Introduction to Single Entity Accounts

Chapter learning objectives

On completion of their studies students should be able to:

• Produce financial statements in a form suitable for publication from trial balance.
• Identify the concepts affecting financial statements.
• Produce the statement of financial position in accordance with IAS 1.
• Produce the statement of changes in equity in accordance with IAS 1.
• Produce the statement of profit or loss and other comprehensive income in
accordance with IAS 1.

1 Session content

2 IAS 1 Presentation of Financial Statements

All entities preparing their financial statements in accordance with International

Accounting Standards should follow the requirements of IAS 1, presentation of financial
statements which was amended in 2011. IAS 1 prescribes what a set of financial
statements should contain and how they should be presented.

Purpose of financial statements

IAS 1 states that the objective of financial statements is to provide information about the
financial position, performance and cash flows of an enterprise that is useful in making
economic decisions. The financial statements will also show how effectively management
have looked after the resources of the entity, i.e. it will help users assess the stewardship
of management.

Contents of financial statements

A complete set of financial statements includes:

• a statement of financial position

• either:
– a statement of profit or loss and other comprehensive income, or
– a statement of profit or loss plus a statement showing other comprehensive income
• a statement of changes in equity
• a statement of cash flows
• accounting policies note and other explanatory notes
IAS 1 does not require the above titles to be used by entities. It is likely that many enitites
in practice will continue to use the previous terms of balance sheet rather than statement
of financial position and cash flow statement rather than statement of cash flows.

Entities are also encouraged to present a financial review by management which

describes and explains the main features of the entities financial performance and
financial position.

This chapter looks at the formats of the statement of profit or loss and other
comprehensive income, statement of financial position and statement of changes in equity.
The statement of cash flow is considered in a later chapter. Notes to the financial
statements are considered with their relevant standards, where appropriate.

Responsibility for financial statements

The board of directors (and/or other governing body) of an entity is responsible for the
preparation and presentation of its financial statements.

3 Concepts and other considerations affecting financial statements

Fair presentation
IAS 1 states that ‘Financial statements shall present fairly the financial position, financial
performance and cash flows of an entity’. Entities that comply with all relevant IAS's will
virtually always achieve this objective.

A fair presentation requires that entities:

• show a faithful representation of the effects of transactions

• select definitions and recognition criteria set down in the in accordance with the
conceptual framework and apply accounting policies in accordance with IAS 8 (see
later)
• present information in a manner which provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures if the requirements of an IFRS or IAS are insufficient
to enable users to understand the impact of the transaction on the financial position
and performance
If, however, an entity feels that compliance with an IFRS would be misleading and
that it is necessary to depart from the requirements of an IFRS in order to show a fair
presentation, the entity should make the following disclosures:
• that management have concluded that the financial statements do present fairly the
financial position, financial performance and cash flows
• that the entity has complied with IFRSs except that it has departed from an IFRS in
order to show a fair presentation
• the IFRS that has been departed from, the nature of the departure i.e. the treatment
that the IFRS would require and the reason why such treatment would be misleading
and the treatment adopted instead
• the financial impact of the departure on net profit/loss, assets, liabilities, equity and
cash flows
However, departing from the provisions of the standards in the interests of fair
presentation, would be very rare.

Going concern

IAS 1 states that financial statements should be prepared on the going concern basis
unless management intend to liquidate the business or to cease trading.

Preparing financial statements on the going concern basis means preparing them on
the assumption that the entity will continue to trade for the foreseeable future.

Accruals basis
IAS 1 requires entities to prepare their financial statements (except for cash flow
information) using the accruals basis of accounting.

This means that transactions should be recorded in the accounting period to which
they relate regardless of whether or not cash has been received or paid.

This concept also means that expenses should be recognised in the statement of profit
or loss and other comprehensive income so as to match against directly related
income.

Consistency
Presentation and classification of items should be consistent from one period to the
next.
Changes are allowed, if required by an IFRS or if it is deemed more appropriate to
change the presentation of information.
Materiality and aggregation

Each material class of similar items should be presented separately in the financial
statements. Immaterial amounts should be aggregated with amounts of a similar nature
and need not be disclosed separately.

Omissions or misstatements of items are material if they could influence the economic
decisions of users.Materiality depends on the size and nature of the omission or
misstatement.

Off-setting
Assets and liabilities, and income and expenses, should not be offset except when
offsetting is required or allowed by an IFRS.

Comparative information
Comparative information should be disclosed in respect of the previous period for all
amounts reported in the financial statements unless an IFRS requires or allows otherwise.

Other requirements
Financial statements should be presented at least annually and should be issued on a
timely basis (within 6 months of the end of the reporting period for public entities and 9
months for private entities) to be useful to users.

IAS 1 does not specify the format of financial statements, but it does provide an appendix
which sets out illustrative formats for the statements to be included in financial
statements. In addition, it provides guidance on the items that should be disclosed in these
statements and those that can be relegated to the notes that accompany the statements (see
below suggested formats).

The statement of financial position

The suggested format for the statement of financial position (SOFP) is as follows:

XYZ Statement of Financial Position as at 31 December 20X0

$000 $000
Assets
Non-current assets
Property, plant and equipment X
Investment property X
Goodwill X
Other Intangible assets X
Investments in associates X
Available-for-sale financial assets X
––
 X
Current assets
Inventories X
Trade and other receivables (e.g. prepayments) X
Cash and cash equivalents X
––
X
Non-current assets held for sale X
––
Total assets X
––
Equity and liabilities
Capital and reserves
Issued share capital X
Share premium X
Revaluation reserve X
Retained earnings X
––
X
Non-controlling interests X
––
Total equity X
Non-current liabilities
Long-term borrowings X
Provisions X
––
X
Current liabilities
Trade and other payables X
Short-term borrowings X
Current tax payable X
––
X
––
Total equity and liabilities X
––
Information to be presented in the SOFP
IAS 1 requires that, as a minimum, the following line items appear in the statement of
financial position (where there are amounts to be classified within these categories):

(a) property, plant and equipment

(b) investment property
(c) intangible assets
(d) financial assets (excluding amounts shown under (e), (h) and (i))
(e) investments accounted for using the equity method
(f) biological assets
(g) inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) the total of assets classified as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations
(k) trade and other payables
(l) provisions
(m) financial liabilities (excluding amounts shown under (k) or (l))
(n) liabilities and assets for current tax as defined in IAS 12 Income Taxes
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12 Income Taxes
(p) liabilities included in disposal groups classified as held for sale in accordance with
IFRS 5
(q) non-controlling interest, presented within equity
(r) issued capital and reserves attributable to owners of the parent
The above list includes items that the IASB believes are so different in nature or
function that they should be separately disclosed, but does not require them to appear
in a fixed order or format.

