Financial Statements

By Salman Sarwat
Financial Statements
 Financial Statement is the product of financial accounting

Financial Accounting

Financial Reporting
(Financial Statement)

External Users Internal User

(Investors, Creditor, Regulators, Supplier, Customer, Media) (Management, Auditors)

Analysis of Financial Statement Corporate Finance

AFS some Preliminaries by Salman Sarwat

Financial Statements
 The purpose of financial statements is to provide:
 Financial Position
 Financial Performance
 Cash Flows
 Financial statements provide information about an entity’s:
 Assets
 Liabilities
 Equity
 Income & Expenses, Including Gains & Losses
 Contributions by & Distributions to Owners (Holders of equity instruments)
 Cash Flows
 Material Disclosures: Off balance sheet items, accounting policies, estimates etc.
 General Purpose Financial Statements:
 For the users who are not in the position to demand tailored reports. That is useful for vide range of
users
 Guidelines are provided in IAS 1 – Presentation of Financial Statement

AFS some Preliminaries by Salman Sarwat

Financial Statements
 Complete set of financial statements:
 Statement of financial position as at the end of the period;
 Statement of comprehensive income for the period;
 Statement of changes in equity for the period;
 Statement of cash flows for the period;
 Notes, comprising a summary of significant accounting policies and other explanatory
information.

 Fair Presentation
 Faithful presentation of the effects of transactions or economic events

 Compliance with IFRS (IAS included)

 An entity whose financial statements comply with IFRSs shall make an explicit and
unreserved statement of such compliance in the notes.
 IFRS are issued by IASB (Accounting Standard Setting Body)

AFS some Preliminaries by Salman Sarwat

Accounting Bodies

 Standards Setter for financial accounting & reporting

 International Accounting Standard Board
 An independent, privately-funded accounting standard-setter
based in London UK
 IASB was founded on April 1, 2001, Successor of IASC
(founded in June 1973)
 Responsibilities:
 Accounting standards, interpretations and framework
 Financial Reporting Standards
 Promoting the use and application of these standards

AFS some Preliminaries by Salman Sarwat

Accounting Bodies

 Financial Accounting Standard Board

 The process of developing accounting principles was started in USA
way back in 1934 by enacting security & exchange act, in order to
protect the investors from the abuses of unregulated financial reporting.
 In 1939 two, special committees “Committee on Accounting
Procedures” and “Committee on Accounting Terminology” were
founded.
 Committees issued 51 accounting Research Bulletins,
 In 1959 AICPA (American Institute of Certified Public Accountant)
replaced the two committees with “Accounting Principle Board” and
“Accounting Research Division”.
 They issued 14 research studies, 31 official opinions and 4 statements.
 In 1973, FASB was established.

AFS some Preliminaries by Salman Sarwat

International Accounting Standard
 International Accounting Standard: 
Issued Currently in Practice
 IAS 41 28
 IFRS 17 17

 IAS Structure
 Introduction
 Objectives
 Scope
 Definitions
 Principles & Rules
 Disclosure
 Accompanied by
 Basis for Conclusion: Relevant material
 Dissenting Opinion: Disagreement by member of the board
 Implementation Guideline: Illustrations

AFS some Preliminaries by Salman Sarwat

International Accounting Standard
 IAS 1: Presentation of Financial Statements.
 IAS 2: Inventories
 IAS 7: Cash Flow Statements
 IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
 IAS 10: Events After the Balance Sheet Date
 IAS 11: Construction Contracts
 IAS 12: Income Taxes
 IAS 16: Property, Plant and Equipment
 IAS 17: Leases
 IAS 18: Revenue
 IAS 19: Employee Benefits
 IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
 IAS 21: The Effects of Changes in Foreign Exchange Rates
 IAS 23: Borrowing Costs

AFS some Preliminaries by Salman Sarwat

International Accounting Standard
 IAS 24: Related Party Disclosures
 IAS 26: Accounting and Reporting by Retirement Benefit Plans
 IAS 27: Consolidated Financial Statements
 IAS 28: Investments in Associates
 IAS 29: Financial Reporting in Hyperinflationary Economies
 IAS 31: Interests in Joint Ventures
 IAS 32: Financial Instruments: Presentation (Financial instruments disclosures are in
IFRS 7 Financial Instruments: Disclosures, and no longer in IAS 32)
 IAS 33: Earnings Per Share
 IAS 34: Interim Financial Reporting
 IAS 36: Impairment of Assets
 IAS 37: Provisions, Contingent Liabilities and Contingent Assets
 IAS 38: Intangible Assets
 IAS 39: Financial Instruments: Recognition and Measurement
 IAS 40: Investment Property
 IAS 41: Agriculture

AFS some Preliminaries by Salman Sarwat

International Financial Reporting
Standards
 Standards issued after 2001
 IFRS 1 First-time Adoption of International Financial Reporting Standards
 IFRS 2 Share-based Payment
 IFRS 3 Business Combinations
 IFRS 4 Insurance Contracts
 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
 IFRS 6 Exploration for and Evaluation of Mineral Resources
 IFRS 7 Financial Instruments: Disclosures
 IFRS 8 Operating Segments
 IFRS 9 Financial Instruments
 IFRS 10 Consolidated Financial Statements
 IFRS 11 Joint Arrangements
 IFRS 12 Disclosure of Interests in Other Entities
 IFRS 13 Fair Value Measurement
 IFRS 14 Regulatory Deferral Accounts
 IFRS 15 Revenue from Contracts with Customers
 IFRS 16 Leases
 IFRS 17 Insurance Contracts

