1.

EXECUTIVE SUMMARYThis report presents the details related to preparation of financial

statements inPakistan. The Institute of Chartered Accountants of Pakistan (ICAP) is the
accountingstandards-setting body in Pakistan. It works closely with State Bank of Pakistan
andSecurities and Exchange Commission of Pakistan (SECP), which is the regulator ofcorporate
sector. Three tier structure is being enforced for preparation of financialstatements in Pakistan.
Section 234 of the Companies Ordinance 1984 laid down thebasic requirements for preparation and
submission of financial statements. In recentyears, Pakistan has made significant progress in
adopting and implementingInternational Financial Reporting Standards (IFRS) for listed companies
through jointefforts and close cooperation of the accounting profession and regulatory bodies.
Thisreport covers the regulatory framework, management responsibility, accountingprinciples,
content requirements and activities for preparation of financial statementsin Pakistan.

2.

1. INTRODUCTIONFinancial statements are a structured representation of the financial

position andfinancial performance of an entity. The objective is to provide information aboutthe
financial position, financial performance and cash flows of an entity that isuseful to a wide range of
users in making economic decisions. Financialstatements also show the results of managements
stewardship of the resourcesentrusted to it. This information, along with other information in the
notes, assistsusers of financial statements in predicting the entitys future cash flows and,in
particular, their timing and certainty.Islamic Republic of Pakistan has been recognized as a
significant contributor to theWorld economy due to its relatively large population and considerable
businessopportunities. This requires that the corporate sector in Pakistan comply withinternationally
acceptable standards on financial system. Pakistan has a statutoryframework to regulate business
activities, including regulatory institutions forenforcing accounting and auditing standards which
ensure high-quality corporatefinancial statements. Appropriate enforcement mechanisms have been
put in placewhich help in preparation of financial statements according to the
internationalrequirements thus provide an aid in creating a uniform basis for comparing
financialperformance among domestic and international competitors.Following text describes the
details related to preparation of financial statements inPakistan.

3.

2. REGULATORY FRAMEWORK FOR PREPARATION OF FINANCIAL STATEMENTS IN

PAKISTANThe Companies Ordinance, 1984 sets primaryrequirements for financial reporting of all
companiesincorporated in Pakistan. The Companies Ordinancerequires the preparation,
presentation and publication offinancial statements, including disclosures and auditing ofall
companies incorporated in Pakistan. In addition to thevarious provisions pertaining to financial
reporting, theFourth Schedule of the Ordinance lays down the form,content and certain disclosure
requirements for preparingfinancial statements for listed companies, while the FifthSchedule outlines
the same for non-listed companies.The Securities and Exchange Commission of Pakistan (SECP) is
empoweredunder Section 234 of the Companies Ordinance to prescribe the appropriateinternational
accounting standards. SECP notifies the accountingstandards based on the recommendation of
Institute ofChartered Accountants of Pakistan (ICAP). These aremainly formulated in line with the
principles underlined inInternational Financial Reporting Standards (IFRS).To provide a
comprehensive framework of accounting and financial reporting thatcovers all entities of varying
sizes and addresses the degree of public interest involvedin such entities, three tiers segregate the

requirements for preparation of financialstatements:Tier 1: Publicly Accountable Entities listed

companies. it has filed, or is in the process of filing, its financial statements with the Securities and
Exchange Commission of Pakistan. it holds assets in a fiduciary capacity for a broad group of
outsiders, such as a bank, insurance company, securities broker, pension fund, mutual fund or
investment banking entit. it is a public utility or similar entity that provides an essential public
service. it is economically significant on the basis of criteria such as total assets, total income,
number of employees, degree of market dominance, and nature and extent of external borrowings.
4.

The criteria for economically significant would be as follows: Turnover in excess of Rs. 1
billion, excluding other income Number of employees in excess of 750 Total borrowings (excluding
normal trade credit and accrued liabilities) in excess of Rs, 500 millionTier 2: Medium Sized Entities
(MSEs) not a listed company or a subsidiary of a listed company. not filed, or is not in the process
of filing, its financial statements with the Securities and Exchange Commission of Pakistan (SECP).
does not hold assets in a fiduciary capacity for a broad group of outsiders, such as a bank,
insurance company, securities broker/dealer, pension fund, mutual fund or investment banking
entity. not a public utility or similar entity that provides an essential public service; not
economically significant on the basis of criteria as defined above. not a Small-Sized Entity (SSE) as
defined below.Tier 3: Small Sized Entities (SSEs) has paid up capital plus undistributed reserves
(total equity after taking into account any dividend proposed for the year) not exceeding Rs. 25
million. has annual turnover not exceeding Rs. 200 million, excluding other income. In order to
qualify as a Small-Sized Entity, both of the above-mentioned conditions must be satisfied.ThreeTiered Structure Standards Application Tier 1 The complete set of IFRS that is approved by ICAP
Publicly Accountable Entities and notified by SECP shall be applicable to these entities. Tier 2 The
Accounting and Financial Reporting Framework Medium-Sized Entities and Standard for Mediumsized Entities issued by the ICAP are applicable to these entities. Tier 3 The Accounting and
Financial Reporting Framework Small-Sized Entities and Standard for Small-Sized Entities issued by
the ICAP are applicable to these entities.