Additional line items, headings and subtotals should be shown in the statement of
financial position if another IFRS requires it or where it is necessary to show a fair
presentation of the financial position. In deciding whether additional items should be
separately presented, management should consider:

• the nature and liquidity of assets and their materiality (e.g. the separate disclosure of
monetary and non-monetary amounts and current and non-current assets)
• their function within the entity (e.g. the separate disclosure of operating assets and
financial assets, inventories and cash) and
• the amounts, nature and timing of liabilities (e.g. the separate disclosure of
interest-bearing and non-interest-bearing liabilities and provisions and current and
non-current liabilities).
Assets and liabilities that have a different nature or function within an entity are
sometimes subject to different measurement bases, for example, plant and equipment
may be carried at cost or held at a revalued amount (in accordance with IAS 16). The
use of these different measurement bases for different classes of items suggests
separate presentation is necessary for users to fully understand the accounts.
Information to be presented in either the SOFP/notes
Further subclassifications of the line items should be presented either in the statement of
financial position or in the notes. The size, nature and function of the amounts involved,
or the requirements of another IFRS will normally determine whether the disclosure is in
the statement of financial position or in the notes.

The disclosures will vary for each item, but IAS 1 gives the following examples:

(a) tangible assets are analysed (IAS 16) by class e.g. property, plant and equipment,
land and buildings, etc
(b) receivables are analysed between:
– amounts receivable from trade customers
– receivables from related parties
– prepayments
– other amounts
(c) inventories are classified (IAS 2) into merchandise, production supplies, materials,
work in progress and finished goods
(d) provisions are analysed showing provisions for employee benefits separate from any
other provisions
(e) equity capital and reserves are analysed showing separately the various classes of
paid-in capital, share premium and reserves

Share capital and reserves disclosures

IAS 1 also requires that the following information on share capital and reserves be made
either in the statement of financial position or in the notes:

(a) for each class of share capital:

– the number of shares authorised
– the number of shares issued and fully paid, and issued but not fully paid
– par value per share, or that the shares have no par value
– a reconciliation of the number of shares outstanding at the beginning and at the end
of the year, the rights, preferences and restrictions attaching to that class, including
restrictions on the distribution of dividends and the repayment of capital,
– shares in the entity held by the entity itself or by subsidiaries or associates of the
entity, and
– shares reserved for issuance under options and sales contracts, including the terms
and amounts

(b) a description of the nature and purpose of each reserve within owners’ equity;

IAS 1 requires the following to be disclosed in the notes:

– the amount of dividends that were proposed or declared after the reporting period but
before the financial statements were authorised for issue
– the amount of any cumulative preference dividends not recognised.
 Note: IAS 1 and IAS 10 do not allow proposed dividends to be included as a liability
in the statement of financial position, unless the dividend was declared before the end
of the reporting period.

Current/Non-current distinction
An entity shall present current and non-current assets and current and non-current
liabilities as separate classifications in the statement of financial position except
when a presentation based on liquidity provides information that is reliable and more
relevant.

Where an entity chooses not to classify by current and non-current, assets and
liabilities should be presented broadly in order of their liquidity.

Whichever method of presentation is adopted, an entity should disclose, for each

asset and liability, the amount that is expected to be recovered or settled after more
than 12 months.

Most entities will show both current and non-current liabilities in the statement of
financial position. However, say, for example, an entity does not normally have
non-current trade liabilities but as a result of one particular transaction has a payable
due 20 months from the end of the reporting period. The entity may, in this case,
classify the entire amount as a trade payable under current liabilities and then show
separately a one-off amount that is due in 20 months’ time (i.e. in more than 12
months from the end of the reporting period).

In judging the most suitable presentation, management should consider the

usefulness of the information they are providing. Information about the financial
position of an entity is often used to predict the expected future cash flows and the
timing of those cash flows. Information about the expected date of recovery and
settlement of items is likely to be useful and therefore worth disclosing.

Current assets
An asset should be classified as a current asset when it is any of the following:

• is expected to be realised in, or is intended for sale or consumption in the entity’s

normal operating cycle
• is held primarily for trading purposes
• is expected to be realised within 12 months of the end of the reporting period or
• is cash or cash equivalent
All other assets should be classified as non-current assets.
Current liabilities
A liability should be classified as a current liability when it:

• is expected to be settled in the entity’s normal operating cycle

• is due to be settled within 12 months of the end of the reporting period
• is held primarily for the purpose of being traded or
• the entity does not have an unconditional right to defer settlement of the liability for
at least 12 months after the end of the reporting period
All other liabilities should be classified as non-current liabilities.

4 Statement of changes in equity

The statement of changes in equity (SOCIE) provides a summary of all changes in equity
arising from transactions with owners in their capacity of owners.

This includes the effect of share issues and dividends.

