Preparation and presentation of financial statements
In most jurisdictions, the structure and content of financial statements are defined by local law, for example in Uganda you need to comply with the Companies Act, 2012 during the preparation of financial statements. International Accounting Standards (IAS) are however, designed to work in any jurisdiction and possess their own set of requirements for presentation of financial statements. This is provided in IAS 1: Presentation of Financial Statements.
Objective of financial statements
General purpose financial statements are aimed at providing information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity's:
- assets
- liabilities
- equity
- income and expenses, including gains and losses
- contributions by and distributions to owners (in their capacity as owners)
- cash flows.
That information, along with other information in the notes, assists users of financial statements in predicting the entity's future cash flows and, in particular, their timing and certainty.
A complete set of financial statements comprises:
- a statement of financial position
- either; a statement of comprehensive income, or – an income statement plus a statement showing other comprehensive income
- a statement of changes in equity
- a statement of cash flows
- notes, comprising a summary of significant accounting policies and other explanatory notes.
- comparative information prescribed by the standard.
IAS 1 does not require the above titles to be used by companies. It is likely that many companies will continue using the previous terms of balance sheet rather than statement of financial position and cash flow statement rather than statement of cash flows.
Identification of financial statements
An entity shall clearly identify the financial statements and distinguish them from other information in the same published document.
An entity shall clearly identify each financial statement and the notes. An entity shall display the following information prominently, and repeat it when necessary for the information presented to be understandable:
- the name of the reporting entity or other means of identification, and any change in that information from the end of the preceding reporting period;
- whether the financial statements are of the individual entity or a group of entities;
- the date of the end of the reporting period or the period covered by the set of financial statements or notes;
- the presentation currency, as defined in IAS 21 The Effects of Foreign Exchange Rates; and
- the level of precision used in presenting amounts in the financial statements. (e.g. thousands, millions)
Statement of financial position
Current and non-current classification
An entity must normally present a classified statement of financial position, separating current and non-current assets and liabilities, unless presentation based on liquidity provides information that is reliable. In either case, if an asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts.
Current assets are assets that are:
- expected to be realised in the entity's normal operating cycle
- held primarily for the purpose of trading
- expected to be realised within 12 months after the reporting period
- cash and cash equivalents (unless restricted).
All other assets are non-current.
Current liabilities are those:
- expected to be settled within the entity's normal operating cycle
- held for purpose of trading
- due to be settled within 12 months
- for which the entity does not have the right at the end of the reporting period to defer settlement beyond 12 months.
Other liabilities are non-current.
When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the discretion to do so, the debt is classified as non-current, even if the liability would otherwise be due within 12 months.
If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.
Settlement by the issue of equity instruments does not impact classification.
Statement of changes in equity
The statement of changes in equity provides a summary of all changes in equity arising from transactions with owners in their capacity as owners.
The statement must show:
- total comprehensive income for the period, showing separately, amounts attributable to owners of the parent and to non-controlling interests
- the effects of any retrospective application of accounting policies or restatements made in accordance with IAS 8, separately for each component of other comprehensive income
- reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
- profit or loss
- other comprehensive income
- transactions with owners, showing separately, contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control
An analysis of other comprehensive income by item is required to be presented either in the statement or in the notes.
The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes:
- amount of dividends recognised as distributions
- the related amount per share.
Statement of comprehensive income
Total comprehensive income is the realised profit or loss for the period, plus other comprehensive income.
Other comprehensive income is income and expenses that are not recognised in profit or loss (i.e. they are recorded in reserves rather than as an element of the realised profit for the period).
IAS 1 allows a choice of two presentations of comprehensive income:
- A statement of comprehensive income showing total comprehensive income , or
- An income statement showing the realised profit or loss for the period PLUS a statement showing other comprehensive income
The Other Comprehensive Income (OCI) section is required to present line items which are classified by their nature, and grouped between those items that will or will not be reclassified to profit and loss in subsequent periods.
An entity's share of OCI of equity-accounted associates and joint ventures is presented in aggregate as single line items based on whether or not it will subsequently be reclassified to profit or loss.