AFS some Preliminaries by Salman Sarwat

IAS & IFRS
 Procedure of publication of standards
 Queries and Criticisms
 Initial Agenda
 Exposure draft which contained proposals
 Responses to the Board
 Final version
 IAS & IFRS are based on GAAP
 Accounting Assumption & Concept: Prerequisites
 Accounting Principles: Must be adhered

AFS some Preliminaries by Salman Sarwat

Accounting Assumption & Concept
 Business Entity Concept:
 Financial and economic matter of the business and his owner must be kept
separate
 Going Concern:
 Business is continuing enterprise
 Monetary Concept:
 Economic events must be reported on value
 Objectivity:
 Accounting should be factual and can be verified
 Substance over Form Concept:
 Substance refers to economic reality whereas form means contractual fabricated
position
 Time Period Reference:
 For the measurement of performance (Annual basis)

AFS some Preliminaries by Salman Sarwat

Accounting Principles
 Accrual Base Principle:
 Recognizing revenue in the accounting record when it is earned and incurred expenses
 Consistency Principle:
 Give the same treatment to comparable transactions from period to period
 Comparability Principle:
 Accounting information of one entity should be comparable with other entity.
 Historical Cost Principle:
 Based on recorded fact, which can be verified through supporting evidence
 Full Disclosure Principle:
 Disclose all relevant & material facts
 Materiality Principle:
 if it influences in the decision making, aggregation of immaterial information, off setting
 Matching Principle:
 Revenue should be offset by all expenses incurred in producing that revenue
 Prudence Principle / Conservatism Principle:
 Select the measurement with the least favorable effect on net income and financial position
 Realization Principle:
 Revenue shall be recognized only when there is reasonable evidence to believe to recover it

AFS some Preliminaries by Salman Sarwat

Statement of Financial Position
 IAS 1 – Presentation of Financial Statement
 Standard does not prescribe the order or format in which an
entity presents items
 An entity shall present current and non-current assets, and
current and non-current liabilities, as separate classifications
 For some entities, such as financial institutions, a presentation
of assets and liabilities in increasing or decreasing order of
liquidity provides information that is reliable and more relevant
than a current/non-current presentation.
 Line items are included when the size, nature or function of an
item or aggregation of similar items is such that separate
presentation is relevant to an understanding of the entity’s
financial position;
AFS some Preliminaries by Salman Sarwat
Statement of Financial Position
 Line items
 Property, plant and equipment;
 Investment property;
 Intangible assets;
 Financial assets;
 Investments accounted for using the equity method;
 Biological assets;
 Inventories;
 Trade and other receivables;
 Cash and cash equivalents;
 The total of assets classified as held for sale and assets included in
disposal groups classified as held for sale in accordance with IFRS 5
Non-current Assets Held for Sale and Discontinued Operations;

AFS some Preliminaries by Salman Sarwat

Statement of Financial Position
 Line items
 Trade and other payables;
 Provisions;
 Financial liabilities
 Liabilities and assets for current tax,
 Deferred tax liabilities and deferred tax assets,
 Liabilities included in disposal groups classified as held for sale
in accordance with IFRS 5;
 Non-controlling interests, presented within equity; and
 Issued capital and reserves attributable to owners of the parent.

AFS some Preliminaries by Salman Sarwat

Statement of Comprehensive Income
 Two statements:
 A statement displaying components of profit or loss
 Other displaying components of other comprehensive income
 Line Items:
 Revenue;
 Expenses
 Function of expense or cost of sales method
 Nature of expense method (Depreciation, Salary, Rent)
 Finance costs;
 Share of the profit or loss of associates and joint ventures (for equity method);
 Tax expense;
 Post-tax profit or loss of discontinued operations
 Profit or loss share of the other comprehensive income of associates and joint
ventures (equity method)

AFS some Preliminaries by Salman Sarwat

Statement of Comprehensive Income
 Profit or loss for the period attributable to:
 Non-controlling interests, and
 Owners of the parent.
 Total comprehensive income for the period attributable to:
 Non-controlling interests, and
 Owners of the parent.
 Revenue Reserves
 Changes in revaluation surplus
 Actuarial gains and losses on defined benefit plans recognized
 Gains & losses arising from translating the financial statements of a foreign
operation
 Gains and losses on re-measuring available-for-sale financial assets
 The effective portion of gains and losses on hedging instruments in a cash
flow hedge

AFS some Preliminaries by Salman Sarwat

Statement of Changes in Equity
 In Grid Form
 Share Capital
 All owner changes in equity
 All non-owner changes in equity
 Additional Paid up Capital
 Changes in Retained Earnings
 Transferred to Reserves
 Dividend Paid
 General Reserve
 Capital Reserves

AFS some Preliminaries by Salman Sarwat

Statement of Cash Flow
 Cash:
 Comprises cash on hand and demand deposits
 Cash Equivalents:
 Short term, highly liquid investments, readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value
 Two Methods:
 Direct Method
 Indirect Method
 Three Sections:
 Operating activities:
 are the principal revenue-producing activities of the entity
 Investing activities:
 are the acquisition and disposal of long-term assets and other investments not included in cash
equivalents
 Financing activities:
 are activities that result in changes in the size and composition of the contributed equity and
borrowings of the entity.

AFS some Preliminaries by Salman Sarwat

Notes to the Accounts
 Disclose the information required by IFRSs that is not presented
elsewhere in the financial statements; but is relevant to
understanding
 Cross-reference each item with financial statement
 Comprises of:
 Statement of compliance with IFRS
 Summary of significant accounting policies applied
 Supporting information for statements
 Other financial disclosures (Off balance Sheet items)
 Derivatives
 Contingent liabilities
 Unrecognized contractual commitments
 Non-financial disclosures

AFS some Preliminaries by Salman Sarwat