which,
beginning life as water-breathers, learn to come out upon the land and
live as air-breathers in the swamps of the coal forests.
A marvellous change this is, as we can judge by watching our
common tadpole, and seeing how during its youth its whole breathing
organs are remade on a totally different principle, its heart is
remodelled from an organ of two chambers into one of three, the whole
course of its blood is altered, some channels being destroyed and
others multiplied and enlarged, a sucking mouth is converted into a
gaping bony jaw, and legs with all their bones and joints are produced
where none were before, while the fish’s tail, its office abandoned, is
gradually absorbed and lost.
The only reason why this completely new creation, taking place in
one and the same animal, does not fill us with wonder is, that it goes
on in the water where generally we do not see it, and because the
most wonderful changes are worked out inside the tadpole, and are
only understood by physiologists. But in truth the real alteration in
bodily structure is much greater than if a seal could be changed into a
monkey.
Now this complete development which the tadpole goes through in
one summer is, after all, but a rapid repetition, as it were, of that slow
and gradual development which must have taken place in past ages,
when water-breathing animals first became adapted to air-breathing.
Any one, therefore, who will take the spawn of a frog from a pond, and
watch it through all its stages, may rehearse for himself that
marvellous chapter in the history of the growth and development of
higher life.
And he will gain much by this study, for all nature teaches us that
this is the mode in which the Great Power works. Not “in the
whirlwind,” or by sudden and violent new creations, but by the “still
small voice” of gentle and gradual change, ordering so the laws of
being that each part shall model and remodel itself as occasion
requires. Could we but see the whole, we should surely bend in
reverence and awe before a scheme so grand, so immutable, so
irresistible in its action, and yet so still, so silent, and so imperceptible,
because everywhere and always at work. Even now to those who
study nature, broken and partial as their knowledge must be, it is
incomprehensible how men can seek and long for marvels of
spasmodic power, when there lies before them the greatest proof of a
mighty wisdom in an all-embracing and never-wavering scheme, the
scope of which is indeed beyond our intelligence, but the partial
working of which is daily shown before our very eyes.
But to return to our shifting scene where the dense forests of the
Coal Period next come before us. There, while numerous fish, small
and great, fill the waters, huge Newts have begun their reign
(Labyrinthodonts), wandering in the marshy swamps or swimming in
the pools, while smaller forms run about among the trees, or, snake-
like in form, wriggle among the ferns and mosses; and one and all of
these lead the double-breathing or amphibian life.
In the next scene the coal forests are passing away, though still the
strange forms of the trees and the gigantic ferns tell us we have not left
192
them quite behind; and now upon the land are true air-breathers, no
longer beginning life in the water, but born alive, as the young ones of
the black salamander are now (see p. 81). The Reptiles have begun
their reign, and they show that, though still cold-blooded animals, they
have entered upon a successful line of life, for they increase in size
and number till the world is filled with them.
Meanwhile other remarkable forms now appear leading off to two
new branches of backboned life. On the one hand, little insect-eating
warm-blooded marsupials scamper through the woods, having started
we scarcely yet know when or where, except that we learn from their
structure that they probably branched off from the amphibians in quite
a different line from the reptiles, and certainly gained a footing upon
the earth in very early times. On the other hand, birds come upon the
193 194
scene having teeth in their mouths, long-jointed tails, and many
other reptilian characters. We have indeed far more clue to the
relationship of the birds than we have of the marsupials, for while we
have these reptile-like birds, we have also the bird-like reptiles such as
the little Compsognathus, which hopped on two feet, had a long neck,
bird-like head and many other bird-like characters, though no wings or