This statement is useful since the total change in equity reflects the increase or decreases
in the net assets of the enterprise in the period and so reflects the change in the wealth of
the

XYZ Statement of changes in equity for the year ended 31 December 20X0

Share Share Revaluation Retained earnings Total

capital premiu reserve
m
$000 $000 $000 $000 $000
Balance at 31 December 20W9 X X X X X
Change in accounting policy X/(X) X/(X)
–– –– –– –– ––
Restated balance X X
Revaluation gain/loss X(X) X/(X)
Transfer to retained earnings (X) X –
Total comprehensive income for the period X X X
Dividends (X) (X)
Issue of share capital X X X
–– –– –– –– ––
Balance at 31 December 20X0 X X X X/(X) X
–– –– –– –– ––
Dividends and shares
Share capital in the SOFP may include both ordinary and preference shares.

Ordinary shares

• Ordinary shareholders own a percentage of the entities net assets.

• Voting rights are attached to the shares.
• A year-end dividend may be paid to shareholders based on the performance of the
entity.
• The dividend is paid as an amount per share.
• A dividend will first be proposed by directors, then declared (confirmed) and then
paid.
• Ordinary dividends should only be accounted for when declared.
• Dividends may be interim, i.e. paid part way through the year and final, i.e declared
and/or paid at year-end.

Ordinary shares will be accounted for as follows:

Debit Cash/Bank
Credit Share capital (nominal value)
Credit Share premium (excess of proceeds above nominal value)

Ordinary dividends will be accounted for as follows:

Debit Retained earnings (shown in SOCIE)

Credit Cash/Bank
Preference shares

• Preference shareholders own a percentage of the entities share capital.

• Voting rights are not attached to the shares.
• A year-end dividend will be paid to shareholders based on a percentage of the
investment.
• Preference dividends should be accounted for on an accruals basis.
Preference dividends will be accounted for as follows:

Debit Finance Cost (SPL)

Credit Accruals (SOFP)
Test your understanding 1 – SOCIE

An entity Apple has the following balances at 1 January 20X1:

$
Share capital ($1 nominal value) 100,000
Share premium 50,000
Retained earnings 200,000

During the year Apple issued 50,000 shares at $1.20 and paid all shareholders a dividend of $0.10
per share.

Profit after tax amounted to $120,000.

Required:

Prepare the statement of changes in equity for the year ended 31 December 20X1 for Apple.

Test your understanding 1 – SOCIE

Hide Answer

Apples statement of changes in equity for the year ended 31 December 20X1

Share Share Retained Total

capital premium earnings
$ $ $ $
Balance at 1 January 20X1 100,000 50,000 200,000 350,000
Profit for the year – – 120,000 120,000
Issue of share capital (W1) 50,000 10,000 60,000
Dividends paid (W2) – – (15,000) (15,000)
–––––– –––––– –––––– ––––––
Balance at 31 December 20X1 150,000 60,000 305,000 515.000
–––––– –––––– –––––– ––––––
(W1 Share issue = 50,000 × $1 = $50,000 share capital and 50,000 × $0.20 = $10,000 share
) premium.
(W2 Dividend of $0.10 per share is based on 150,000 shares (100,000 b/wd plus 50,000 issued
) during the year)
Assessment on this will be largely in the form of OTQ's which will only test one or two
principles at a time. You will not be expected to prepare a set of financial statements in
totality. However, it is important you practice these types of questions as you do not
know which element will be tested in your assessment.

llustration 1 – SOFP and SOCIE

Bernie is an entity with authorised share capital of $500,000, consisting of ordinary shares of $1
each. The entity prepares its accounts as on 31 March each year and the trial balance before
adjustments, extracted on 31 March 20X1 is as follows:

Dr Cr
$ $
Ordinary share capital 400,000
Share premium 15,000
Retained earnings at 1 April 20X0 122,000
6% Loan 100,000
Leasehold factory
Cost at 1 April 20X0 400,000
Accumulated depreciation at 1 April 20X0 152,000
Plant and machinery
Cost at 1 April 20X0 150,000
Additions in year 20,000
Accumulated depreciation at 1 April 20X0 60,000
Trade payables 280,000
Accrued expenses 60,000
Inventory as at 31 March 20X1 320,000
Trade receivables 200,000
Prepayments 160,000
Cash and cash equivalents 180,000
Profit for year (subject to items in the following notes) 222,000
Interim dividend paid 5,000
Sale proceeds of plant 24,000
–––––––– ––––––––
1,435,000 1,435,000
–––––––– ––––––––
You ascertain that:

(1) The loan is repayable at par by five equal annual instalments starting on 31
December 20X1.
(2) The plant disposed of originally cost $32,000 and depreciation of $6,400 had been
charged by the date of disposal.
(3) Annual depreciation is calculated at the year end as:
– leasehold factory 2% on cost and
– plant and machinery 20% reducing balance.
(4) A final dividend of 20 cents per share is declared on 5 April 20X1.
(5) Tax for the year is estimated to be $20,000.
(6) During the year 100,000 shares had been issued at $1.10 each. This share issue has
been accounted for.
Required:

Prepare, in a form suitable for publication, the statement of financial position and
statement of changes in equity as at 31 March 20X1.

Solution

Bernie Statement of financial position as at 31 March 20X1

$ $
Non-current assets
Property, plant and equipment (W1) 307,520
Current assets
Inventories 320,000
Trade receivables 200,000
Prepayments 160,000
Cash and cash equivalents 180,000
860,000
–––––––––
Total assets 1,167,520
–––––––––

Equity and liabilities

Capital and reserves
Share capital 400,000
Share premium 15,000
Retained earnings 292,520
––––––– 707,520
Non-current liabilities
6% Loan (W5) 80,000
Current liabilities
6% Loan (W5) 20,000
Trade payables 280,000
Accrued expenses 60,000
Income tax 20,000
––––––– 380,000
 –––––––––
1,167,520
–––––––––

Bernie Statement of changes in equity for the year ended 31 March 20X1

Share Share Retained Total

capital premium earnings
$ $ $ $
Balance at 1 April 20X0 300,000 5,000 122,000 427,000
Profit for the year (W2) – – 175,520 175,520
Dividends paid (trial balance figure) – – (5,000) (5,000)
Issue of share capital (W7) 100,000 10,000 – 110,000
–––––– –––––– ––––––– ––––––
Balance at 31 March 20X1 400,000 15,000 292,520 707,520
–––––– –––––– ––––––– ––––––

