Module 3- Financial reporting and interpretation

Content 4 Publish Financial Statements

Financial Statement Presentation - IAS 1 Section 3
This section explains fair presentation of financial statements, what compliance with IFRS for SMEs requires and what
is a complete set of financial statements.
Fair Presentation - Requires the faithful presentation of the effects of transactions other events and conditions in
accordance with the definitions and recognition for assets, liabilities , income, and expenses set out in IFRS for SMEs
with additional disclosure when necessary.
Compliance with the IFRS for SMEs – An entity whose financial statements comply with IFRS for SMEs shall make an
explicit and unreserved statement of such compliance in the notes.
Going concern - When preparing financial statements management must make an assessment of the entity’s ability to
continue as a going concern taking into account all available information about the future which at least should be 12
months from the reporting date. Where there are material uncertainties related to events or conditions that cast
significant doubt upon the entity’s ability to operate as a going concern these uncertainties must be disclosed.
Frequency of reporting – A company shall present a full set of financial statements including comparative information
annually. When the reporting period changes, or financial statements are prepared for longer or shorter period this
must be disclose giving reason and stating that the comparative amounts is not entirely comparable.
Consistency of Presentation – an entity shall retain the presentation and classification of items in the financial
statements from one period to the next unless the IFRS requires a change in presentation or another presentation
would be more appropriate in regard to selection and application of accounting policies in IFRS section 10.
Comparative information - Except when the IFRS permits or requires otherwise, an entity shall disclose comparative
information in respect of the previous comparable period for all amounts presented in the current period’s financial
statements.
Materiality and aggregation – An entity shall present separately each material class of similar items for example
current assets of inventory and cash. Items which are dissimilar in nature and function example current assets and
non-current assets must also be presented separately unless they are immaterial.
Identification of the financial statements - An entity shall clearly identify each of the financial statements and the
notes and distinguish them from other information in the same document. In addition it must display the following
and repeat where necessary:
a) The name of the reporting entity and any changes in its name since the end of the reporting period
b) Whether the financial statements cover the individual entity or a group of entities
c) The date at the end of the reporting period and the period covered by the financial statements
d) The presentation currency used
e) The level of rounding if any used in the presenting the amounts in the financial statements
Presentation of information not required by IFRS – IFRS does not address presentation of segment information,
earnings per share or interim financial reports however an entity making such disclosures shall describe the basis for
preparing and presenting the information.
Complete set of financial statement of an entity shall include all of the following:
1. A Statement of Financial Position as at the reporting date
2. A Statement of Comprehensive Income for the reporting period displaying all items of income and expenses
recognised during the period.
3. A Statement of Changes in Equity for the reporting period.
4. A Statement of Cash Flows for the reporting period
5. Notes comprising a summary of significant accounting policies and other explanatory information.
(See notes to financial statements below) adjusting, nonadjusting, possible loss contingences, probable
contingent gain, provision
 Notes to Financial Statements - IAS 1 Section 8 (pg 12 module 3)
2003 3b Past Paper page 143
Notes contain supporting information in addition to that presented in the financial statements. They provide
narrative descriptions of items presented in the financial statements and provide information about items that do not
qualify for recognition in those statements for example new product launch or new market targeted.
Notes required and order in which they are presented:
1. A statement that the financial statements have been prepared in compliance with the IFRS for SMEs
2. A summary of significant accounting policies applied (eg depreciation of assets and inventory valuation)
3. Supporting information for items presented in the financial statements in the order in which each statement
and line is presented ( for eg investments maturity date)
4. Any other disclosures (eg provisions, contingencies, post balance sheet event and errors)
Importance of Notes:
1. They are used to make important disclosures that explain the assumption used to prepare the financial
statements, circumstances and events. Notes therefore increases the understandability of users through
full disclosure and completeness. The objective of financial information is for decision making and the
notes provide additional supporting information to improve its interpretation and understanding and
therefore improve decision making.
2. Auditors use notes to assist them in arriving on an opinion on the financial statements. For example, they
used the notes to determine if the accounting policies used are appropriate, properly applied and reflected in
the reported results of the company.