ILLUSTRATION
The following trial balance has been extracted from the books of Mukasa as at 31 March 2022:
UGX’000 UGX’000
Accounts office rent 98
Audit fee 22
Salaries 150
Irrecoverable debts 27
General administration 125
General distribution 23
Storage costs 110
Advertising 40
Share capital (all ordinary shares of Shs1 each) 270
Share premium 80
Revaluation reserve 20
Dividend 27
Cash at bank and in hand 3
Receivables 233
Noncurrent asset investments 280
Interest paid 25
Dividends received 15
Interest received 1
Land and buildings at cost (land 100, buildings 100) 200
Land and buildings: accumulated depreciation 30
Plant and machinery at cost 400
Plant and machinery: accumulated depreciation 170
Retained earnings account (at 1 April 2021) 235
Purchases 1,210
Sales 2,165
Inventory at 1 April 2021 140
Trade payables 27
Bank loan 100
3,133 3,133
Additional information
- Inventory at 31 March 2022 had a cost of UGX 85,000.
- Depreciation for the year to 31 March 2022 is to be charged against cost of sales as follows:
Buildings 5% on cost (straight line)
Plant and machinery 30% on carrying value (CV) (reducing balance)
- Income tax of UGX165,000 is to be provided for the year to 31 March 2022. A dividend of 10c per share was paid. The loan is repayable in five years.
- Noncurrent asset investments are to be revalued up by UGX100,000
- Salaries are to be apportioned equally between cost of sales, administration expenses and distribution costs.
Prepare the statement of comprehensive income, statement of changes in equity and statement of financial position for year ended 31 March 2022.
Statement of comprehensive income for the year ended 31 March 2022
` UGX’000
Revenue 2,165
Cost of sales (W1) (1,389)
Gross profit 776
Administration (W1) (295)
Distribution (W1) (250)
Operating profit 231
Finance cost (25)
Interest receivable 1
Investment income 15
Profit before tax 222
Income tax expense (165)
Profit for the year 57
Other comprehensive income
Gain on property revaluation 100
Total comprehensive income for the year 57
Statement of financial position as at 31 March 2022
UGX’000
Noncurrent assets:
Property, plant and equipment (W2) 326
Investment (280 + 100) 380
Current assets:
Inventory 85
Receivables 233
Bank 3
321
1,027
Equity and Liabilities
Capital and Reserves:
Share capital 270
Share premium 80
Revaluation reserve 120
Retained earnings 265
735
Noncurrent liabilities 100
Current liabilities ($27 + $165) 192
1,027
Statement of changes in equity
Share Share Revaluation Retained Total
Capital Premium reserve earnings equity
UGX’000 UGX’000 UGX’000 UGX’000 UGX’000
B/f 270 80 20 235 605
Total comprehensive income 100 57 157
For the year
Dividends (27) (27)
C/f 270 80 120 265 735
Workings
(W1) Costs Cost of sales Distribution Admin UGX’000 UGX’000 UGX’000
Accounts office rent 98
Audit fee 22
Salaries 50 50 50
Irrecoverable debts 27
General administration 125
General distribution 23
Distribution centre 110
Advertising 40
Purchase 1,210
Opening inventory 140
Closing inventory (85)
Depreciation
(5% × 100) + (400 – 170) × 30% 74 - -
Total 1,389 250 295
(W2) Tangible noncurrent assets
Land and buildings Plant and machinery Total
UGX’000 UGX’000 UGX’000
CV b/f 170 230 400
Depreciation charge (5) (69) (74)
CV C/F 165 161 326
Fair presentation and compliance with IFRSs
The financial statements shall present fairly the financial position, financial performance and cash flows of the entity. An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes.
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure.
Going concern
When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment of the entity's ability to continue as a going concern, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties.
When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern.
Accrual basis of accounting
An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting.
Materiality and aggregation
An entity shall present separately each material class of similar items
Offsetting
An entity shall not offset assets and liabilities unless required or permitted by an IFRS. Where an entity undertakes, in the course of its ordinary activities, transactions that do not generate revenue but that are incidental to its main revenue-generating activities, it presents the results of such transactions by netting any income with the related expenses arising on the same transaction, when such presentation reflects the substance of the transaction or other event.
Consistency of presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS.
Frequency of reporting
There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the entity must disclose the reason for the change and state that amounts are not entirely comparable.
Comparative information
Except when IFRSs permit or require otherwise, an entity shall disclose comparative information in respect of the previous period for all amounts reported in the current period's financial statements. An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements. When the entity changes the presentation or classification of items in its financial statements, the entity shall reclassify comparative amounts, unless reclassification is impracticable.
An entity is required to present at least two of each of the following primary financial statements:
- statement of financial position
- statement of profit or loss and other comprehensive income
- separate statements of profit or loss (where presented)
- statement of cash flows
- statement of changes in equity
- related notes for each of the above items.
A third statement of financial position is required to be presented if the entity retrospectively applies an accounting policy, restates items, or reclassifies items, and those adjustments had a material effect on the information in the statement of financial position at the beginning of the comparative period.