5.

3. MANAGEMENT RESPONSIBILITY IN PREPARING FINANCIAL STATEMENT IN

PAKISTANAccording to the regulatory guidelines from Govt. of Pakistan through abovementioned
institutions, every company must prepare annual accounts that report onthe performance and
activities of the company during the year. The period reportedon in the accounts is called the
financial year. This starts on the day after theprevious financial year ended or, in the case of a new
company, on the day ofincorporation. A more precise term for a financial year is an accounting
referenceperiod (ARD). For a new company, the ARD is set using its date of incorporation.Every
company is required to send a set of annual accounts to the registered addressof every member of
the company at least twenty one days before the annual generalmeeting. A listed company is also
required to send five copies each of such balance-sheet and profit and loss account and other
documents (auditors report, directorsreport etc) to SECP, the stock exchange and the registrar at
least twenty-one daysbefore the date of annual general meeting. After the balance-sheet and profit
and lossaccount or the income and expenditure account, have been laid before the companyat the
annual general meeting, every listed company is required to file with theRegistrar at least three
copies duly signed by the chief executive, directors, chairmanof directors or the auditors of the

company, as the case may be along with the reportsand other documents whereas in case of a
public company, which is not a listedcompany at least two copies, within thirty days from the date of
such meeting.Qualitative characteristics are the attributes that make the information provided
infinancial statements useful to users. The principal characteristics which are requiredto be adhered
by the companies preparing financial statements in Pakistan arementioned below:(a)
Understandability: It is essential that information provided in financialstatements be readily
understandable by users.(b) Relevance: To be useful, information must be relevant to the decision
makingneeds of users.(c) Materiality: The relevance of information is affected by its nature
andmateriality, information is material if its omission or misstatement could influence theeconomic
decisions of users taken on the basis of the financial statements. Materiality
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depends on the size of the item or error judged in the particular circumstances of itsomission
or misstatement.(d) Reliability: Information is reliable when it is free from material error and biasand
can be depended on by users to represent faithfully that which it is said torepresent. In assessing
reliability, substance over form, prudence, neutrality andcompleteness are also considered.(e)
Faithful Representation: To be reliable, information must represent faithfullythe transactions and
other events it either purports to represent.(f) Substance Over Form: Information is to represent
faithfully the transactions andother events that it purports to represent, it is necessary that they are
accounted forand presented in accordance with their substance and economic reality and notmerely
their legal form.(g) Neutrality: To be reliable, the information contained in financial statements mustbe
neutral, that is, free from bias.(h) Prudence: Prudence is the inclusion of a degree of caution in the
exercise of thejudgments needed in making the estimates required under conditions of
uncertainty,such that assets or income are not overstated and liabilities or expenses are
notunderstated.(i) Completeness: To be reliable, the information in financial statements must
becomplete within the bounds of materiality and cost. An omission can causeinformation to be false
or misleading and thus unreliable and deficient in terms of itsrelevance.(j) Comparability: Users must
be able to compare the financial statements of anentity over time in order to identify trends in the
entitys financial position andperformance. Users must also be able to compare the financial
statements of differententities in order to evaluate their relative financial position, performance and
changesin financial position.(k) Timeliness: If there is undue delay in the reporting of information it
may lose itsrelevance. Management may need to balance the relative merits of timely reportingand
the provision of reliable information. To provide information on a timely basis itmay often be
necessary to report before all aspects of a transaction or other event

7.

are known, thus impairing reliability. Conversely, if reporting is delayed until allaspects are
known, the information may be highly reliable but of little use to userswho have had to make
decisions in the interim. In achieving a balance betweenrelevance and reliability, the overriding
consideration is how best to satisfy theeconomic decisionmaking needs of users.(l) Balance
between Benefit and Cost: The benefits derived from informationshould exceed the cost of providing
it. The evaluation of benefits and costs is,however, substantially a judgmental process. The
preparers and users of financialstatements should be aware of this constraint. In achieving a balance
betweenrelevance and reliability, the overriding consideration is how best to satisfy theeconomic
decision-making needs of users.

