CHAPTER ONE

DEVELOPMENT OF ACCOUNTING PRINCIPLES AND PROFESSIONAL PRACTICE

LEARNING OBJECTIVES
 The environment of financial accounting
 Financial reporting requirements in Ethiopia
 The IASB and its governance structure
 List of IASB pronouncements
 The IASB’s conceptual framework for financial reporting
 Objectives of financial reporting
 Qualitative characteristics of financial reports
 Elements of financial statements
 Recognition, measurement, and disclosure concepts
 IFRS-based Financial Statements (IAS 1)

1.1. The environment of financial accounting

Fair presentation of financial affairs is the essence of accounting theory and practice. With the
increasing size and complexity of business enterprises and the increasing economic role of
government, the responsibility placed on accountants is greater today than ever before. If
accountants are to meet this challenge, they must have a logical and consistent body of
accounting theory to guide them. This theoretical structure must be realistic in terms of the
economic environment and must be designed to meet the needs of users of financial statements.
Financial accounting is the process that culminates in the preparation of financial reports on the
enterprise for use by both internal and external parties. Users of these financial reports include
investors, creditors, managers, unions, and government agencies.
The objective of financial accounting is to provide financial information about the reporting
entity that is useful to:
 present and express potential equity investors,
 lenders, and
 Other creditors in making decisions in their capacity as capital providers.

1|Page
Capital providers (Investors) are the primary user group because they are interested in assessing the
company’s ability to generate net cash inflows and management’s ability to protect and enhance
their investments.

Financial statements are the principal means through which a company communicates its financial
information to those outside it. These statements provide a company’s history quantified in money
terms. The financial statements most frequently provided are the balance sheet, the income
statement, the statement of cash flows, and the statement of owners’ or stockholders’ equity. Note
disclosures are an integral part of each financial statement.

Some financial information is better provided, or can be provided only, by means of financial
reporting other than formal financial statements. Examples include the president’s letter or
supplementary schedules in the corporate annual report, prospectuses, reports filed with government
agencies, news releases, management’s forecasts, and social or environmental impact statements.
Companies may need to provide such information because of authoritative pronouncement,
regulatory rule, or custom. Or they may supply it because management wishes to disclose it
voluntarily.

1.2. Financial reporting requirements in Ethiopia

Ethiopia passed a financial reporting law in 2014 which requires the use of IFRS by commercial
businesses operating in Ethiopia.
 Proclamation No. 847/2014
 Regulation No. 332/2014
The proclamation requires Commercial organizations to follow International Financial Reporting
Standards (IFRS), or International Financial Reporting Standards for Small and Medium
Enterprises (IFRS for SME) and Charities and societies to follow International Public Sector
Accounting Standards (IPSAS) Public auditors to follow International Standards for Auditing.
Public interest entity (PIE) should use the full IFRS. A PIE is a reporting entity that is of
significant public relevance because of the nature of its business, its size, its number of employees.
PIE also includes banks, insurance companies, and any other financial institutions and public
enterprises. Small or medium enterprises (SME) are not public interest entity.
IFRS implementation road map: 3 phase transition over 3 years:
Phase 1: Significant Public Interest Entities (Financial Institutions and public enterprises owned
by Federal or Regional Governments- Adoption of IFRS). Adoption starts from EFY 2009 (i.e.,

2|Page
specifically July 8, 2017);
Phase 2: Other Public Interest Entities (ECX member companies and those that meet PIE
quantitative thresholds) adoption of IFRS and IPSAS for Charities and Societies start adoption of
the standards at the start of EFY 2010 (i.e., specifically July 8, 2018)
Phase 3: Small and Medium-sized Entities adoption of the IFRS for SMEs start adoption of the
standards from EFY 2011 (i.e., specifically July 8, 2019).
1.3. The IASB and its governance structure
The main international standard-setting organization is based in London, United Kingdom, and is
called the International Accounting Standards Board (IASB). The IASB issues International
Financial Reporting Standards (IFRS), which are used on most foreign exchanges. As indicated
earlier, IFRS is presently used or permitted in over 115 countries and is rapidly gaining
acceptance in other countries as well.
The standard-setting structure internationally is composed of the following four organizations: -
1. The IFRS Foundation provides oversight to the IASB, IFRS Advisory Council, and IFRS
Interpretations Committee. In this role, it appoints members, reviews effectiveness, and helps
in the fundraising efforts for these organizations.
2. The International Accounting Standards Board (IASB)develops, in the public interest, a
single set of high-quality, enforceable, and global international financial reporting standards
for general-purpose financial statements.