Workings

(W1) Property, plant and equipment

Leasehold Plant and Total

factory machinery
$ $ $
Cost
At 1 April 20X0 400,000 150,000 550,000
Additions – 20,000 20,000
Disposals – (32,000) (32,000)
––––––– ––––––– –––––––
At 31 March 20X1 400,000 138,000 538,000
––––––– ––––––– –––––––
Acc dep'n
At 1 April 20X0 152,000 60,000 212,000
Disposals – (6,400) (6,400)
Charge for year (W4) 8,000 16,880 24,880
––––––– ––––––– –––––––
At 31 March 20X1 160,000 70,480 230,480
––––––– ––––––– –––––––
 Carrying amount at
31 March 20X1 240,000 67,520 307,520
––––––– ––––––– –––––––
Carrying amount at 1 April 20X0 248,000 90,000 338,000
––––––– ––––––– –––––––

(W2) Profit for the year

$
Per TB 222,000
Loss on disposal (W3) (1,600)
Depreciation – factory (W4) (8,000)
Depreciation – P&M (W4) (16,880)
Income tax expense (20,000)
–––––––
175,520
–––––––

(W3) Loss on disposal

$
Proceeds (TB) 24,000
Carrying value (32,000 – 6,400) 25,600
–––––––
Loss on disposal 1,600

(W4) Depreciation

Factory 2% × $400,000 = $8,000

P & M 20% × (cost $138,000 – depn ($60,000 – $6,400)) = 20% × $84,400 = $16,880

(W5) Loan

This is repaid in 5 equal instalments. The first payment is due within 12 months of the reporting
date and therefore must be shown as a current liability. Total liability = $100,000 split $20,000
current (1/5) and $80,000 non-current (4/5).

(W6) Dividends

No adjustments are made for the final dividend as they were declared after the reporting date.
(W7) Share issue

Total proceeds = 100,000 × $1.10 = $110,000

Nominal value = 100,000 × $1 = $100,000 (share capital account)

Premium = 100,000 × $0.10 = $10,000 (share premium account)

5 Statement of Profit or Loss and other Comprehensive Income

IAS 1 allows a choice of two presentations of comprehensive income:
• A statement of profit or loss and other comprehensive income; or
• A statement of profit or loss showing the profit or loss for the period PLUS a
separate statement of other comprehensive income, which will also include a total for
total comprehensive income
Total comprehensive income is the profit or loss for the period, plus other comprehensive
income.
Other comprehensive income is income and expenses that are not recognised in profit or
loss (i.e. they are recorded in reserves rather than as an element of the profit for the
period). For the purpose of F1, other comprehensive income mainly includes any
change in the revaluation reserve and actuarial gains and losses on defined benefit plans
(see later in chapter 19) . Further detail on other comprehensive income items can be
found later on in this chapter in expandable text.
The most common format would be to use the function method.
This would be presented as one statement as follows:
XYZ Statement of profit or loss and other comprehensive Income for the year ended 31 December
20X0
$000
Revenue X
Cost of sales (X)
–––––
Gross profit/(loss) X/(X)
Distribution costs (X)
Administrative expenses (X)
–––––
Profit/(loss) from operations X/(X)
Income from investments X
Finance cost (X)
–––––
Profit/(loss) before tax X/(X)
Income tax expense (X)
–––––
Profit/(loss) for the period X/(X)
Other comprehensive income
e.g. Gain/loss on revaluation X
–––––
Total comprehensive income for the year X
This analysis of expenses is based on the function method. This presentation method is
the format most likely to appear in the OTQ's and case study. The alternative method for
presentation of expenses is called the nature of expenses and can be seen in expandable
text later on in this chapter.
Material items
• When items of income and expenses are material, their nature and amount shall be
disclosed separately before operating profit.
• This may either be done on the face of the statement of profit or loss and other
comprehensive income or in the notes.
• Examples:
– inventory write-offs
– impairment losses (see later in chapter 13)
– restructuring costs
– disposals of property, plant and equipment
– litigation settlements

The statement of profit or loss used to be called the income statement. The current revised
IAS 1 states either title can be used. For assessment purposes always use the current title
of statement of profit or loss, however, on occasions the assessment may refer to the
income statement in questions.

Other comprehensive income

IAS 1 requires other comprehensive income to be split between two headings:

• items that will not be reclassified to profit or loss and

• items that may be reclassified subsequently to profit or loss
For the purposes of F1 students will mainly deal with revaluation gains or losses in other
comprehensive income and these should be shown as "items that will not be reclassified
to profit or loss".Other items that may appear in this category could be re-measurement
component gains or losses on defined benefit pension plans (see chapter 19), share of
other comprehensive income of associates or income tax relating to any items not
reclassified.

Items that may be reclassified subsequently to profit or loss could be exchange

differences on translating foreign operations (see chapter 18), available-for-sale financial
assets, cash flow hedges and income tax relating to any items reclassified (covered in the
F2 syllabus).

Alternative presentation
An entity may present two statements instead of one: a separate statement of profit or loss
and a statement of other comprehensive income.