8.

4. ACCOUNTING PRINCIPLES ENFORCED IN PAKISTAN 4.1. Elements The elements

directly related to the financial statements which are proposed byconcerned Pakistani regulatory
bodies are defined as follows:-(a) An asset is a resource controlled by the entity as a result of past
events and fromwhich future economic benefits are expected to flow to the entity.(b) A liability is a
present obligation of the entity arising from past events, thesettlement of which is expected to result
in an outflow from the entity of resourcesembodying economic benefits.(c) Equity is the residual
interest in the assets of the entity after deducting all itsliabilities.(d) Income is increase in economic
benefits during the accounting period in the formof inflows or enhancements of assets as well as
decreases of liabilities that result inincrease in equity, other than those relating to contributions from
equity participants.(e) Expenses are decrease in economic benefits during the accounting period in
theform of outflows or depletions of assets or incurrence of liabilities that results indecrease in equity,
other than those relating to distributions to equity participants.(f) Profit is frequently used as a
measure of performance or as the basis for othermeasures, such as return on investment or
earnings per share. The elements directlyrelated to the measurement of profit are income and
expenses. 4.2. Measurement The measurement basis which should be adopted by entities in
preparing theirfinancial statements is historical cost. This is usually combined with
othermeasurement bases. For example, inventories are usually carried at the lower of costand net
realizable value, marketable securities may be carried at market value andpension liabilities are
carried at their present value.

9.

4.3. Basic Overall Considerations Overall considerations for preparing and presenting
financial statements inPakistan are: Fair Presentation and Compliance with IFRS. Going
Concern Accrual Basis of Accounting Consistency of Presentation Materiality and Aggregation
Off setting Comparative InformationThey are discussed below: 4.3.1.Fair Presentation and
Compliance with IFRS. Financial statements shall present fairly the financial position,
financialperformance and cash flows of an entity. Fair presentation requires the faithfulrepresentation
of the effects of transactions, other events and conditions inaccordance with the definitions and
recognition criteria for assets, liabilities, incomeand expenses set out in the Framework. The
application of IFRSs, with additionaldisclosure when necessary, is presumed to result in financial
statements that achievea fair presentation. 4.3.2.Going Concern Financial statements shall be
prepared on a going concern basis unlessmanagement either intends to liquidate the entity or to
cease trading, or has norealistic alternative but to do so. When management is aware, in making
itsassessment, of material uncertainties related to events or conditions that may castsignificant doubt
upon the entitys ability to continue as a going concern, thoseuncertainties shall be disclosed. When
financial statements are not prepared on agoing concern basis, that fact shall be disclosed, together
with the basis on which thefinancial statements are prepared and the reason why the entity is not
regarded as agoing concern. 4.3.3.Accrual Basis of Accounting An entity shall prepare its financial
statements, except for cash flowinformation, using the accrual basis of accounting. 4.3.4.Consistency
of Presentation The presentation and classification of items in the financial statements shall
beretained from one period to the next unless it is apparent, following a significant

10.

change in the nature of the entitys operations or a review of its financial statements,that
another presentation or classification would be more appropriate having regard tothe criteria for the

selection and application of accounting policies or a Standard or anInterpretation requires a change

in presentation. 4.3.5.Materiality and Aggregation Each material class of similar items shall be
presented separately in thefinancial statements. Items of a dissimilar nature or function shall be
presentedseparately unless they are immaterial. 4.3.6.Off setting Assets and liabilities, and income
and expenses, shall not be offset unlessrequired or permitted by a Standard or an Interpretation.
4.3.7.Comparative Information Except when a Standard or an Interpretation permits or requires
otherwise,comparative information shall be disclosed in respect of the previous period for allamounts
reported in the financial statements. Comparative information shall beincluded for narrative and
descriptive information when it is relevant to anunderstanding of the current periods financial
statements.
11.

5. CONTENTS OF FINANCIAL STATEMENTS PREPARED IN PAKISTAN 5.1. Components

of Financial Statements: According to the ICAP standards available in Pakistan for preparation of
financialstatements, a typical financial statement comprises of: A balance sheet. An income
statement. A statement of changes in equity showing either o all changes in equity, or o changes in
equity other than those arising from transactions with equity holders acting in their capacity as equity
holders; A cash flow statement. Notes, comprising a summary of significant accounting policies
and other explanatory notes. Figure 1: An Extract of Section 234 of Companies Ordinance 1984

12.