3|Page
 1.4. List of IASB pronouncements
The IASB issues three major types of pronouncements:
1. International Financial Reporting Standards: Financial accounting standards issued
by the IASB are referred to as International Financial Reporting Standards (IFRS). The
IASB has issued 13 of these standards to date, covering such subjects as business
combinations and share-based payments. Prior to the IASB (formed in 2001), standard-
setting on the international level was done by the International Accounting Standards
Committee, which issued International Accounting Standards (IAS). The committee
issued 41 IASs, many of which have been amended or superseded by the IASB. Those
still remaining are considered under the umbrella of IFRS.
2. Conceptual Framework for Financial Reporting: As part of a long-range effort to
move away from the problem-by-problem approach, the IASB uses an IFRS conceptual
framework. This Conceptual Framework for Financial Reporting sets forth the fundamental
objective and concepts that the Board uses in developing future standards of financial
reporting. The intent of the document is to form a cohesive set of interrelated concepts—a
conceptual framework—that will serve as tools for solving existing and emerging problems

4|Page
 in a consistent manner. For example, the objective of general-purpose financial reporting
discussed earlier is part of this Conceptual Framework. The Conceptual Framework and
any changes to it pass through the same due process (preliminary views, public hearing,
exposure draft, etc.) as an IFRS. However, this Conceptual Framework is not an IFRS and
hence does not define standards for any particular measurement or disclosure issue.
Nothing in this Conceptual Framework overrides any specific international accounting
standard.
3. International Financial Reporting Standards Interpretations: Interpretations issued
by the IFRS Interpretations Committee are also considered authoritative and must be
followed. These interpretations cover (1) newly identified financial reporting issues not
specifically dealt with in IFRS and (2) issues where unsatisfactory or conflicting
interpretations have developed, or seem likely to develop, in the absence of authoritative
guidance. The IFRS Interpretations Committee has issued over 20 of these interpretations
to date.
In keeping with the IASB’s own approach to setting standards, the IFRS Interpretations
Committee applies a principles-based approach in providing interpretative guidance. To this
end, the IFRS Interpretations Committee looks first to the Conceptual Framework as the
foundation for formulating a consensus. It then looks to the principles articulated in the
applicable standard, if any, to develop its interpretative guidance and to determine that the
proposed guidance does not conflict with provisions in IFRS.
The IFRS Interpretations Committee helps the IASB in many ways. For example,
emerging issues often attract public attention. If not resolved quickly, these issues can lead to
financial crises and scandal. They can also undercut public confidence in current reporting
practices. The next step, possible governmental intervention, would threaten the continuance of
standard-setting in the private sector. The IFRS Interpretations Committee can address
controversial accounting problems as they arise. It determines whether it can resolve them or
whether to involve the IASB in solving them. In essence, it becomes a “problem filter” for the
IASB. Thus, the IASB will hopefully work on more pervasive long-term problems, while the
IFRS Interpretations Committee deals with short-term emerging issues.
1.5. The IASB’s conceptual framework for financial reporting
A conceptual framework establishes the concepts that underlie financial reporting. A

5|Page
conceptual framework is a coherent system of concepts that flow from an objective. The
objective identifies the purpose of financial reporting. The other concepts provide guidance on
(1) identifying the boundaries of financial reporting; (2) selecting the transactions, other
events, and circumstances to be represented; (3) how they should be recognized and
measured; and (4) how they should be summarized and reported.
Need for a Conceptual Framework
Why do we need a conceptual framework? First, to be useful, rule-making should build on and
relate to an established body of concepts. A soundly developed conceptual framework thus
enables the IASB to issue more useful and consistent pronouncements over time, and a
coherent set of standards should result. Indeed, without the guidance provided by a soundly
developed framework, standard-setting ends up being based on individual concepts developed
by each member of the standard-setting body.