Statement of profit or loss plus statement of other comprehensive income – function

method
A recommended format for the statement of profit or loss would be as follows:
XYZ Statement of profit or loss for the year ended 31 December 20X0

$000
Revenue X
Cost of sales (X)
–––––
Gross profit/(loss) X/(X)
Distribution costs (X)
Administrative expenses (X)
–––––
Profit/(loss) from operations X/(X)
Income from investments X
Finance cost (X)
–––––
Profit/(loss) before tax X/(X)
Income tax expense (X)
–––––
Profit/(loss) for the period X/(X)
A recommended format for the presentation of other comprehensive income would
be:
XYZ Other comprehensive income for the year ended 31 December 20X0

Profit/(loss) for the period X/(X)

Other comprehensive income
e.g. Gain/loss on revaluation X/(X)
–––––
Total comprehensive income for the year X

Information to be presented in the SPL

IAS 1 requires that certain information (as a minimum) is presented in the statement of
profit or loss, including:

(a) revenue
(b) finance costs
(c) share of profits and losses of associates (examined) and joint ventures (beyond the
scope of this syllabus), accounted for using the equity method
(d) tax expense
(e) a single amount for the total of discontinued operations (see chapter 14 later for more
detail)
Additional line items, headings and subtotals should be shown in the statement of profit
or loss if another IFRS requires it or where it is necessary to show a fair presentation of
the financial position.
Materiality, the nature and function of the item are likely to be the main considerations
when deciding whether to include an additional line item in the statement of profit or loss.
In this method expenses are presented according to their nature rather than their function
as follows:
XYZ Statement of profit or loss and other comprehensive Income for the year ended
31 December 20X0

Revenue X
Other operating income X
Changes in inventory of WIP and finished goods (X)
Work performed by the entity and capitalised X
Raw material and consumables used (X)
Employee benefits expense (X)
Depreciation and amortisation expense (X)
Impairment of property, plant and equipment (X)
Other expenses (X)
Finance costs (X)
–––––

Profit/(loss) before tax X/(X)

Income tax expense (X)
–––––
Profit/(loss) for the period X/(X)
Other comprehensive income
Gain/loss on revaluation X
–––––
Total comprehensive income for the year X

Illustration 2 – Statement of profit or loss

The following is an extract from the trial balance of an entity Lafford, at 30 September
20X1.

Dr Cr
$000 $000
Revenue 41,600
Purchases 22,600
Inventory at 1 October 20X0 13,000
Distribution costs 6,000
Administrative expenses 5,000
Irrecoverable debts written off 600
Hire of machinery 500
Production wages 400
Loan interest (loan repayable 20X9) 1,050
Dividends received 900
Warehouse machinery:
Cost 3,000
Accumulated depreciation at 1 October 20X0 1,700
Motor vehicles:
Cost 1,000
Accumulated depreciation at 1 October 20X0 500

The following information should also be taken into account:

(1) Closing inventory at 30 September 20X1 was $15.6 million.

(2) Irrecoverable debts written off are to be included in administrative expenses.
(3) Depreciation is to be provided for on the straight line basis as follows:
– Warehouse machinery 10 per cent
– Motor vehicles 25 per cent
(4) Depreciation of motor vehicles is to be divided equally between distribution costs
and administrative expenses, and depreciation of warehouse machinery is to be charged
wholly to cost of sales.
(5) The estimated income tax expense for the year ended 30 September 20X1 is $3
million.
Required:
Produce Lafford's statement of profit or loss and other comprehensive income for the year
ended 30 September 20X1 in a form suitable for publication.
Solution

Lafford Statement of profit or loss and other comprehensive income for the year ended 30
September 20X1

$000
Revenue 41,600
Cost of sales (W1) (21,200)
–––––––
Gross profit 20,400
Distribution costs (W1) (6,125)
Administrative expenses (W1) (5,725)
–––––––
Profit from operations 8,550
Income from investments 900
Finance cost (1,050)
–––––––
Profit before tax 8,400
–––––––
Income tax expense (3,000)
–––––––
Profit for the period 5,400
Other comprehensive income: –
–––––––
Total comprehensive income for the year 5,400
–––––––

Workings

(W1)

COS Distribution Administration

$000 $000 $000
Purchases 22,600
Opening inventory 13,000
Distribution costs 6,000
Administrative expenses 5,000
Irrecoverable debts 600
written off
Hire of machinery 500
Production wages 400
Closing inventory (15,600)
Dep'n – WM (10% × 300
3,000)
Dep'n – MV (25% × 125 125
1,000)
––––––– –––––– ––––––
21,200 6,125 5,725
––––––– –––––– ––––––
Notes to financial statements
Notes to the financial statements normally include narrative descriptions or more detailed
analysis of items in the financial statements, as well as additional information such as
contingent liabilities and commitments.

IAS 1 also provides guidance on the structure of the accompanying notes to financial
statements, the accounting policies and other required disclosures.

The notes to the financial statements of an entity should:

(a) present information about the basis of preparation of the financial statements and the
specific accounting policies adopted for significant transactions
(b) disclose the information required by other IFRSs that is not presented elsewhere in
the financial statements
(c) provide additional information which is not presented elsewhere in financial
statements but is relevant to an understanding of any of them
Notes to the financial statements should be presented in a systematic manner and any
item in the financial statements should be cross-referenced to any related information in
the notes.

Notes are normally provided in the following order, which assists users in understanding
the financial statements and comparing them with those of other entities:

(a) statement of compliance with IFRSs

(b) summary of the significant accounting policies applied
(c) supporting information for items presented in each financial statement in the order in
which each line item and each financial statement is presented
(d) other disclosures, including:
• contingent liabilities, commitments and unrecognised contractual commitments other
financial disclosures
• non-financial disclosures

Accounting policies
The summary of significant accounting policies in the notes to the financial statements
should describe the following:

• the measurement basis (or bases) used in preparing the financial statements and
• each specific accounting policy that is necessary for a proper understanding of the
financial statements
Test your understanding 2 – P
The following information has been extracted from the accounting reports of an entity P:

P – trial balance as at 31 March 20X1

Dr Cr
$000 $000
Revenue 5,300
Cost of sales 1,350
Dividends received 210
Administrative expenses 490
Distribution costs 370
Interest payable 190
Prepayments 25
Dividends paid 390
Property, plant and equipment 4,250
Short-term investments 2,700
Inventory at 31 March 20X1 114
Trade receivables 418
Cash and cash equivalents 12
Trade payables 136
Long-term loans (repayable 20X9) 1,200
Share capital 1,500
Share premium 800
Retained earnings at 31 March 20X0 1,163
–––––––– ––––––––
10,309 10,309
–––––––– ––––––––

