UNDERSTANDING OF FINANCIAL STATEMENT International Accounting Standard Board Framework International Financial Reporting Standards (IFRS) are based

on the IASB framework for the sake of preparation and presentation of financial statement. Role of IASB framework IASB framework provides facility of consistent and logical formulation of IFRSs. It also provides platform for resolving accounting issues. Hence, framework enjoys the status of conceptual base for development of IFRSs. Elements of financial statement: The framework defines elements of financial statement. Definition of these elements reduces confusion over which item is to be recognized and which should not. An item which does not fulfill the features of definition of an element should not be recognized. There are five elements of financial statement: Asset, Liability, Equity, Income and Expense. Asset: A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Liability: A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources. Equity: The residual interest in the assets of an entity after deducting all its liabilities. Income: Increase in economic benefits in the form of enhancement of assets or decrease in liability that result in increase in equity. Expense: Decrease in economic benefits in the form of depletion of assets or increase in liability that result in decrease in equity. The framework definitions demonstrate that IFRS is based on balance sheet approach to recognition i.e. income and expenses are defined as changes in assets and liabilities rather than other way round. Recognition of the elements of the FS: An item is to be recognized in the FS when it meets the definition of an element, the item has a value which can be measured reliably and it is probable to inflow or outflow of the resources.

Presentation of Financial Statement (IAS-1) Objective of IAS-1 1. The objective of IAS-1 is to prescribe the basis for presentation of general purpose financial statement to ensure comparability. The general purpose financial statements are those intended to serve users who are not in a position to require financial reports for their particular purpose. 2. IAS-1 sets out overall requirement of presentation and minimum requirement of contents. Objective of financial statement Objectives of general purpose financial statements is to provide information about the financial position, financial performance, change in equity and cash flow of an entity that is useful to a wide range of users in making economic decisions. Component of financial statement A complete set of financial statement should include: 1. A statement of financial statement at the end of the period. 2. A statement of comprehensive income for the period. 3. A statement of changes in equity for the period. 4. A statement of cash flow for the period. 5. Notes, comprising a summary of accounting policies and detail of the elements of financial statement. Principles for financial statement 1. An entity preparing IFRS financial statement is presumed to be a going concern. If management has significant concerns about the entity ability to continue as a going concern, the uncertainties must be disclosed. 2. IAS-1 requires that an entity prepare its financial statements, using the accrual basis of accounting except for cash flow statement. 3. The presentation and classification of items in the FS shall be consistent. 4. Each material class of similar items must be presented separately in the FS and dissimilar items may be aggregated only if they are individually immaterial. 5. Assets and Liabilities, Income and Expense may not be offset unless required by the IFRS. 6. IAS-1 requires that comparative information of the previous period shall be disclosed for all the amounts reported in the financial statement, both at face and notes. Structure and Content of FS in General 1. Name of the financial statement component 2. Name of the reporting enterprise 3. The date or period covered 4. Presentation currency 5. Level of precision (thousand, millions etc.) 6. Whether the statement is for the enterprise or for a group Notes Disclosures required by IAS-1 The following notes disclosures are required by IAS-1 if not disclosed elsewhere information published with the financial statements: 1. Domicile and legal form of the country 2. Country of incorporation 3. Address of registered office or principal palace of business 4. Description of the entitys operations and principal activities

5. Information regarding the length of life. 6. Name of the parent company and ultimate parent of the group. 7. Disclosure about dividend 8. Disclosure about capital Performa of Cash flow Statement A. Cash flow from operating activities Net profit before income tax Less/ Add: interest income/ expense (take from IS) Operating profit Adjustment of non-cash items Depreciation Amortization of Goodwill Warranty provisions Loss on disposal of asset Foreign exchange loss Bad debts Operating profit before working capital Working capital adjustment Dec/ Inc in inventory (Dec-add & Inc-less) Dec/ Inc in receivables (Dec-add & Inc-less) Dec/ Inc in payables (Dec-less & Inc-add) Cash Generated from operation Add: Interest received Less: Interest paid Add: Dividend received Less: Dividend paid Add: Tax refund Less: Tax paid Net Cash flow from operating activities B. Cash flow from investing activities Purchase of PPE and IP Less: proceed from sale of PPE and IP Net cash flow from investing activities C. Cash flow from financing activities Proceed from issue of shares Proceed from long term borrowing Less: Payment of finance lease Less: payment of long term loan Net cash flow from financing activities Net Inc/ Dec in cash and cash equivalent (A+B+C) Cash and cash equivalent opening balance Cash and cash equivalent closing balance