1.5.1. Objectives of financial reporting

What is the objective (or purpose) of financial reporting? The objective of general-purpose

6|Page
financial reporting is to provide financial information about the reporting entity that is useful
to present and potential equity investors, lenders, and other creditors in making decisions about
providing resources to the entity. Those decisions involve buying, selling, or holding equity
and debt instruments, and providing or settling loans and other forms of credit. Information
that is decision-useful to capital providers (investors) may also be useful to other users of
financial reporting who are not investors. Let’s examine each of the elements of this objective.
General-Purpose Financial Statements
General-purpose financial statements provide financial reporting information to a wide variety
of users. These statements help shareholders, creditors, suppliers, employees, and regulators to
better understand its financial position and related performance. To be cost-effective in
providing this information, general-purpose financial statements are most appropriate. In other
words, general-purpose financial statements provide at the least cost the most useful
information possible.
Equity Investors and Creditors
The objective of financial reporting identifies investors and creditors as the primary user
group for general-purpose financial statements. Identifying investors and creditors as the
primary user group provides an important focus of general-purpose financial reporting. Its
primary focus is on investors and creditors because they have the most critical and immediate
need for information in financial reports. As a result, the primary user groups are not
management, regulators, or some other non-investor group.
Entity Perspective
As part of the objective of general-purpose financial reporting, an entity perspective is
adopted. Companies are viewed as separate and distinct from their owners (present
shareholders) using this perspective. The entity perspective is consistent with the present
business environment where most companies engaged in financial reporting have substance
distinct from their investors (both shareholders and creditors). Thus, a perspective that financial
reporting should be focused only on the needs of shareholders—often referred to as the
proprietary perspective—is not considered appropriate.
Decision-Usefulness
Investors are interested in financial reporting because it provides information that is useful for
making decisions (referred to as the decision-usefulness approach). As indicated earlier, when

7|Page
making these decisions, investors are interested in assessing (1) the company’s ability to
generate net cash inflows and (2) management’s ability to protect and enhance the capital
providers’ investments. Financial reporting should therefore help investors assess the amounts,
timing, and uncertainty of prospective cash inflows from dividends or interest, and the
proceeds from the sale, redemption, or maturity of securities or loans. In order for investors to
make these assessments, the economic resources of an enterprise, the claims to those resources
and the changes in them must be understood. Financial statements and related explanations
should be a primary source for determining this information.
1.5.2. Qualitative characteristics of financial reports
The IASB identified the qualitative characteristics of accounting information that distinguish
better (more useful) information from inferior (less useful) information for decision-making
purposes.

1.5.2.1. Fundamental Quality—Relevance

Relevance is one of the two fundamental qualities that make accounting information useful for
decision-making. To be relevant, accounting information must be capable of making a

