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ACC203

Financial Accounting 2
Preparation of Company Financial
Statements
COMMONWEALTH OF AUSTRALIA
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Topic Outline
• Preparation of General Purpose Financial Statements
1.

• Legislative requirements for preparation of a company’s


2. annual reports

• Understand accounting policies


3. • Understand how changes in accounting estimates are
accounted for

• Understand how to account for prior period errors


4. • Understand the concept of materiality

• Events subsequent to Balance Sheet Date


5.

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Reference
• Company accounting 10th Edition 2015, by Leo K., Knapp
Prescribed J., McGowan S., and Sweeting J. Chapters 14 and 15
Text

• Accounting 9th Edition 2015, Hoggett J., Edwards L.,


Medlin J. Chalmers K., Hellmann A., Beattie C., and
Additional Maxfield J., Chapter 23
Reference

• Tutorial 10. Refer Daily Weekly Schedule for question


numbers
Tutorial

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General Purpose Financial Statements (GPFS)

Corporations Act – s295(1)


Components of an annual financial report

To include:
Notes to the
Financial Directors’
financial
statements declaration
statements

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Annual Reporting Requirements
Financial Statments s295(2)

1. • Statement of financial position as at the end of the


year

2. • Statement of comprehensive income


• Statement of changes in equity

3. • A statement of cash flows for the year


• Consolidated accounts (if required)

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Annual Reporting Requirements
Notes to the financial statements s295(3)
The notes to the financial statements s295(3)

The notes must contain all information necessary to ensure:

The financial report provides a true and fair view of both:

The financial position

The performance of the company/consolidated entity

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Annual Reporting Requirements
Directors declaration s295(4)

Director’s opinion must state whether:

There are reasonable grounds to believe that the company is solvent

The financial statements and notes are in accordance with the


Corporations Act

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A Complete Set of Financial
Statements - AASB101
Statement of Financial Position
Statement of Profit or Loss & Other Comprehensive Income
1.

• Statement of Changes in Equity - shows how the company’s


capital, reserves and retained earnings have changed
2.

• Statement of Cash Flows


• Notes to the financial statements
3.

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General Features of Financial
Statements - AASB101
• Fair presentation and compliance with International
* Financial Reporting standards (IFRSs)

• Going concern
* • Accrual basis of accounting

• Materiality and aggregation


* • Offsetting

• Frequency of reporting
* • Comparative information

• Consistency of presentation
*

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1. Fair Presentation & Compliance
with IFRSs
• A set of financial statements are required to
Presentation
display fair presentation

• Applying IFRSs is presumed to result in a fair


IFRS
presentation

• Entities must explicitly state their compliance with


AASB and IFRS accounting standards in a note to
Compliance the financial statements

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General Features of Financial
Statements

• There is an assumption that all entities adopt the


going concern basis of accounting
• Exception applies where management intends to
Going liquidate or cease trading and a liquidity basis is used
concern

• The financial statements are required to be presented


using the accruals basis of accounting
Accrual • Exception: Statement of cash flows
basis

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General Features of Financial
Statements
• Each material class of similar items must be presented
separately
• Material items of a dissimilar nature or function must be
presented separately
Materiality

• Assets/liabilities and income/expenses are not to be


offset, unless required by another accounting standard
• Offsetting is appropriate when netting any income with
related expenses arising from the same transaction – e.g.
Offsetting gains/losses on the sale of non-current assets

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General Features of Financial
Statements

• Financial statements must be prepared annually


Frequency

• Comparative information for the immediately preceding reporting


period must be disclosed for all amounts
Comparatives

• Financial information must be consistently presented between


periods
• Exception: a significant change in operations or required by
Consistency another accounting standard

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Identification of the Financial
Statements
 AASB 101 requires the following information to be
disclosed separately in the financial report

 name of the entity


 If the report relates to a single or group of entities
 reporting period
 presentation currency
 rounding used

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Statement of Financial Position
(SOFP)

• The prime information source about an


entity’s financial position
*

• Items classified on basis of:


• Current/non-current
* • In order of their liquidity

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Statement of Financial Position
AASB101 Disclosure
• Requires inclusion of additional items, headings and
AASB101 sub-totals, if relevant, based on assessment of:

• The nature and liquidity of assets


Disclosure • The function of assets

• The amounts, nature and timing of liabilities


Disclosure

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Statement of Financial Position
AASB101 Disclosure
• Must be broken down into appropriate
Inventories
classifications

• Must be disaggregated into classes


PP&E

• Specific share capital disclosures are also required.