5.2. Balance Sheet According to the ICAP standards available in Pakistan for preparation of
financialstatements, as a minimum, the balance sheet should include but are not restricted
tofollowing line items which present the following amounts: a. property, plant and equipment b.
investment property; c. intangible assets; d. financial assets; e. investments accounted for using the
equity method; f. biological assets (agriculture); g. inventories; h. trade and other receivables; i. cash
and cash equivalents; j. trade and other payables; k. provisions; l. financial liabilities; m. liabilities and
assets for current tax; n. deferred tax liabilities and deferred tax assets; o. minority interest,
presented within equity; and p. issued capital and reserves attributable to equity holders of the
parent. 5.3. Profit And Loss Account or Income Statement The company, as a minimum, the income
statement should disclose the followingline items:a. revenue;b. finance costs;c. share of the profit or
loss of associates and joint ventures accounted for using the equity method;d. tax expense;e. a
single amount comprising the total of the post-tax profit or loss of discontinued operations and the
post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operations;f. profit or loss
after tax.

13.

g. the company should present additional line items, headings and sub-totals in income
statement when such presentation is relevant to an understanding of the Companys financial
performanceh. the company should present the analysis of expenses in income statement.i.
Expenses, classified according to their function under the following sub-heads, along with additional
information on their nature, namely: (i) Cost of sales; (ii) distribution cost; (iii) administrative
expenses; (iv) other operating expenses; and (v) finance costj. Other operating income, namely: (i)
Income from financial assets; (ii) income from investments in and debts, loans, advances and
receivables to each related party; (iii) income from assets other than financial assets.k. Finance cost

separately show the amount of interest on borrowings from related parties, if any.l. Other information
relating to the following, namely:- (i) debts written off as irrevocable distinguishing between trade
debts, loans, advances and other receivables; and (ii) provisions for doubtful or bad debts
distinguishing between trade debts, loans advances and other receivables.m. 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. In the case of joint auditors, the aforesaid information shall be shown separately for
each of the joint auditors. 5.4. Cash Flow Statement The Companies are required to report cash
flows from operating activities usingeither the direct method, whereby major classes of gross cash
receipts and gross cashpayments are disclosed or the indirect method, whereby net profit or loss is
adjustedfor the effects of transactions of non-cash nature, any deferrals or accruals of past orfuture
operating cash receipts or payments, and items of income or expenseassociated with investing or
financing cash flows.
14.

The Company should report cash flows from the following operating, investing orfinancing
activities on a net basis.The cash flows arising from transactions in a foreign currency recorded in
Companysfunctional currency by applying to the foreign currency amount the exchange ratebetween
the functional currency and the foreign currency at the date of the cash flow.The cash flows from
interest and dividends received and paid should be disclosedseparately and classified in a consistent
manner from period to period as eitheroperating, investing or financing activities?The cash flows
arising from taxes on income should separately disclosed and classifiedas cash flows from operating
activities unless they can be specifically identified withfinancing and investing activities. 5.5.
Accounting Policies In Pakistan the accounting policies that a Company might consider
presentinginclude, but are not restricted to, the following:a) revenue recognition;b) consolidation
principles, including subsidiaries and associates;c) business combinations;d) joint ventures;e)
property, plant & equipmentf) intangiblesg) capitalization of borrowing costs and other expenditure;h)
construction contracts;i) investment properties;j) financial instruments and investments;k) leases;l)
research and development costs;m) inventories;n) taxes, including deferred taxes;o) provisions;p)
employee benefit costs;q) foreign currency translation and hedging;

15.

r) definition of business and geographical segments and the basis for allocation ofcosts
between segments;s) definition of cash and cash equivalents;t) inflation accounting;u) government
grants;v) method used for investment in associates;w) valuation of inventories;x) long-term contracts
for construction;y) borrowing costs;z) segment reporting.

16.

6. ACTIVITIES FOR PREPARING FINANCIAL STATEMENTS The primary activities for

preparing financial statements in Pakistan are discussedbelow: 6.1. Journalizing and Ledger Posting
in Pakistan: There are three methods of capturing economic events being used by companiesin
Pakistan: 6.1.1. Manual SystemIn which all entries are made manually in a General Journal in a
specified format(usually T-account) and then these entries are posted in the appropriate
GeneralLedger (G/L) account by manually adding to the total of the previous balance. In
thisconventional system the trial balance is prepared at specified period usually after onemonth. At
these regular intervals the corresponding adjusting entries are made andan adjusted trial balance is