8|Page
difference in a decision. Information with no bearing on a decision is irrelevant. Financial
information is capable of making a difference when it has predictive value, confirmatory value,
or both.
Financial information has predictive value if it has value as an input to predictive
processes used by investors to form their own expectations about the future. Relevant
information also helps users confirm or correct prior expectations; it has confirmatory value.
For example, when Nippon issues its year-end financial statements, it confirms or changes past
(or present) expectations based on previous evaluations. It follows that predictive value and
confirmatory value are interrelated.
Materiality is a company-specific aspect of relevance. Information is material if omitting it or
misstating it could influence decisions that users make on the basis of the reported financial
information. An individual company determines whether information is material because
both the nature and/or magnitude of the item(s) to which the information relates must be
considered in the context of an individual company’s financial report.
1.5.2.2. Fundamental Quality—Faithful Representation
Faithful representation is the second fundamental quality that makes accounting information
useful for decision-making. Faithful representation means that the numbers and descriptions
match what really existed or happened. Faithful representation is a necessity because most
users have neither the time nor the expertise to evaluate the factual content of the
information. For example, if Siemens AG’s (DEU) income statement reports sales of
€60,510 million when it had sales of €40,510 million, then the statement fails to faithfully
represent the proper sales amount. To be a faithful representation, information must be
complete, neutral, and free of material error.
Completeness means that all the information that is necessary for faithful representation is
provided. An omission can cause information to be false or misleading and thus not be helpful
to the users of financial reports. For example, when Société Générale (FRA) fails to
provide information needed to assess the value of its subprime loan receivables (toxic assets),
the information is not complete and therefore not a faithful representation of their values.
Neutrality means that a company cannot select information to favor one set of interested
parties over another. Providing neutral or unbiased information must be the overriding
consideration. For example, in the notes to financial statements, tobacco companies such as

9|Page
British American Tobacco (GBR) should not suppress information about the numerous
lawsuits that have been filed because of tobacco-related health concerns—even though such
disclosure is damaging to the company.
Free from Error: an information item that is free from error will be a more accurate (faithful)
representation of a financial item. For example, if UBS (CHE) misstates its loan losses, its
financial statements are misleading and not a faithful representation of its financial results.
However, faithful representation does not imply total freedom from error. This is because most
financial reporting measures involve estimates of various types that incorporate management’s
judgment. For example, management must estimate the amount of uncollectible accounts to
determine bad debt expense. And determination of depreciation expense requires estimation of
useful lives of plant and equipment, as well as the residual value of the assets.
1.5.2.3. Enhancing Qualities
Enhancing qualitative characteristics are complementary to the fundamental qualitative
characteristics. These c h a r a c t e r i s t i c s distinguish more-useful information from
less-useful information.
Comparability: Information that is measured and reported in a similar manner for different
companies is considered comparable. Comparability enables users to identify the real
similarities and differences in economic events between companies. For example, historically
the accounting for pensions in Japan differed from that in the United States. In Japan,
companies generally recorded little or no charge to income for these costs. U.S. companies
recorded pension cost as incurred. As a result, it is difficult to compare and evaluate the
financial results of Toyota (JPN) or Honda (JPN) to General Motors (USA) or Ford (USA).
Investors can only make valid evaluations if comparable information is available.
Verifiability: verifiability occurs when independent measurers, using the same methods,
obtain similar results. Verifiability occurs in the following situations.
1. Two independent auditors count Tata Motors’ (IND) inventory and arrive at the same
physical quantity amount for inventory. Verification of an amount for an asset therefore
can occur by simply counting the inventory (referred to as direct verification).
2. Two independent auditors compute Tata Motors’ inventory value at the end of the year
using the FIFO method of inventory valuation. Verification may occur by checking the
inputs (quantity and costs) and recalculating the outputs (ending inventory value) using

10 | P a g e
 the same accounting convention or methodology (referred to as indirect verification).
Timeliness: Timeliness means having information available to decision-makers before it
loses its capacity to influence decisions. Having relevant information available sooner can
enhance its capacity to influence decisions, and a lack of timeliness can rob information of
its usefulness. For example, if Lenovo Group (CHN) waited to report its interim results until
nine months after the period, the information would be much less useful for decision-making
purposes.
Understandability: Decision-makers vary widely in the types of decisions they make, how
they make decisions, the information they already possess or can obtain from other sources,
and their ability to process the information. For information to be useful there must be a
connection (linkage) between these users and the decisions they make. This link,
understandability, is the quality of information that lets reasonably informed users see its
significance. Understandability is enhanced when information is classified, characterized, and
presented clearly and concisely.
1.5.3. Elements of financial statements
The elements directly related to the measurement of financial position are assets, liabilities, and
equity. These are defined as follows:

ASSET. 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.