feathers.
The birds, however, even though reptile-like in their beginning,
must soon have branched out on a completely new line. They for the
195
first time among this group of animals, have the perfect four-
chambered heart with its quick circulation and warm blood; while not
only do they use their fore limbs for flying (for this some reptiles did
before them), but they use them in quite a new fashion, putting forth a
clothing of feathers of wondrous beauty and construction, and with true
wings taking possession of the air, where from this time their history is
one of continued success.
And now we have before us all the great groups of the backboned
family—fish, amphibia, reptiles, birds and mammalia; but in what
strange proportions! As the scenery of the Chalk Period with its fan-
palms and pines comes before us, we find that the gristly fish, except
the sharks and a few solitary types, are fast dying out, while the bony
196
fish are but just beginning their career. The large amphibians are all
gone long ago; they have run their race, enjoyed their life and finished
their course, leaving only the small newts and salamanders, and later
on the frogs and toads, to keep up the traditions of the race. The land-
birds are still in their earliest stage; they have probably scarcely lost
their lizard-like tail, and have not yet perfected their horny beak, but
are only feeling their way as conquerors of the air. And as for the milk-
givers, though we have met with them in small early forms, yet now for
a time we lose sight of them again altogether.
It is the reptiles—the cold-blooded monster reptiles—which seem
at this time to be carrying all before them. We find them everywhere—
in the water, with paddles for swimming; in the air, with membranes for
flying; on the land hopping or running on their hind feet. From small
creatures not bigger than two feet high, to huge monsters thirty feet in
height, feeding on the tops of trees which our giraffes and elephants
could not reach, they fill the land; while flesh-eating reptiles, quite their
match in size and strength, prey upon them as lions and tigers do upon
197
the grass-feeders now. This is no fancy picture, for in our museums,
and especially in Professor Marsh’s wonderful collection in Yale
Museum in America, you may see the skeletons of these large reptiles,
and build them up again in imagination as they stood in those ancient
days when they looked down upon the primitive birds and tiny
marsupials, little dreaming that their own race, then so powerful, would
dwindle away, while these were to take possession in their stead.
And now in our series of changing scenes comes all at once that
strange blank which we hope one day to fill up; and when we look
again the large reptiles are gone, the birds are spreading far and wide,
and we come upon those early and primitive forms of insect-eaters,
gnawers, monkeys, grass-feeders, and large flesh-eaters, whose
descendants, together with those of the earlier marsupials, are
henceforward to spread over the earth. We need scarcely carry our
pictures much farther. We have seen how, in these early times, the
flesh-feeders and grass-feeders were far less perfectly fitted for their
198
lives than they are now; how the horse has only gradually acquired
his elegant form; the stag his branching antlers; and the cat tribe their
scissor-like teeth, powerful jaws, and muscular limbs; while the same
history of gradual improvement applies to nearly all the many forms of
milk-givers.
But there is another kind of change which we must not forget,
which has been going on all through this long history, namely,
alterations in the level and shape of the continents and islands, as
coasts have been worn away in some places and raised up or added
to in others, so that different countries have been separated from or
joined to each other. Thus Australia, now standing alone, with its
curious animal life, must at some very distant time have been joined to
the mainland of Asia, from which it received its low forms of milk-
givers, and since then, having become separated from the great
battlefield of the Eastern Continent, has been keeping for us, as it were
in a natural isolated zoological garden, the strange primitive Platypus
and Echidna, and Marsupials of all kinds and habits.
So too, Africa, no doubt for a long time cut off by a wide sea which
prevented the larger and fiercer animals from entering it, harboured the
