THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/201 PRINCIPLES OF FINANCIAL AND COST ACCOUNTING Nadeeshani Dissanayake B. Sc. Accounting (Sp), First Class, ACA, ACMA, CPA (Aust)

CONCEPTUAL FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

LEARNING OUTCOMES At the end of this session the students should be able to: � Understand the need for conceptual framework for financial reporting � Understand the objective of financial reporting � Understand the fundamental assumptions in FR � Describe the qualitative characteristics of financial information � Define the elements of financial statements � Understand the components of financial statements

WHAT IS A CONCEPTUAL FRAMEWORK? “A conceptual framework is a coherent system of inter-related objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, limits of financial accounting and financial statements. ” (FASB Definition) 4

Objectives of the Framework 1. 2. 3. 4. 5. 6. 7. To assist in the development of A/Ss and review of existing standards. To assist in promoting harmonization of regulation, Accounting Standards and procedures relating to Financial Reporting To assist preparers of Financial Statements in applying accounting standards To assist auditors in forming an opinion To solve new practical accounting problems quickly. To increase financial statements users’ understanding and confidence in financial reporting. To enhance, comparability among companies’ Financial Statements. 5

THE MATTERS DEALT WITHIN THE FRAMEWORK The objectives of financial statements Underlying assumptions Qualitative characteristics of F/Ss The elements of F/Ss The definition and recognition of the elements of F/Ss Measurement of the elements of the F/Ss Concepts of capital and capital maintenance 6

THE OBJECTIVE OF FINANCIAL REPORTING “ Provide financial information about the reporting entity that is useful to existing and potential investors and other creditors in making decisions about providing resources to the entity”. Financial statements prepared for this purpose meet the common needs of most users who don’t have the right to demand information and who have a reasonable knowledge of business and economic activities Financial statements also show the results of the stewardship of management or the accountability of management. 7

FINANCIAL REPORTS AND USERS 8

Underlying Assumptions Accrual Basis – In order to meet the objectives, financial statements are prepared on the accrual basis of accounting. What is accrual basis of accounting? What is cash basis? Effects of transactions and other events are recognised when they occur ( not when cash or cash equivalents received or paid) 9

Underlying Assumptions Going Concern – The financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. Hence it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. 10

QUALITATIVE CHARACTERISTICS Primary Qualitative Characteristics of Accounting Information Relevance : Capable of making a difference in users’ decision Information should have the predictive value (predictive role), Feedback value (Confirmatory role). Faithfully represent /Reliability: Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error. Completeness Neutrality (unbiased) Free from errors 11

QUALITATIVE CHARACTERISTICS Enhancing Qualitative Characteristics � Comparability: information should be presented in a manner that can be compared with the historical information of the same organization, information of the other competitive organizations, information with the industry average figures. Verifiability knowledgeable and independent observers could reach consensus Materiality Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity. � Understandability: information should be presented in a manner that can be easily understood by an average man who is having a general idea about business Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Generally, the older the information is the less useful it is. 12

ELEMENTS OF FINANCIAL STATEMENTS There are five elements in the Financial Statements. Assets Liabilities Equity Income Expenses 13

ELEMENTS OF FINANCIAL STATEMENTS ASSETS. A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Main features • Controlled by the enterprise • Past Events • Future economic benefits Group Work : A Printing Machine, Office Building, employees, elephant, Cash, stationery – pens/clips/pins, teak trees, bees 14

ELEMENTS OF FINANCIAL STATEMENTS LIABILITIES. A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Main features • Present obligations • Transfer economic benefits • Past Transactions or Events Group Work - annual reports 15

Elements of Financial Statements INCOME. Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. EXPENSES. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Group Work - annual reports 16

ELEMENTS OF FINANCIAL STATEMENTS EQUITY. The residual interest in the assets of the enterprise after deducting all its liabilities. Group Work - annual reports Basic Accounting equation and double entry system 17

COMPONENTS OF FINANCIAL STATEMENTS Statement of Financial Position • Income Statement • Statement of Comprehensive Income (including other Comprehensive Income) • Statement of Changes in Equity • Statement of Cash flows • Notes • Group Work - annual reports 18

Statement of Financial Position XYZ Group – Statement of Financial position as at 31 December 2011 31 Dec 2010 ASSETS Non-current assets Property, Plant and equipment x x Goodwill x x Other intangible assets x x Investments in associates x x Financial assets x x Total non-current assets x x Inventories x x Trade receivables x x Other current assets x x Cash and cash equivalents x x Total current assets x x Total assets xx xx Current Assets Continued…… 19

STATEMENT OF FINANCIAL POSITION 31 Dec 2011 31 Dec 2010 EQUITY AND LIABILITIES Equity attributable to owners of the parent Stated capital x x Retained earnings x x Other components of equity x x x X Non-controlling interest x x Total equity x x Long –term borrowings x x Deferred tax x x Long –term provision s x x Total non-current liabilities x x Non –current liabilities Continued…… 20

STATEMENT OF FINANCIAL POSITION Current liability Trade and other payables x x Short-term borrowings x x Current portion of long – term borrowing x x Current tax payable x x Short-term provisions x x Total current liabilities x x Total equity and liabilities xx xx 21

STATEMENT OF COMPREHENSIVE INCOME 2011 2010 x x (x) Gross profit x x Other income x x Distribution costs x x Administrative expenses x x Other expenses x x Finance costs x x Share of profit of associates x x Profit before tax x x (x) Profit for the year from continuing operations x x Loss for the year from discontinued operations - (x) PROFIT FOR THE YEAR x x Revenue Cost of sales Income tax expense Continued…… 22

STATEMENT OF COMPREHENSIVE INCOME 2011 2010 x x Exchange differences on translating foreign operations x x Investments in equity instruments x x (x) x Share of other comprehensive income of associates x (x) Income tax relating to components of other comprehensive income x (x) Other comprehensive income for the year, net of tax (x) x TOTLA COMPREHENSIVE INCOME FOR THE YEAR x x PROFIT FOR THE YEAR Other comprehensive income: Cash flow hedges Gains on property revaluation Actuarial gains (losses) on defined benefit pension plans Continued…… 23 ….

STATEMENT OF COMPREHANSIVE INCOME 2011 2012 x x Owners of the parent x x Non-controlling interest x x x x Basic EPS x x Diluted EPS x x TOTAL COMPREHENSIVE INCOME FOR THE YEAR Profit attributable to Total comprehensive income attributable to: Earnings per share (in currency units) 24

Statement of Changes in Equity …. . XYZ Group – Statement of changes in equity for the year ended 31 December 2011 S. ca pit al Retai ned earni ngs Transla tion of foreign operati ons Inve. in equity instru. Cash flow hedge s Reval uation surplu s Total N CI Tot al Equ ity Balance at 1 Jan 2010 x x x x x Changes in accounting policy - (x) Restated balance x x x x x x x x x Changes in equity for 2010 Dividends Total Comprehensive Income for the year Balance at 31 Dec 2010 Changes in equity for 2011 Issues of share capital Dividend Total comprehensive income for the year Transfer to retained earnings Balance at 31 Dec 2011 x x 25