Inventories (IAS-2) The objective of the standard is to prescribe the accounting treatment for inventories. Cost of the inventory is to be recognized as asset and carried forward until it is sold. The standard provides the guidance on the determination of cost including any write down to net realizable value. Scope: This standard is applied to all inventories except: 1. Work in progress arising under construction contracts 2. Financial instruments 3. Biological assets Definition: A. Inventories are assets: 1. Held for sale in the ordinary course of business 2. In the process of production for such sale 3. In the form of material to be consumed in the production process for such sale B. Net realizable value: Estimating selling price in the ordinary course of business less estimated cost to sell C. Fair value: Fair value is an amount for which an asset could be exchanged, or a liability settled between knowledgeable willing parties in an arms length transaction. Measurement of inventories: Inventories shall be measured at the lower of cost and net realizable value. Cost of Inventory: The cost of inventory comprises all cost of purchase, conversion cost and any other cost which required bringing the inventory in the existing location and condition. Cost of purchase: Cost of purchase comprises purchase price, import duties, transport, handling and other cost directly attributable to the acquisition less trade discount, rebates and other similar items. Conversion cost: Conversion cost comprises direct labour and production overhead. However, inventories cost should not include abnormal wastage, storage cost, administrative cost and selling cost etc. Cost formulas: Cost of the inventory can be calculated through FIFO and Weighted Average Cost Method. However, LIFO method is not permitted. Reversal of write down (Expense): Reversal of write down of same inventory may be made up to the cost.

Events after reporting period (IAS-10) Objective of IAS-10 is when an entity should adjust it financial statement for events after the reporting period. Suppose, financial year of 2012 starts from 1st January 2012 and ends on 31st December 2012. Approval of the accounts by the management was provided on 31st March 2013 whereas accounts are submitted in AGM for the approval of shareholders on 30th April 2013, after which reports are authorized to issue. IAS-10 is applicable for the events which are occurred after the balance sheet date but to the date of approval by the management i.e. 31st December 2012 to 31st March 2013. Event may be adjusting or non-adjusting. Adjusting events are those which provide additional evidence of their existence at the balance sheet date. Adjusting events are required to be recognized in the FS. Non-adjusting events are those which do not provide additional evidence of their existence at the balance sheet date. Non-adjusting events are required to be disclosed in the notes of the financial statement. Special consideration: 1. An entity shall not prepare its financial statement on a going concern basis, if management determines after the end of reporting period about liquidate the entity or cease trading. 2. Dividend is to be recorded in that year in which it is proposed, therefore it is nonadjusting event. Hence, dividend declared after the reporting date but before authorized for issue is non-adjusting event. 3. Abnormal loss / natural calamities do not provide additional evidence, therefore nonadjusting events. 4. Amalgamation/ reconstruction/ acquisition do not provide additional evidence, therefore non-adjusting events. Illustration: 1. Reduction in value of closing stock is an adjusting event and provides additional evidence of their existence at the balance sheet date. 2. A court case was settled confirming the obligation at the end of reporting period. 3. Major litigation due to the events occurred after the reporting period. 4. Costs of assets purchased before the end of reporting period were determined after the reporting period. 5. Errors or fraud affecting financial statements at the end of reporting period were discovered after the reporting period.

