Lecture Video 10

Lecture 10: Purpose of Financial Statements

We are going to start our first lecture on International Accounting Standard 1 (IAS1), and this standard is all about the presentation of financial statements. The presentation of financial statements builds on the underlying principles that were laid out for you within the framework. But now it starts to get quite specific and starts becoming a bit more practical. IAS1 is going to affect all companies that prepare financial statements under the full IFRS. 

I'm going to start off and just discuss what IAS1 defines as the purpose of financial statements. Diagrammatically the purpose of financial statements is to provide information about financial position, financial performance, and cash flows of an entity that is useful to users in their decision-making process. Now in order to meet this purpose, the IAS1 describes what is required to be within a full set of financial statements. Now in that full set of financial statements, you are going to have to have assets, liabilities and equity and that is all going to form part of a statement of financial position. That's your first statement. Then you have to also include income and expenses within your financial performance, and that is all going to be recorded in the statement of profit or loss and other comprehensive income. 

Attached to that is also going to be your statements of changes in equity, which will be the movements in equity for the year. Last but definitely not least, we also need to provide information about cash flows and related to that will be our cash flow statements. I'm not going to discuss that much further here because that is all going to be covered in its own accounting standard in IAS7.

Now all of these items that are recognised in the statement of financial position will also need further disclosures and additional information, which we will provide in the notes to the financial statements. So the notes will affect every single component. 

Purpose of Financial Statements: 

To recap, the purpose of financial statements is to provide information about the financial position, financial performance and cash flows. This information must be useful to a wide range of users in making economic decisions. The framework defines that a bit more specifically as users who are investors, what primacy is given to investors and providers of capital lenders to the business. 

To meet this objective, the financial statements must provide information about assets, liabilities, equity, income and expenses, contributions by and distributions to owners, and cash flows. So this we will group in assets, liabilities, and equities in the statement of financial position. The income and expenses, including gains or losses, will be in the statement of profit or loss and OCI. And the contributions by and distributions to owners will be in the statement of changes in equity. Last up; we'll have our statement of cash flows. 

All the above information, along with other information in the notes, will help assist the users of financial statements in predicting the entity's future cash flows and any timing and uncertainty of those cash flows. That gives us a well-established idea of the purpose of financial statements per IAS1. We also have an additional purpose, which IAS1 talks about being stewardship, but that is a secondary purpose. 

Complete Set of Financial Statements: (4:38) 

  • A complete set of financial statements per IAS1, is always going to start with your statement of financial position but take note that is a wealth concept and that will always be defined as one as being at the end of the year; so these statements of financial position for ABC Limited at year-end. 

  • Then there must be a statement of profit or loss and OCI (Other Comprehensive Income) and take note that is a periodic or income based concept, and that is for the period. There is a beginning and an end to the period.  

  • A statement of changes in equity, also for the period ending.  

  • A statement of cash flows also for the period. 

  • And along with all of this, we will have notes. These will summarise any significant accounting policies and any other explanatory information about estimates and judgments.

One thing that people often forget is that whenever I have to change an accounting policy or make changes that go back into previous periods, we have an accounting standard which helps us with that specific issue, IAS8. But you will also need to have a statement of financial position at the beginning of the earliest comparative period when a new accounting policy is changed. 

These titles for the statements aren’t compulsory. You may use other titles other than those in the standard. You may say statement of comprehensive income instead of the full name statement of profit and loss and OCI, but remember you can't be misleading in this respect at all. 

The purpose, very theoretical, it must be under your belt, and you must be able to build on this. Please watch the next video to get some practical application. 

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