grade 11 ordinary level wxamination students

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1. BACC 12674/BAFA 11213 – Financial Reporting and Digitalization Preparation of Financial statements for a Company: Statement of Financial Position Notes to the financial statements Events After the Reporting Period Dr. Nisansala Wijekoon PhD (New Zealand), MBA ( C’bo ), B.B. Mgt. ( Acc ) ( Kel’ya ), CA Passed Finalist    Senior Lecturer Department of Accountancy E-mail: [email protected]

2. Learning Outcomes – Lesson 4 Understand the structure and content of published financial statements (Statement of Financial Position) 1 2 Apply the requirements for the classification/ presentation of items reported in the SFP. Discuss the other disclosures required by LKAS 1 in the Note to F/S 3 Distinguish between adjusting and non- adjusting events after the reporting period in accordance with LKAS 1 2

3. Statement of Financial Position A major purpose of statement of financial position is to provide information about an entity’s financial position. Elements of financial position – Assets, Liabilities & Equity It provides the basic information for evaluating an entity’s capital structure, analysing its liquidity, solvency and financial flexibility. The format of the statement of financial position follows the basic accounting equation, which states that: Assets = Liabilities + Equity 3

4. Why the balance sheet always balances? Rationale The balance sheet is structured in a manner that the total assets of an entity equal to the sum of liabilities and equity. This may lead you to wonder as to why the balance sheet must always be in equilibrium. Assets of an entity may be financed from internal sources (i.e. share capital and profits) or from external credit (e.g. bank loan, trade creditors, etc.). Since the total assets of a business must be equal to the amount of capital invested by the owners (i.e. in the form of share capital and profits not withdrawn) and any borrowings , the total assets of a business must equal to the sum of equity and liabilities. This leads us to the Accounting Equation: Assets = Liabilities + Equity 4

5. Purpose & Importance of Statement of Financial Position Statement of Financial Position helps users of financial statements to assess the financial soundness of an entity in terms of liquidity risk, financial risk, credit risk and business risk. Analysis of the statement of financial position could therefore assist the users of financial statements to predict the amount, timing and volatility of entity's future earnings. 5

6. Format of Statement of financial position AB Ltd Statement of financial position As at 31 March XXXX ASSETS Notes Rs. Rs. Non-current assets Plant and Machinery 2 x Other Intangible assets x Investments x x Current assets Closing Inventory x Receivables x Cash x x Total assets xx EQUITY AND LIABILITIES Notes Rs. Rs. Equity Issued Share capital x Other reserves x Accumulated earnings x x Non-current liabilities Long term Loans x Long term provisions x x Current liabilities Trade Creditors Bank Overdraft x Tax payable x x Total equity and liabilities xx 6

7. Information required to be presented in the notes To provide greater transparency and enhance the understandability of the statement of financial position, paragraph 77 of LKAS 1 requires the sub-classification of line items to be reported either in the statement or in the notes. 7

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9. Notes: Overview Purpose is to enhance the understandability of all statements through further disclosures. As far as practicable, each item in these statements is cross- referenced to any related information in the notes (LKAS 1 para 113). The following information must be disclosed in the notes (LKAS 1 para 112): information about the basis of preparation of the financial statements and the specific accounting policies used information required by other Sri Lanka Accounting Standards unless presented in the financial statements and other information that is not presented elsewhere in the financial statements but is relevant to understanding them. 9

10. Notes: Directors’ declaration The Corporations Act (2007) requires a directors’ declaration to be disclosed in the notes stating whether, in the directors’ opinion: there are reasonable grounds to believe that the company is solvent — that is, able to pay its debts as and when they become due and payable; the financial statements and notes are in accordance with the Corporations Act; and a statement of compliance with LKAS in the notes to the financial statements (where the entity has in fact complied with such requirements). 10

11. Notes: Accounting policies An entity shall present a summary of significant accounting policies applied (LKAS 1 para 114). This summary should include (LKAS 1 para 117): the measurement bases used in preparing the financial statements; and the other accounting policies used that are relevant to an understanding of the financial statements. 11

12. Notes: Accounting policies (cont’d) Any judgements made by management when applying the entity’s accounting policies that have the most significant effects on amounts recognised in the financial statements must also be disclosed (LKAS 1 para 122), for example: classification of expenses as research or development determining the useful life of intangible assets as finite or indefinite 12

13. Notes: Sources of estimation uncertainty An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year (LKAS 1 para.125). In respect of those assets and liabilities, the notes shall include details of: their nature; their carrying amount as at the reporting date; examples include future interest rates and useful lives of non-current assets. 13

14. Notes: Other disclosures LKAS 1 para 51 requires the following disclosures: the name of the reporting entity and any change in that name from the preceding reporting date whether the financial statements cover the individual entity or a group of entities the date of the end of the reporting period or the reporting period covered by the financial statements, the presentation currency, the level of rounding used in presenting amounts in the financial statements, usually thousands or millions. 14