large wingless ostriches, the gentle lemurs, the chattering monkeys,
the scaly manis, and a whole host of insect-eaters; while South
America, also standing alone, gave the sloths and armadilloes, the ant-
bears, opossums, monkeys, rheas, and a number of other forms, the
chance of establishing themselves firmly before stronger enemies
came to molest them. These are only a few striking examples which
help us to see how, if we could only trace them out, there are reasons
to be found why each animal or group of animals now lives where we
find it, and has escaped destruction in one part of the world when it
has altogether disappeared in others.
* * * * *
So, wandering hither and thither, the backboned family, and
especially the milk-givers, took possession of plains and mountain
ranges, of forests and valleys, of deserts and fertile regions. But still
another question remains—How has it come to pass that large animals
which once ranged all over Europe and Northern Asia,—mastodons,
tusked tapirs, rhinoceroses, elephants, sabre-toothed tigers, cave-
199
lions, and hippopotamuses in Europe, gigantic sloths and llamas in
North America, and even many huge forms in South America, have
either been entirely destroyed or are represented now only by
scattered groups here and there in southern lands? What put an end to
the “reign of the milk-givers,” and why have they too diminished on the
earth as the large fish, the large newts, and the large lizards did before
them?
To answer this question we must take up our history just before the
200
scene at the head of our last chapter, which the reader may have
observed does not refer, as the others have done, to the animals in the
chapter itself. Nevertheless it has its true place in the series, for it tells
of a time when the great army of milk-givers had its difficulties and
failures as well as all the other groups, only these came upon them not
from other animals but from the influence of snow and ice.
For we know that gradually from the time of tropical Europe, when
all the larger animals flourished in our country, a change was creeping
very slowly and during long ages over the whole northern hemisphere.
The climate grew colder and colder, the tropical plants and animals
were driven back or died away, glaciers grew larger and snow deeper
and more lasting, till large sheets of ice covered Norway and Sweden,
the northern parts of Russia, Germany, England, Holland, and
Belgium, and in America the whole of the country as far south as New
York. Then was what geologists call the “Glacial Period;” and whether
the whole country was buried in ice, or large separate glaciers and
thick coverings of snow filled the land, in either case the animals, large
and small, must have had a bad time of it.
True, there were probably warmer intervals in this intense cold,
when the more southern animals came and went, for we find bones of
the hippopotamus, hyæna, and others buried between glacial beds in
the south of England. But there is no doubt that at this time numbers of
land animals must have perished, for in England alone, out of fifty-
three known species which lived in warmer times, only twelve survived
the great cold, while others were driven southwards never to return,
and the descendants of others came back as new forms, only distantly
related to those which had once covered the land.
Moreover, when the cold passed away and the country began
again to be covered with oak and pine forests where animals might
feed and flourish, we find that a new enemy had made his appearance.
Man—active, thinking, tool-making man—had begun to take
possession of the caves and holes of the rocks, making weapons out
of large flints bound into handles of wood, and lighting fires by rubbing
wood together, so as to protect himself from wild beasts and inclement
weather.
In America and in England alike, as well as in Northern Africa, Asia
Minor, and India, we know that man was living at this time among
animals, many of them of species which have since become extinct,
and with his rude weapons of jagged flint was conquering for himself a
place in the world.
He must have had a hard struggle, for we find these flint
implements now lying among the bones of hyænas, sabre-toothed
tigers, cave-lions, cave-bears, rhinoceroses, elephants, and
hippopotamuses, showing that it was in a land full of wild beasts that
he had to make good his ground.
“By the swamp in the forest