Share
• May be disclosed either in the statement of financial
Capital position or in the notes.

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Statement of Profit or Loss and
Other Comprehensive Income
 A prime source of information about an entity’s
performance
 Income, expenses and other comprehensive income
are included.
 Total comprehensive income has two components:
1. Profit or loss (P&L)
2. Other comprehensive income (OCI)

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Statement of Profit or Loss and Other
Comprehensive Income
Profit or loss – AASB101

 All items of income and expense recognised into period


must be included in the company’s profit or loss.

 Exclusions relate to:


 Corrections of errors and the effects of changes in
accounting policies
 Accounting standards that require other
comprehensive income to be excluded from profit or
loss.

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Other Comprehensive Income
• OCI includes income that is not recognised in
profit or loss.
* • Components of OCI comprise:

• Changes in a revaluation surplus


• Actuarial gains/losses
OCI
• Gains and losses on foreign currency translation
• Gains and losses on financial assets
OCI • gains and losses on hedging instruments

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Statement of Profit or Loss and
Other Comprehensive Income
• Income tax relating to each component of OCI is required
to be disclosed.
*

• May be either on the statement or in the notes.


*
• Reclassification adjustments relating to components of OCI
are also required to be disclosed.
* • Do not arise on changes in a revaluation surplus.

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Statement of Profit or Loss and Other
Comprehensive Income
AASB 101 prescribes line items to appear on the statement.
Minimum line items required on face of statement are as follows:

• Revenue
* • Finance cost

• Share of profits/(losses) of associates and JV’s


* • Tax expenses

• Profit/(loss) from sale of discontinuing operations


* • Share of OCI of associates and JVs

• Profit /(loss) and comprehensive income attributed


* to non-controlling interests and the parent.

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Statement of Profit or Loss and
Other Comprehensive Income
• Income comprises
• Revenue – inflows from ordinary activities,
Income e.g. sale of goods, provisions of services

• Gains – inflows from activities outside


ordinary trading, e.g. sale of non-current
Gains assets

• Where material, revenue and gains may


Disclosure
require separate disclosure

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Statement of Profit or Loss and
Other Comprehensive Income
 To enhance interpretation of the statement AASB 101
requires separate disclosure of the nature and amount
of certain material income and expense items including:
 Inventory and PPE write-downs
 Cost of restructuring
 Disposals of PPE & other investments
 Profit/(losses) re discontinuing operations
 Litigation settlements
 Reversals of provisions
 Such disclosures can be made either in the statement
or in the notes

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Statement of Profit or Loss and
Other Comprehensive Income
 Entities are required to present expenses, classified by nature or
function, whichever is more relevant and reliable information

Nature Function
Purchases of material Cost of sales
Employee benefits Costs of distribution
Depreciation Administrative costs
Advertising costs
 AASB 101 encourages, but does not require this analysis to be
presented on the face of the statement

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Statement of Changes in Equity
(SOCE) Required disclosures:

 Total comprehensive income for the period attributable to:


 Equity holders of parent; and Non controlling interests

 Changes in accounting policies and Corrections of errors


AASB 108

 A reconciliation between opening and closing balances showing


changes resulting from:
 Profit/(Loss)
 OCI
 Transactions with equity holders, showing separately
distributions to equity holders

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Notes to the accounts
AASB101
• Notes enhance the interpretation of the financial
statements
Purpose

• Items in the statements is cross-referenced to any


related information in the notes
Reference

• Summary of accounting policies


• Supporting information
Order of
notes • Other disclosures: Dividends, Auditor remuneration

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Sources of Estimation Uncertainty
AASB101, Para. 125
• These are disclosed in the notes about the
future of estimation uncertainty that is
Key
assumptions material

• Their nature
Disclosure
• Their carrying amount at reporting date

• Future interest rates and useful lives of non-


Examples
current assets.

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Corporate Social Responsibility
Reporting (CSR)

• The responsibility of an entity for the


impact of it’s decisions and activities on
What is it? society and the environment relating to:

• Sustainable development, including the


CSR health and the welfare of society

• Expectations of stakeholders
CSR
• Must be compliant with applicable law

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Corporate Social Responsibility
Reporting (CSR)

• Currently there are no accounting standards requiring CSR


reporting by Australian companies.
AASB

• It is likely that CSR reporting will continue to be driven by


community concerns with global warming and the impact of
CSR activities on the environment.