15. Notes: Other disclosures (cont’d) LKAS 1 para 138 requires the following disclosures: the legal form of the entity, such as whether it is a company or a trust the country of incorporation the address of the registered office or the principal place of business (if different from the registered office) a description of the nature of the entity’s operations and its principal activities the name of the parent and the ultimate parent of the group 15

16. Events After the Reporting Period According to LKAS 10, Events after the reporting period, events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue . Two types of events can be identified: ADJUSTING EVENTS AFTER THE REPORTING PERIOD Those that provide evidence of conditions that existed at the end of the reporting period NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD Those that are indicative of conditions that arose after the reporting period 16

17. LKAS 10: Events after the reporting period – adjusting events LKAS 10 requires an entity to adjust the amounts recognised in the financial statements to reflect adjusting events after the end of reporting period. Examples of adjusting events: A customer goes into liquidation, meaning that any receivable owing from the customer at end of reporting period is uncollectible. 17

18. LKAS 10: Events after the reporting period – non-adjusting events LKAS 10 does not require an entity to make any adjustments to the financial statements in relation to non-adjusting events, however does require note disclosure outlining: the nature of the event; and an estimate of the financial effect. Examples of non-adjusting events: major business combination after end of reporting period; destruction of property by fire after end of reporting period; issue of new share capital after end of reporting period; commencing major litigation – where the events giving rise to the litigation occurred after the end of reporting period. 18

19. Exercise – Events after the reporting period The financial statements of ABC Ltd. are authorised for issue on 12 May 2017 and the end of the reporting period is 31 March 2017. State whether each of the following material items would be an adjusting or non-adjusting event after the reporting period in the financial statements of ABC Ltd. Give reasons for your answer. 1) At 31 March ABC Ltd. had recorded an overdue receivable from XY Ltd. at Rs.25,000 because collection of the full amount of Rs.40,000 was in doubt. On 16 April, a receiver was appointed to XY Ltd. The receiver informed ABC Ltd. that the Rs.40,000 would be paid in full by 30 June 2017. Suggested Answer: Adjusting entry; the information provided by the receiver provides evidence that the receivable was not impaired . 19

20. Exercise – Events after the reporting period The financial statements of ABC Ltd. are authorised for issue on 12 May 2017 and the end of the reporting period is 31 March 2017. State whether each of the following material items would be an adjusting or non-adjusting event after the reporting period in the financial statements of ABC Ltd. Give reasons for your answer. 2) On 24 April ABC Ltd. issued corporate bonds for Rs.1,000,000, with interest of 5% payable semi-annually in arrears. Suggested Answer: Non-adjusting; a new event after the reporting period. 20

21. Exercise – Events after the reporting period The financial statements of ABC Ltd. are authorised for issue on 12 May 2017 and the end of the reporting period is 31 March 2017. State whether each of the following material items would be an adjusting or non-adjusting event after the reporting period in the financial statements of ABC Ltd. Give reasons for your answer. 3) ABC Ltd’s investments in listed shares are held-for-trading and classified as ‘at fair value through profit loss’ in accordance with LKAS 39. As at 31 March, these investments were recorded at the market value at that date, which was Rs.500,000. During the period leading up to 12 May 2017, there was a steady decline in the market values of all the shares in the portfolio, and by 12 May 2017 the fair value of the investment had fallen to Rs.400,000. Suggested Answer: Non-adjusting; the company is measuring the investments at fair value, which must be determined as at the end of the reporting period. The change in fair value will be recorded in the next reporting period. 21

22. Exercise – Events after the reporting period The financial statements of ABC Ltd. are authorised for issue on 12 May 2017 and the end of the reporting period is 31 March 2017. State whether each of the following material items would be an adjusting or non-adjusting event after the reporting period in the financial statements of ABC Ltd. Give reasons for your answer. 4) ABC Ltd. had reported a contingent liability at 31 March 2017 in respect of a lawsuit against the company by an employee who was injured during 2016. The case was not heard until the first week of May 2017. On 11 May, the judge handed down her decision, against ABC Ltd. The judge determined that ABC Ltd. was liable to pay damages and costs totalling Rs.3,000,000. Suggested Answer: Adjusting Event: Present obligation at the end of reporting period: in such cases any contingent liability would need to be reclassified as a provision. 22

23. Exercise – Events after the reporting period The financial statements of ABC Ltd. are authorised for issue on 12 May 2017 and the end of the reporting period is 31 March 2017. State whether each of the following material items would be an adjusting or non-adjusting event after the reporting period in the financial statements of ABC Ltd. Give reasons for your answer. 5) As in question 4), except that the damages and costs awarded against ABC Ltd were Rs.50 million, leading ABC Ltd. to place itself into voluntary liquidation. Suggested Answer: Adjusting; in addition the financial statements cannot be prepared on the going concern basis 23