Content 7 Limitations of financial statements

• Comparability across companies and industries

Companies vary in the accounting policies they use. Different firms use different accounting policies, and this makes
comparisons between firms difficult. For example, one company may use the LIFO method of inventory valuation and
another in the same industry may use FIFO. If inventory is a significant item in both companies their current ratio, net
profit ratio and other ratios will not be comparable as the method used affects the value of inventory reported in the
balance sheet as well as the reported net profits of the business. Reported profits are highest under FIFO and lowest
under LIFO. Differences in depreciation methods, straight line and reducing balance methods, will also affect the
comparability of asset as it affects the net book value for non-current assets and the reported profits of the period.
Comparisons are also made difficult as firms operate in different environments such as different countries and also
size of the business and its comparator will impact results. Also, different firms have different financial and risk
profiles which can impact any analysis done.
• Use in decision making
Accounting information provides the foundation for informed decision-making by management, investors, creditors,
and other stakeholders. It helps evaluate the financial health, profitability, and performance of a company. However,
historical cost information may not be the most appropriate information for the decision for which the analysis is
being undertaken. Information is also generally summarised and detailed information may be needed to make
decisions. Also, the base information is often out of date, so timeliness of information leads to problems of
interpretation which hampers the quality of decisions.
• Inflationary effects
Financial statements are based on historical cost which make comparisons from different periods misleading if there
is significant inflation or deflation. Comparisons across companies is difficult because transactions at different dates
exhibit different cost because of inflation. Different amounts of purchasing power expended makes comparison
misleading. Also, depreciation expenses based on the cost of the asset are understated, which results in an
overstatement of profits. By overstating profits, the business owner may withdraw more cash from the business
affecting its liquidity. Also, over-stated profits may cause workers to demand more wages and investors a higher
return on their capital. Moreover, the business pays higher tax.
• Audited and Unaudited financial statements
Audited Financial Statements ascertain the correct and reliable financial situation of a company. Reviewing the
financial statements provides insights into the validity and accuracy of accounting information and records and that
statements are prepared in accordance with set laws and accounting standards. An independent auditor critically
analyses the accounts and financial statements, highlighting major financial concerns and ensuring transparency. An
independent audit enhances the credibility and trustworthiness of financial information. The presence of internal
and external auditors both lends credibility to the figures, which appear in financial statements and provide
transparency to stakeholders that the company is being run within their best interest. Unaudited financial statements
may carry the potential risk of errors, intentional or unintentional mistakes or misinterpretations of accounting
standards which may all go unnoticed. It lacks credibility, potentially leading to doubts about the reliability of financial
information.
• Changes in the regulatory environment (IFRS and Legal)
Changes in accounting policies, legal framework in where the firm is operating, and standards can all affect the
reported results of the company making inter firm comparisons and previous year comparisons within the same
business difficult if these new regulations are implemented by the firm.
• Estimates and aggregation.
Financial statements contain numerous estimates which are sometimes based on subjective judgements. Estimates
are used in determining the allowance for doubtful debts, provision for depreciation and contingent losses. If these
estimates are inaccurate the financial statements will not show a true and fair view of its financial position, financial
performance and its cash flow.
• No predictive value.
Predictive value means that financial information can be used to predict future outcomes or trends. It should allow
users to make their own predictions based on the financial information. For example, current-year revenue data can
serve as a basis for predicting revenue in future years. Accounting information is historical and does not provide
insights into the future prospects of a company. Stakeholders need additional information such as management
forecasts for forward-looking information. Also, the impact of the changing environment on the results reflected in
the financial statement may make predictions useless. Problems of price changes, changes in technology, economy,
political, legal, and social may all impact accounting information and therefore the ability to anticipate future
outcomes and trends.