Property, Plant and Equipment (IAS-16) Tangible Assets: According to IAS-16, tangible assets mean that which are held by an entity for use in production or supply of goods and services, for rentals to others or for administrative purposes. Tangible assets are expected to be used more than one accounting period. Recognition of NCA: NCA are to be recognized when cost of the asset can be measured reliably and there is a probable that future economic benefit will flow to the entity. Measurement of NCA: a. Initial Measurement: Initially, NCA is required to be recognized at cost. Cost includes purchase price of the asset, import duties, non-refundable taxes, directly attributable cost (installation cost, site preparation cost) less trade discounts. However, asset acquired in exchange of another asset, cost should be measured at fair value. b. Subsequent Measurement: Subsequently, NCA is required to be recognized either at cost model or at revaluation model. Cost model means asset is to be carried at book value. Book value means cost of the asset less accumulated depreciation and impairment. Revaluation Model means asset is to be carried at fair value. Fair value is an amount for which an asset could be exchanged, between knowledgeable willing parties in an arms length transaction. Accounting for Revaluation Model: When an asset is to be revalued, there may be revaluation gain or revaluation loss. Revaluation gain appears when the fair value of an asset is greater than the net book value of the asset at the date of revaluation. Revaluation loss appears when the fair value of an asset is lesser than the net book value of the asset at the date of revaluation. Journal entries:
Revaluation gain is appeared: For Non-depreciable For depreciable asset: Accumulated Depreciation asset: Non-Current Asset Non-Cur Asset Rev. Surplus -----------------------------Non-Current Asset Rev. Surplus If in the previous year Revaluation loss was occurred but in the current financial year Revaluation surplus is appeared: Asset P&L (Old revaluation loss) Revaluation Surplus(BF) Revaluation loss is appeared: For Non-depreciable and depreciable asset: Revaluation Loss Non-Current Asset Revaluation Surplus is recognized in equity in BS (as capital reserve), whereas Revaluation Loss is charged as an expense in P&L. If in the previous year Revaluation surplus was occurred but in the current financial year Revaluation loss is appeared: Revaluation Surplus (Old surplus) P&L (balancing figure) Asset

According to IAS-16, depreciation is a systematic allocation of depreciable amount over the useful life of an asset. Depreciable amount means cost of an asset less residual value. Depreciation Methods: 1. Straight line method= (Cost of an asset- residual value) / useful life 2. Reducing balance method= (1-RV/Cost)1/n 3. Sum of digit method = n (n+1)/ 2 4. Machine hours method = (Depreciable amount / Estimated life in hours) Actual hours used.

Revenue (IAS-18) Objective: The objective of IAS-18 is to prescribe the accounting treatment for revenue arising from certain types of transactions and events. Revenue: Revenue is the gross inflow of economic benefit arising from ordinary course of activities such as sale of goods, sale of services, interest, royalties and dividends. Criteria for recognition of revenue on account of sale of goods: 1. Risk and Reward has been transferred. 2. No managerial involvement. 3. Cost of goods measured reliably. 4. Inflow of economic benefit is probable. 5. Amount of revenue can be measured reliably. All criteria must be met for recognition. Sometimes, risk & reward has been transferred but any other criteria not met. Company has to record goods in its own book. Criteria for recognition of revenue on account of sale of services: 1. Completion of work can be measured reliably. 2. Cost of services can be measured reliably. 3. Inflow of economic benefit is probable. 4. Amount of revenue can be measured reliably. Criteria for recognition of Dividend Income: When right to receive dividend established. It means when company declared the dividend. Criteria for recognition of Interest Income: On the basis of time by applying effective rate of interest. Criteria for recognition of Royality Income: On the basis of accrual. All revenues must be recognized at present value.

Fair value measurement (IFRS-13) Need Different IFRSs recommend using fair value but every IFRS provide it own guidelines to determine fair value. IFRS-13 states that how initial fair value is measured and how subsequent fair value is determined. Scope: Three things are explained in IFRS-13: 1. Fair value. 2. Methods to determine fair value. 3. Disclosure regarding determination of fair value. Fair value: Fair value is the amount which can be received on account of sale of an asset or paid to transfer a liability between market participants in an ordinarily transaction at the date of measurement. Market participant means willing independent buyer and selling having good knowledge. Ordinarily transaction means arms length transaction. Methods to determine fair value: Fair value should be taken from Principal market. In the absence of principal market, fair value is to be taken from most advantageous market. Principal market means market with greatest volume of activity of concerned nature. Most advantageous market means maximize the obtainable value of the asset and minimize the payable value of the liability. Assumptions: 1. Transaction cost is ignored while determining fair value of asset. 2. Transportation cost included while determining fair value of asset. 3. However, when identify most advantageous market consider both transaction cost and transportation cost. Hierarchy used for fair value: Level-1 Quoted price from market

Level-2

If quoted price not given, price of similar asset from nonactive market If above both also not given, determine the fair value through unobservable inputs i.e. valuation technique. For determining fair value, location of asset, condition of asset and highest best use of the asset should also be considered.

Level-3