prepared. All these activities are performed manuallyusing the paper based calculations. This
system is being used by small companieswho cannot afford to have automated accounting software.
However this system isvanishing fast due to affordable automation equipment and reliable software
at verylow cost of ownership. 6.1.2. Semi Automated SystemIn which the journal entries are made
through an automated system such as acomputer and these journal entries are separately posted
into computer software forupdating the G/L accounts. Most of the medium sized companies in
Pakistan haveadopted these semi-automated systems. They provide a balance in cost and
benefitsrealized in using these systems. 6.1.3. Fully Automated SystemIn which the journal entries
are made through an automated system such as acomputer and these journal entries are
automatically posted in the appropriate G/Laccounts instantly. These systems provide end to end
automation of financialreporting upto generation of all financial statements by a single click. Example
of suchsystems includes SAP and other Enterprise Resource Planning (ERP) software.
Suchsystems are very expensive to own and implement thus can be employed by onlylarge entities.
17.

6.2. Accounts Closing: After all journal entries are made to the General Ledger (G/L)
accounts and TrialBalance prepared the closing process starts which lead to preparation of
allcomponents of financial statement. Typical steps in closing process are mentionedbelow: Obtain
bank statements for all accounts. Perform reconciliation between bank statement and G/L for all
cash accounts. Review outstanding checklist for any long outstanding checks. Evaluate all
investments for proper accounting and current accounting rules in regard to accounting for equity
investments. Obtain detail of Account Receivable (A/R) balances. Reconcile ending A/R balance
to G/L. Prepare account analysis showing bad debt allowance. Tie Bad Debt Expense to Income
Statement. Tie write-offs to actual write-offs recorded during the period. Tie ending balance to G/L.
Ensure amounts are properly classified as Prepaid Assets. Review all asset items for proper
classification of short-term vs. long-term. Review new Fixed Asset purchases during period.
Ensure all items added to Fixed Assets are properly capitalized. Ensure journal entries were
recorded correctly to remove asset which were disposed and accumulated depreciation. Determine
gain or loss recognized on disposals. Ensure that assets under Capital Lease are being amortized
appropriately. Prepare footnote disclosure to show accumulated depreciation balances as of periodend as well as current period depreciation expense. Perform Accounts Payable (A/P) cutoff.
Reconcile A/P sub-ledger to G/L. Contact vendors for outstanding/unbilled amounts as of periodendExternal Auditors, Legal, Consultants, Recruiting firms, etc. Prepare reconciliation of Accrued
Expenses accounts. Review all liability items for proper classification of short-term vs. long-term.
Prepare footnote disclosure for future commitments. Tie Net Income in Retained Earnings rollforward to Income Statement.

18.

6.3. Preparation of Balance Sheet, Income Statement and Cash Flow Statement: After the
closing process has been completed, the trial balance provides the basisfor preparation of Balance
Sheet, Income Statement and Cash Flow Statement. The income statement is prepared first using
the appropriate revenue and expense accounts. This statement also reports the tax liability of the
company. The net income determined in the income statement is reported in the statement of
retained earnings. The statement of retained earning is calculated second because it determines
amount of retained earnings to be reported in the balance sheet. The balance sheet is developed

using the companys assets, liabilities and owners equity. The balance of these accounts is taken
directly from the trial balance. Balance sheets are presented with asset accounts appearing on the
left and liabilities and owners equity accounts appearing on the right. Separate subtotals for current
assets and current liabilities are mentioned. The basis of preparation of the financial statements
and specific accounting policies selected and applied for significant transactions and events are
disclosed as explanatory notes.Consolidated financial statements are to be signed by the same
persons by whom theindividual balance sheet and the profit and loss account or income and
expenditureaccount of the holding company are required to be signed.
19.

7. CONCLUSIONPakistan has made significant progress in closing the gap between local
requirementsfor corporate financial reporting and international standards by not only adopting
IFRSbut also by establishing mechanisms to ensure their enforcement. Over the past fewyears, this
has contributed to maintaining uniformity in the process of preparation offinancial statements in
Pakistan.

20.

BIBLIOGRAPHY Accounting and Financial Reporting Standards for Medium-Sized Entities

MSEs) and Small-Sized Entities (SSEs) Review of practical implementation issues of International
Financial Reporting Standards - Case study of Pakistan, United Nations Conference on Trade and
Development. A Guide on Accounts and Accounting Reference Dates by Securities and Exchange
Commission of Pakistan. The Companies Ordinance 1984 by Government of Pakistan. Financial
statements disclosure check list for listed companies by The Institute of Chartered Accountants of
Pakistan. Medium-Sized Entities Illustrative Financial Statements by The Institute of Chartered
Accountants of Pakistan. Business Recorder Pakistan Economist Official Pakistan Government
site