Download Managing Financial Aspects of a Business

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI
LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201
PRINCIPLES OF FINANCIAL AND COST ACCOUNTING
Nadeeshani Dissanayake
B.Sc. Accounting (Sp), First Class, ACA, ACMA, CPA (Aust)
CONCEPTUAL FRAMEWORK FOR
THE PREPARATION AND
PRESENTATION OF FINANCIAL
STATEMENTS
LEARNING OUTCOMES
At the end of this session the students should be able to:
 Understand the need for conceptual framework for
financial reporting
 Understand the objective of financial reporting
 Understand the fundamental assumptions in FR
 Describe the qualitative characteristics of financial
information
 Define the elements of financial statements
 Understand the components of financial
statements
WHAT IS A CONCEPTUAL FRAMEWORK?
“A conceptual framework is a coherent
system of inter-related objectives and
fundamentals that can lead to consistent
standards and that prescribes the nature,
function, limits of financial accounting and
financial statements.” (FASB Definition)
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Objectives of the Framework
1.
2.
3.
4.
5.
6.
7.
To assist in the development of A/Ss and review of
existing standards.
To assist in promoting harmonization of regulation,
Accounting Standards and procedures relating to
Financial Reporting
To assist preparers of Financial Statements in applying
accounting standards
To assist auditors in forming an opinion
To solve new practical accounting problems quickly.
To increase financial statements users’ understanding
and confidence in financial reporting.
To enhance, comparability among companies’ Financial
Statements.
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THE MATTERS DEALT WITHIN THE
FRAMEWORK

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
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The objectives of financial statements
Underlying assumptions
Qualitative characteristics of F/Ss
The elements of F/Ss
The definition and recognition of the
elements of F/Ss
Measurement of the elements of the F/Ss
Concepts
of
capital
and
capital
maintenance
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THE OBJECTIVE OF FINANCIAL REPORTING
“ Provide financial information about the
reporting entity that is useful to existing and
potential investors and other creditors in making
decisions about providing resources to the
entity”.


Financial statements prepared for this purpose meet the common needs of
most users who don’t have the right to demand information and who have a
reasonable knowledge of business and economic activities
Financial statements also show the results of the stewardship of
management or the accountability of management.
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FINANCIAL REPORTS AND USERS
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Underlying Assumptions
Accrual Basis –
In order to meet the objectives, financial
statements are prepared on the accrual basis of
accounting.
What is accrual basis of
accounting? What is cash basis? Effects of
transactions and other events are
recognised when they occur ( not when
cash or cash equivalents received or paid)
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Underlying Assumptions
Going Concern –
The financial statements are normally
prepared on the assumption that an
enterprise is a going concern and will
continue in operation for the foreseeable
future.
Hence it is assumed that the entity has
neither the intention nor the need to
liquidate or curtail materially the scale of
its operations.
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QUALITATIVE CHARACTERISTICS
Primary Qualitative Characteristics of Accounting
Information

Relevance :
Capable of making a difference in users’ decision
Information should have the predictive value (predictive role), Feedback
value (Confirmatory role).

Faithfully represent /Reliability:
Financial reports represent economic phenomena in words and numbers.
To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the phenomena that it
purports to represent. To be a perfectly faithful representation, a depiction
would have three characteristics. It would be complete,
 neutral and free from error.



Completeness
Neutrality (unbiased)
Free from errors
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QUALITATIVE CHARACTERISTICS
Enhancing Qualitative Characteristics

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Comparability:
information should be presented in a manner that can be compared
with the historical information of the same organization, information of
the other competitive organizations, information with the industry
average figures.
Verifiability
knowledgeable and independent observers could reach consensus
Materiality
Information is material if omitting it or misstating it could influence
decisions that users make on the basis of financial information about a
specific reporting entity.
 Understandability:
information should be presented in a manner that can be easily
understood by an average man who is having a general idea about
business
 Timeliness
Timeliness means having information available to decision-makers in time
to be capable of influencing their decisions. Generally, the older the
information is the less useful it is.
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ELEMENTS OF FINANCIAL STATEMENTS