• There has been a growth in the number of Australian companies


presenting information on socially responsible activities.
Future • This is expected to increase in the future

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Annual Auditor’s Report
The auditor must form an opinion as to whether the:

• Financial report is in accordance with Corporations


Act and AASB accounting standards
*
• Financial report gives a true and fair view
• The company has kept registers and records
* required by the Corporations Act

• The company has kept financial records to enable a


financial report to be prepared and audited
*

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Accounting Policies
 Accounting policies are the principles, bases or rules
adopted by a company in preparing and presenting its
financial reports

 In selecting accounting policies regulators, standard


setters and management should consider:

 Relevance, Reliability and Accountability

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Relevance
 Information that enables users to:
 Make predictions or form expectations about the future
performance of an entity
 Confirm or refute past evaluations
 Assess the accountability rendered by the preparers of
the financial statements

 Information may be relevant due to its size or nature

 To be relevant, information must be timely and


understandable.

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Reliability
 Information that is free from material error and can be
depended upon by users to represent faithfully that which it
purports to represent

 In order to faithfully represent a transaction, it is necessary


that the substance of the transaction be presented, rather
than its legal form.
 Example: recognising an asset and corresponding liability
when accounting for a finance lease

 Reliable information is:


 Neutral – free from bias
 Prudent – prepared using a degree of caution
 Complete – free from material error

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Changes in Accounting
estimates and errors
• Setting accounting policies
AASB108

• Changing accounting policies


AASB108

• Disclosures in the financial statements


AASB108 concerning accounting policies

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Disclosure of Accounting
Policies AASB101
The accounting policies note will disclose information as follows:

1. A statement that the financial statements are GPFS and


identification of the financial reporting framework applied
in their preparation.

The note must state whether the statements are prepared in


accordance with:
– accounting standards
– interpretations of accounting standards.

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Disclosure of Accounting
Policies AASB101
2. The measurement basis used in preparing the financial
statements.

3. A description of accounting policies.


 The information provided should allow users to understand
how transactions and other events are reflected in the
financial statements

 E.g. AASB 102 Inventories requires disclosure of the


accounting policies adopted in measuring inventories
including the cost formula used.
 Otherwise management judgement is required.

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Disclosure of Accounting
Policies
4. Judgements, apart from those involving estimations, that
management has made in applying the entity’s accounting
policies that have a significant effect on the financial statements
E.g. the classification of leases as financial or operating

5. Information about assumptions made concerning the future


 E.g. sources of estimation uncertainty that have a significant
risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year.

 E.g.: Long-term employee benefits such as superannuation


obligations,

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Changes in Accounting Policies
 If an entity changes an accounting policy and the effect of
the change has a material effect ,disclosures must include:
 the nature of the change in accounting policy

 the amount of the adjustment for the current and


previous periods

 the amount of any adjustment to periods prior to those


presented to the extent practicable

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Changing Accounting Estimates
 Accounting estimates are regularly changed as new
information arises
 Changes in accounting estimates require prospective
application
Example
 The useful life assessment of non-current assets
change – the actual useful life is shorter than the original
estimate of useful life

 Depreciation expense recognised in prior periods is not


changed, but the remaining carrying amount of the asset
is written off over its remaining (shorter) useful life

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Materiality
• Information is material if its omission, misstatement or non-disclosure
could adversely affect users’ decisions or management’s discharge of
Definition its accountability

• All accounting information is assessed against the concept of


materiality
• AASB1031 - provides guidelines to help determine whether the amount
Application of an item is material

• Immaterial errors may not be corrected, and immaterial facts may not
be reported
Application

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Materiality Guidelines

Select appropriate base amount


Calculate error/omission amount as a percentage of the base
1.
• If error/omission > than 10% of base = material
If error/omission < than 5% of base = immaterial
If between 5 and 10% = apply judgement
2.

• Some items are material regardless of their amount, but are


material due to their nature – e.g. related party transactions
3.

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Events Occurring After Reporting
Date AASB110
• A reporting date event are those events… that
occur between the reporting date and the date
Definition when the financial report is authorised for issue

• Must be material
• Must provide a clearer picture of the company’s
Required situation

• The standard requires action with respect to


such events to ensure more relevant and reliable
Purpose reporting

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After Reporting Date Events
Adjusting Events AASB110
• Those which provide more information about
Definition conditions that existed at reporting date

• Settlement of a law suit which had been in


Example process at reporting date

• An adjustment to the financial statements


Application

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After Reporting Date Events
Non-Adjusting Events AASB110
• Those which do not relate to conditions existing at
reporting date but which are material to an evaluation
Definition of the reports

• An uninsured flood which destroys the company’s


Example
manufacturing plant

• Information about such events is to be disclosed in


Application
the notes to the accounts

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