The following information should also be taken into account:

(1) During the year, P paid a final dividend of $240,000 in respect of the year ended 31
March 20X0. This was in addition to the interim dividend paid on 1 September 2010 in
respect of the year ended 31 March 20X1.
(2) The tax charge for the year has been estimated at $470,000.
(3) The directors declared a final dividend of $270,000 on 3 April 20X1.
Required:

Produce, in a form suitable for publication, the statement of profit or loss and other
comprehensive income, statement of financial position and statement of changes in equity
for the year ended 31 March 20X1.
Answer

P Statement of profit or loss and other comprehensive income for the year ended 31
March 20X1

$000
Revenue 5,300
Cost of Sales (1,350)
–––––
Gross profit 3,950
Distribution costs (370)
Administrative expenses (490)
–––––
Profit from operations 3,090
Income from investments 210
Finance cost (190)
–––––
Profit before tax 3,110
Income tax expense (470)
–––––
Profit for period 2,640
Other comprehensive income: –
–––––
Total comprehensive income for the period 2,640
–––––

P Statement of changes in equity for the year ended 31 March 20X1

Share Share Retained Total

capital premium earnings
$ $ $ $
Balance at 1 April 20X0 1,500 800 1,163 3,463
Total comprehensive income 2,640 2,640
Dividends (390) (390)
––––––– ––––––– ––––––– ––––––––
Balance at 31 March 20X1 1,500 800 3,413 5,713
––––––– ––––––– ––––––– ––––––––

Note: Dividends declared after the year end will not be adjusted for.
P Statement of financial position as at 31 March 20X1

$000 $000
Non-current assets
Property, plant and equipment 4,250
Current assets
Inventories 114
Trade and other receivables 418
Prepayments 25
Investments 2,700
Cash and cash equivalents 12
–––––– 3,269
–––––––
Total assets 7,519
–––––––
Equity and liabilities
Capital and reserves
Issued ordinary share capital 1,500
Share premium 800
Retained earnings 3,413
–––––– 5,713
Non-current liabilities
Long-term loans 1,200
Current liabilities
Trade payables 136
Income tax 470
–––––– 606
–––––––
Total equity and liabilities 7,519
–––––––
Test your understanding 3 – Picklette
The following information has been extracted from the books of an entity Picklette for the
year ended 31 March 20X1:

Dr Cr
$000 $000
Administrative expenses 170
Interest paid 5
Distribution costs 240
Share capital (ordinary $1 shares) 200
Dividends paid 6
Cash and cash equivalents 9
Land and Buildings
Cost at 1 April 20X0 (land $110, buildings $100) 210
Accumulated depreciation at 1 April 20X0 48
Plant and machinery
Cost at 1 April 20X0 125
Accumulated depreciation at 1 April 20X0 75
Accruals 90
Retained earnings at 1 April 20X0 270
Trade receivables and payables 738 60
Inventory as at 1 April 20X0 150
Purchases 470
10% Loan 80
Revenue 1,300
––––– –––––
2,123 2,123
––––– –––––

Additional information:

(1) Inventory at 31 March 20X1 was valued at $250,000.

(2) Buildings and plant and machinery are depreciated on a straight-line basis (assuming
no residual value) at the following rate:
On cost: Buildings 5%
Plant and machinery 20%

(3) There was no purchases or sales of non-current assets for the year to 31 March 20X1.
(4) The depreciation charges for the year to 31 March 20X1 are to be apportioned as
follows:
Cost of sales 60%
Distribution costs 20%
Administrative expenses 20%

(5) Income tax for the year to 31 March 20X1 is estimated at $135,000.
(6) The loan is repayable in five years and the balance has been outstanding for the
whole year.

Required:
Produce a statement of profit or loss and other comprehensive income, a statement of
financial position and a statement of changes in equity for the year to 31 March 20X1 for
Picklette. Show all workings clearly.

Test your understanding 3 – Picklette

Hide Answer

Picklette Statement of profit or loss and other comprehensive income for the year ended 31
March 20X1

$000
Revenue 1,300
Cost of Sales (W1) (388)
––––––
Gross profit 912
Distribution costs (W1) (246)
Administrative expenses (W1) (176)
––––––
Profit from operations 490
Income from investments –
Finance cost (W2) (8)
––––––
Profit before tax 482
Income tax expense (W3) (135)
––––––
Profit for the period 347
Other comprehensive income: –
––––––
Total comprehensive income for the year 347
––––––
Picklette Statement of financial position as at 31 March 20X1
$000 $000
Non-current assets
Property, plant and equipment (W4) 182
Current assets
Inventories 250
Trade receivables 738
Cash and cash equivalents 9
997
––––––
Total assets 1,179
––––––
Equity and liabilities
Capital and reserves
Share capital 200
Retained earnings 611
–––––– 811
Non-current liabilities
10% Loan 80
Current liabilities
Trade payables 60
Accrued expenses (W6) 93
Income tax 135
––––– 288
––––––
1,179
––––––

Picklette Statement of changes in equity for the year ended 31 March 20X1

Share Retained Total

capital earnings
$000 $000 $000
Balance at 1 April 20X0 200 270 470
Total comprehensive income 347 347
Dividends (W2) (6) (6)
–––––– –––––– ––––––
Balance at 31 March 20X1 200 611 811
–––––– –––––– ––––––

Workings
(W1)

COS Distribution Administration

$000 $000 $000
Purchases 470
Opening inventory 150
Distribution costs 240
Administrative expenses 170
Closing inventory (250)
Dep'n – Land and buildings (60:20:20) 3 1 1
Dep'n – Plant and machinery (60:20:20) 15 5 5
–––– –––– ––––
388 246 176
–––– –––– ––––

(W2) Loan interest due (10% × $80) = $8 (IS)