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There are five elements in the Financial
Statements.
Assets
Liabilities
Equity
Income
Expenses
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ELEMENTS OF FINANCIAL STATEMENTS
ASSETS.
A resource controlled by the entity as a result of past
events and from which future economic benefits are
expected to flow to the entity.
Main features
• Controlled by the enterprise
• Past Events
• Future economic benefits
Group Work : A Printing Machine, Office Building, employees,
elephant, Cash, stationery – pens/clips/pins, teak trees, bees
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ELEMENTS OF FINANCIAL STATEMENTS
LIABILITIES.
A present obligation of the entity arising
from past events, the settlement of which
is expected to result in an outflow from
the entity of resources embodying
economic benefits.
Main features
•Present obligations
•Transfer economic benefits
•Past Transactions or Events
Group Work - annual reports
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Elements of Financial Statements
INCOME. Income is increases in economic benefits during the
accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
EXPENSES. Expenses are decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity
participants.
Group Work - annual reports
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ELEMENTS OF FINANCIAL STATEMENTS
EQUITY.
The residual interest in the assets of the
enterprise after deducting all its liabilities.
Group Work - annual reports
Basic Accounting equation and double entry system
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COMPONENTS OF FINANCIAL STATEMENTS
Statement of Financial Position
• Income Statement
• Statement of Comprehensive Income (including
other Comprehensive Income)
• Statement of Changes in Equity
• Statement of Cash flows
• Notes
•
Group Work - annual reports
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Statement of Financial Position
XYZ Group – Statement of Financial position as at 31 December 2011
31 Dec 2011
31 Dec 2010
ASSETS
Non-current assets
Property, Plant and equipment
x
x
Goodwill
x
x
Other intangible assets
x
x
Investments in associates
x
x
Financial assets
x
x
Total non-current assets
x
x
Inventories
x
x
Trade receivables
x
x
Other current assets
x
x
Cash and cash equivalents
x
x
Total current assets
x
x
Total assets
xx
xx
Current Assets
Continued……
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STATEMENT OF FINANCIAL POSITION
31 Dec 2011
31 Dec 2010
Stated capital
x
x
Retained earnings
x
x
Other components of equity
x
x
x
X
Non-controlling interest
x
x
Total equity
x
x
Long –term borrowings
x
x
Deferred tax
x
x
Long –term provision s
x
x
Total non-current liabilities
x
x
EQUITY AND LIABILITIES
Equity attributable to owners
of the parent
Non –current liabilities
Continued…… 20
STATEMENT OF FINANCIAL POSITION
Current liability
Trade and other payables
x
x
Short-term borrowings
x
x
Current portion of long –
term borrowing
x
x
Current tax payable
x
x
Short-term provisions
x
x
Total current liabilities
x
x
Total liabilities
x
x
Total equity and liabilities
xx
xx
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STATEMENT OF COMPREHENSIVE INCOME
2011
2010
Revenue
x
x
Cost of sales
(x)
(x)
Gross profit
x
x
Other income
x
x
Distribution costs
x
x
Administrative expenses
x
x
Other expenses
x
x
Finance costs
x
x
Share of profit of associates
x
x
Profit before tax
x
x
Income tax expense
(x)
(x)
Profit for the year from
continuing operations
x
x
Loss for the year from
discontinued operations
-
(x)
PROFIT FOR THE YEAR
x
x
Continued……
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STATEMENT OF COMPREHENSIVE INCOME
2011
2010
x
x
Exchange differences on translating
foreign operations
x
x
Investments in equity instruments
x
x
Cash flow hedges
(x)
(x)
Gains on property revaluation
x
x
Actuarial gains (losses) on defined
benefit pension plans
(x)
x
Share of other comprehensive income of
associates
x
(x)
Income tax relating to components of
other comprehensive income
x
(x)
Other comprehensive income for the year,
net of tax
(x)
x
TOTLA COMPREHENSIVE INCOME FOR
THE YEAR
x
x
PROFIT FOR THE YEAR
Other comprehensive income:
Continued……
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….
STATEMENT OF COMPREHANSIVE INCOME
2011
2012
x
x
Owners of the parent
x
x
Non-controlling interest
x
x
x
x
Owners of the parent
x
x
Non-controlling interest
x
x
x
x
Basic EPS
x
x
Diluted EPS
x
x
TOTAL COMPREHENSIVE INCOME FOR
THE YEAR
Profit attributable to
Total comprehensive income
attributable to:
Earnings per share (in currency units)
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XYZ Group – Statement of changes in equity for the year ended 31 December 2011
S.c
api
tal
Retai
ned
earni
ngs
Transla
tion of
foreign
operati
ons
Inve. in
equity
instru.
Cash
flow
hedge
s
Reval
uation
surplu
s
Total
NC
I
Tota
l
Equ
ity
Balance at 1 Jan 2010
x
x
x
x
x
x
x
x
x
Changes in accounting policy
-
(x)
Restated balance
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Changes in equity for 2010
Dividends
Total Comprehensive Income for the year
Balance at 31 Dec 2010
Changes in equity for 2011
Issues of share capital
Dividend
Total comprehensive income for the year
Transfer to retained earnings
Balance at 31 Dec 2011
x
x
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