The oak-branches groan,
As the savage primeval,
With russet hair thrown
O’er his huge naked limbs, swings his hatchet of stone.
“And now, hark! as he drives with

A last mighty swing,
The stone blade of the axe through
The oak’s central ring,
From his blanched lips what screams of wild agony spring!
There’s a rush through the fern-fronds,

A yell of affright,
And the Savage and Sabre-tooth
Close in fierce fight,
201
As the red sunset smoulders and blackens to night.”
Many and fierce these conflicts must have been, for the wild
beasts were still strong and numerous, and man had not yet the skill
and weapons which he has since acquired. But rough and savage
though he may have been, he had powers which made him superior to
all around him. For already he knew how to make and use weapons to
defend himself, and how to cover himself at least with skins as
protection from cold and damp. Moreover, he had a brain which could
devise and invent, a memory which enabled him to accumulate
experience, and a strong power of sympathy which made him a highly
social being, combining with others in the struggle for life.
And so from that early time till now, man, the last and greatest
winner in life’s race, has been taking possession of the earth. With
more and more powerful weapons he has fought against the wild
beasts in their native haunts; and by clearing away the large forests,
cutting up the broad prairies and pastures, and cultivating the land, he
has turned them out of their old feeding grounds, till now we must go to
the centre of Africa, the wild parts of Asia, or the boundless forests of
South America, to visit in their homes the large wild animals of the
great army of milk-givers.
* * * * *
Since, therefore, these forms are growing rarer every century, and
some of them, such as the Dodo, Epyornis, and Moa among birds, and
the northern sea-cow or Rhytina among milk-givers, have already
disappeared since the times of history, we must endeavour, before
others are gone for ever, to study their structure and their habits. For
we are fast learning that it is only by catching at these links in nature’s
chain that we can hope to unravel the history of life upon the earth.
At one time naturalists never even thought that there was anything
to unravel, for they looked upon the animal kingdom as upon a building
put together brick by brick, each in its place from the beginning. To
them, therefore, the fact that a fish’s fin, a bird’s wing, a horse’s leg, a
man’s arm and hand, and the flipper of a whale, were all somewhat
akin, had no other meaning than that they seemed to have been
formed upon the same plan; and when it became certain that different
kinds of animals had appeared from time to time upon the earth, the
naturalists of fifty years ago could have no grander conception than
that new creatures were separately made (they scarcely asked
themselves how) and put into the world as they were wanted.
But a higher and better explanation was soon to be found, for there
was growing up among us the greatest naturalist and thinker of our
day, that patient lover and searcher after truth, Charles Darwin, whose
genius and earnest labours opened our eyes gradually to a conception
so deep, so true, and so grand, that side by side with it the idea of
making an animal from time to time, as a sculptor makes a model of
clay, seems too weak and paltry ever to have been attributed to an
Almighty Power.

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Advanced Accounting and Financial

Reporting 2016 1st Edition George

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ADVANCED ACCOUNTING AND

© Emile Woolf International, May 2016

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© Emile Woolf International iv The Institute of Chartered Accountants of Pakistan

CERTIFIED FINANCE AND ACCOUNTING PROFESSIONAL

On the successful completion of this paper candidates will be able to:

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A Presentation of financial statements including public sector

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B Financial reporting and ethics (continued)

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B Financial reporting and ethics (continued)

© Emile Woolf International viii The Institute of Chartered Accountants of Pakistan

B Financial reporting and ethics (continued)

© Emile Woolf International ix The Institute of Chartered Accountants of Pakistan

© Emile Woolf International x The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

PRESENTATION OF FINANCIAL STATEMENTS INCLUDING PUBLIC SECTOR

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1 REGULATORY FRAMEWORK FOR ACCOUNTING IN PAKISTAN

 Accounting regulation in Pakistan

1.1 Accounting regulation in Pakistan

1.2 Companies’ Ordinance 1984: Introduction to accounting requirements

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 an income statement (statement of comprehensive income): a structured

1.4 Applicability of accounting standards in Pakistan

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© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

1.5 Accounting standards: Three tier approach

1.6 International Financial Reporting Standards

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when there was divergence in practice. These interpretations were called

Published by the IASC Published by the IASB

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2 COMPANIES’ ORDINANCE 1984: FOURTH SCHEDULE

 Fixed assets (non-current assets)

These requirements must be followed in addition to those in IFRS.

2.1 Fixed assets (non-current assets)

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2.2 Long term investments

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Available for sale investment

2.3 Long term loans and advances

Illustration: Long term loans and advances

Note to the accounts: 2013 2012

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2.4 Long term deposits and prepayments

2.5 Current assets

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Illustration: Stock in trade

Note to the accounts: 2013 2012

Illustration: Trade debts

Accounting regulation in Pakistan

an income statement (statement of comprehensive income): a structured

Fixed assets (non-current assets)

Other operating income:

trade debts (other than loans and advances) showing separately:

The meaning of GAAP

It shows the capacity of a reporting entity to generate net cash inflows