Amount paid (TB) $5, therefore accrual required for $3

(W3) Tax charge

$
Estimated charge for the year 135

(W4) Property, plant and equipment

Land and Plant and Total

buildings machinery
$ $ $
Cost
At 1 April 20X0 210 125 335
–––––– –––––– ––––––
At 31 March 20X1 210 125 335
–––––– –––––– ––––––
Acc dep'n
At 1 April 20X0 48 75 123
Charge for year (W5) 5 25 30
–––––– –––––– ––––––
At 31 March 20X1 53 100 153
–––––– –––––– ––––––
Carrying amount at 31 March 20X1 157 25 182
–––––– –––––– ––––––
Carrying amount at 1 April 20X0 162 50 212
–––––– –––––– ––––––
(W5) Depreciation

Land and buildings 5% × $100 = $5

P & M 20% × $125 = $25

(W6) Accrued expenses

$
As per TB 90
Interest accrual (W2) 3
––––
As at 31 March 20X1 93

Test your understanding 4 – Thistle

Thistle is an entity with authorised share capital of 1,400,000 50c ordinary shares. At the
year-end the entity has in issue 1,000,000 ordinary shares, all of which are fully paid.

The entity prepares its accounts annually to 30 June and its trial balance for the year
ended 30 June 20X1, before final adjustments, is as follows:

Dr Cr
$ $
Ordinary share capital 800,000
Share premium 100,000
Retained earnings at 1 July 20X0 540,000
10% Loan 80,000
Land and Buildings
Cost at 1 July 20X0 1,400,000
Accumulated depreciation at 1 July 20X0 58,000
Motor Vehicles
Cost at 1 July 20X0 67,500
Accumulated depreciation at 1 July 20X0 30,250
Fixtures & Fittings
Cost at 1 July 20X0 19,800
Accumulated depreciation at 1 July 20X0 8,400
Trade receivables and payables 71,500 60,820
Prepayments and accruals 970 1,360
Inventory as at 30 June 20X1
Raw materials 32,500
Finished goods 29,700
Cash and cash equivalents 217,360
Profit for year (subject to items in the following notes) 160,500
–––––––– ––––––––
1,839,330 1,839,330
–––––––– –––––––

The following information should also be taken into account:

(1) Land is included in the trial balance at its original cost of $800,000 and the following
transactions have happened during the year in relation to non-current assets, neither of
which have yet been recorded in the books:
– A building was purchased which cost $100,000.
– Motor vehicles which had originally cost $24,000 were sold during the year for
$12,000. Accumulated depreciation of $14,000 had been charged on these motor vehicles
at 1 July 20X0.

(2) Depreciation for the year is to be provided using the following policies:
Land nil depreciation
Buildings 2% per annum, straight line
Motor vehicles 20% per annum, reducing balance
Fixtures & fittings 10% per annum, straight line

A full year’s charge is made in the year of acquisition and none in the year of disposal.

(3) The directors have estimated that the entity's tax liability for the year will be $18,500.
(4) The directors would like to declare a final ordinary dividend of 7 cents per share.
(5) Interest on the loan is paid annually in arrears on 1 July. The loan is repayable in
20X9.
(6) During the year 100,000 ordinary shares were issued at a premium of 40 cents per
share. This share issue is reflected in the trial balance.
Required:
Produce, in a form suitable for publication, the statement of financial position and
statement of changes in equity for the year ended 30 June 20X1.
Answer
Thistle Statement of financial position as at 30 June 20X1

$ $
Non-current assets
Property, plant and equipment (W1) 1,459,220
Current assets
Inventories (W3) 62,200
Trade receivables 71,500
 Prepayments 970
Cash and cash equivalents (W8) 129,360
––––––– 264,030
–––––––––
Total assets 1,723,250
–––––––––
Equity and liabilities
Capital and reserves
Ordinary share capital 800,000
Share premium 100,000
Retained earnings 654,570
1,554,570
–––––––
Non-current liabilities
10% Loan 80,000
Current liabilities
Trade payables 60,820
Accruals 1,360
Debenture interest owing (W4) 8,000
Income tax 18,500
––––––– 88,680
–––––––––
Total equity and liabilities 1,723,250
–––––––––

Thistle Statement of changes in equity for the year ended 30 June 20X1

Share Share Retained Total

capital premium earnings
$ $ $ $
Balance at 30 June 20X0 750,000 60,000 540,000 1,350,000
Total comprehensive income (W7) 114,570 114,570
Dividends (W2) – –
Issue of share capital (W2) 50,000 40,000 – 90,000
––––––– ––––––– ––––––– ––––––––
Balance at 30 June 20X1 800,000 100,000 654,570 1,554,570
––––––– ––––––– ––––––– ––––––––

Workings
(W1) Property, plant and equipment

Land and Motor Fixtures Total

buildings vehicles & fittings
$ $ $ $
Cost/Valuation
At 1 July 20X0 1,400,000 67,500 19,800 1,487,300
Additions 100,000 100,000
Disposals (24,000) (24,000)
–––––––– ––––––– –––––– ––––––––
At 30 June 20X1 1,500,000 43,500 19,800 1,563,300
–––––––– ––––––– –––––– ––––––––

Accumulated depreciation:
At 1 July 20X0 58,000 30,250 8,400 96,650
Charged during the year (W6) 14,000 5,450 1,980 21,430
Disposals (14,000) (14,000)
––––––– ––––––– –––––– –––––––
At 30 June 20X1 72,000 21,700 10,380 104,080
––––––– ––––––– –––––– –––––––
Carrying amount
At 30 June 20X1 1,428,000 21,800 9,420 1,459,220
–––––––– ––––––– ––––––– ––––––––
At 1 July 20X0 1,342,000 37,250 11,400 1,390,650
–––––––– ––––––– ––––––– ––––––––

(W2) Share capital

50c ordinary shares No.
Authorised shares 1,400,000
Issued and fully paid 1,000,000
No.
Number of issued shares at 1 July 20X0 900,000
Number Issued in the year 100,000
–––––––––
Number of issued shares at 30 June 20X1 1,000,000
–––––––––

Total proceeds = 100,000 × $0.90 = $90,000

Nominal value = 100,000 × $0.50 = $50,000 (share capital account)

Premium = 100,000 × $0.40 = $40,000 (share premium account)

An ordinary dividend of $70,000 (1,000,000 × 0.07) is declared but no adjustment as not

done at year end.

(W3) Inventory

$
Raw materials 32,500
Finished goods 29,700
––––––
62,200
––––––

(W4) Loan interest

Interest due for the year $8,000 ($80,000 × 10%) payable 1 July 20X1

(W5) Gain on disposal

$
Proceeds 12,000
Carrying value (24,000 – 14,000) 10,000
––––––
Profit on disposal 2,000

(W6) Depreciation

Building 2% × $700,000 (1,400,000 – land $800,000 + additions $100,000) = $14,000

Motor vehicles 20% × (cost $43,500 – depn ($30,250 – $14,000)) = 20% × $27,250 =
$5,450

Fixtures and fittings 10% × $19,800 = $1,980

(W7) Profit for year

$
Per TB 160,500
Gain on disposal (W5) 2,000
Depreciation(W6)
– buildings (14,000)
– motor vehicles (5,450)
– fixtures & fittings (1,980)
Income tax expense (18,500)
Finance cost (W4) (8,000)
––––––––
Profit for the year 114,570
––––––––
(W8) Cash and cash equivalents

$
TB 217,360
Proceeds from sale of NCAs 12,000
Purchase of NCAs (100,000)
––––––––
Cash and cash equivalents 129,360

Test your understanding 5 – Practice questions

(1) Which of the following best describes the purpose of financial statements according
to IAS 1 Presentation of Financial Statements?
A To provide information that enables users to assess the stewardship of management
B To provide information about the financial position, financial performance and cash
flows of an enterprise
C To provide a summary of all financial transactions entered into in the accounting
period
D To provide an statement of profit or loss and other comprehensive income and a
statement of financial position

(2) Which of the following are concepts that should be applied when preparing financial
statements according to IAS 1 Presentation of Financial Statements?
(i) Going concern
(ii) Accruals
(iii) Consistency
(iv) Off-setting
A i and ii
B i and iii
C i, ii and iv
D All of them

(3) Which of the following items must be shown on the face of the statement of profit or
loss and other comprehensive income according to IAS 1 Presentation of Financial
Statements?
(i) Revenue
(ii) Cost of sales
(iii) Gross profit
(iv) Finance costs
(v) Income tax expense
A All of them
B i, ii, iii and iv
C i, iv and v
D i, ii and iii

(4) Which of the following items would be shown in the statement of changes in equity?
(i) Profit for period
(ii) Dividends paid
(iii) Dividends proposed after the reporting period
(iv) Issue of shares
(v) Revaluation surplus
A i, ii, iv and v
B i, ii, iii and iv
C i, iii, iv and v
D All of them

(5) Which of the following items would be shown as other comprehensive income on the
statement of profit or loss and other comprehensive income?
(i) Profit for period
(ii) Dividends paid
(iii) Dividends proposed
(iv) Issue of shares
(v) Revaluation surplus
A i, ii, iv and v
B i, ii, and iv
C v
D All of them

Data for Questions 6 and 7:

Trade receivables as at 31 December 20X0 were $18,000.
The irrecoverable debt allowance as at 1 January 20X0 was $900.
During the year, irrecoverable debts of $12,000 have been written off to administrative
expenses.
After the year-end, but before the accounts had been completed, the entity discovered that
a major customer had gone into liquidation and that their outstanding balance of $2,000
was unlikely to be paid.
Furthermore, as a result of the recent bad debt experience, the directors have decided to
increase the irrecoverable debt provision at 31 December 20X0 to 10 per cent of
outstanding trade receivables.

(6) What is the correct balance for trade receivables, net of irrecoverable debt allowance,
as at 31 December 20X0?
A $3,600
B $5,400
C $14,400
D $16,200
(7) What is the correct charge to the statement of profit or loss and other comprehensive
income for irrecoverable debts and allowances for the year to 31 December 20X0?
A $14,000
B $14,400
C $14,700
D $15,600

(8) According to IAS 1, which of the following must be recognised in the statement of
profit or loss?
A Depreciation
B Equity dividends paid
C Revaluation gains
D Transfer from a revaluation reserve to retained earnings when a revalued asset is sold

(9) According to IAS 1 which of the following will appear separately in an entity's
statement of changes in equity?
A Other income, dividends paid and proceeds from a share issue
B Other income, surplus arising on a revaluation and proceeds from a share issue
C Dividends paid, dividends received and proceeds from a share issue
D Dividends paid and proceeds from a share issue

(10)Which of the following assets would be classified as current according to IAS 1

definition?
Asset A which is expected to be sold within the next 12 months
Asset B which is not expected to be sold within the next 12 months but expected to be
realised with the entity's normal operating cycle
Asset C which is held primarily for the purpose of being traded but for which there is
currently no anticipated sale date
A Asset A only
B Asset A and Asset B
C Asset A and Asset C
D All of them

Answer
(1) B
(2) D
(3) C
(4) A
(5) C
(6) C – The irrecoverable debt must be written off against receivables before the
allowance is calculated for the year, i.e. $18,000 – 2,000 = $16,000
The allowance for the year is calculated as 10% × $16,000 = $1,600

The balance on receivables to be shown on the SOFP will be $14,400 (16,000 – 1,600)

(7) C – The total for irrecoverable debts for the year will be $14,000 (12,000 + 2,000)
The allowance charged to the statement of profit or loss and other comprehensive income
will be $700 (the movement 1,600 – 900)

(8) A – All other items will be shown in the SOCIE and not the statement of profit or
loss. The revaluation gain (option C) will also be shown as other comprehensive income.
(9) D – Other income and dividends received form part of the statement of profit or loss
(10)D

6 Summary diagram