LIABILITY. 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.

EQUITY. The residual interest in the assets of the entity after deducting all its liabilities.

The elements of income and expenses are defined as follows:

INCOME. 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. 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.

11 | P a g e
1.5.4 Recognition, measurement, and disclosure concepts
The third level of the Conceptual Framework consists of concepts that implement the basic
objectives of level one. These concepts explain how companies should recognize, measure, and
report financial elements and events. Here, we identify the concepts as basic assumptions,
principles, and a cost constraint. Not everyone uses this classification system, so focus your
attention more on understanding the concepts than on how we classify and organize them.
These concepts serve as guidelines in responding to controversial financial reporting issues.
Basic Assumptions
As indicated earlier, the Conceptual Framework specifically identifies only one assumption—
the going concern assumption. Yet, we believe there are a number of other assumptions that
are present in the reporting environment. As a result, for completeness, we discuss each of
these five basic assumptions in turn: (1) economic entity, (2) going concern, (3) monetary unit,
(4) periodicity, and (5) accrual basis.
Economic Entity Assumption
The economic entity assumption means that economic activity can be identified with a
particular unit of accountability. In other words, a company keeps its activity separate and
distinct from its owners and any other business unit. At the most basic level, the economic
entity assumption dictates that Sappi Limited (ZAF) record the company’s financial activities
separate from those of its owners and managers. Equally important, financial statement
users need to be able to distinguish the activities and elements of different companies, such as
Volvo (SWE), Ford (USA), and Volkswagen AG (DEU). If users could not distinguish the
activities of different companies, how would they know which company financially
outperformed the other?
The entity concept does not apply solely to the segregation of activities among competing
companies, such as Toyota (JPN) and Hyundai (KOR). An individual, department, division,
or an entire industry could be considered a separate entity if we choose to define it in this
manner. Thus, the entity concept does not necessarily refer to a legal entity. A parent and its
subsidiaries are separate legal entities, but merging their activities for accounting and reporting
purposes does not violate the economic entity assumption.
Going Concern Assumption
Most accounting methods rely on the going concern assumption—that the company will have a

12 | P a g e
long life. Despite numerous business failures, most companies have a fairly high
continuance rate. As a rule, we expect companies to last long enough to fulfill their objectives
and commitments.
This assumption has significant implications. The historical cost principle would be of limited
usefulness if we assume eventual liquidation. Under a liquidation approach, for example, a
company would better state asset values at fair value than at acquisition cost. Depreciation and
amortization policies are justifiable and appropriate only if we assume some permanence to
the company. If a company adopts the liquidation approach, the current/non-current
classification of assets and liabilities loses much of its significance.
Labeling anything a long-lived or non-current asset would be difficult to justify. Indeed, listing
liabilities on the basis of priority in liquidation would be more reasonable. The going concern
assumption applies in most business situations. Only where liquidation appears imminent is
the assumption inapplicable. In these cases, a total revaluation of assets and liabilities can
provide information that closely approximates the company’s fair value. You will learn more
about accounting problems related to a company in liquidation in advanced accounting courses.
Monetary Unit Assumption
The monetary unit assumption means that money is the common denominator of economic
activity and provides an appropriate basis for accounting measurement and analysis. That is,
the monetary unit is the most effective means of expressing to interested parties’ changes in
capital and exchanges of goods and services. Application of this assumption depends on the
even more basic assumption that quantitative data are useful in communicating economic
information and in making rational economic decisions.
Furthermore, accounting generally ignores price-level changes (inflation and deflation) and
assumes that the unit of measure – Birr, euros, dollars, or yen—remains reasonably stable. We
therefore use the monetary unit assumption to justify adding 1985 pounds to 2015
pounds without any adjustment. It is expected that the pound or other currency, unadjusted
for inflation or deflation, will continue to be used to measure items recognized in financial
statements. Only if circumstances change dramatically (such as high inflation rates similar to
that in some South American countries) will “inflation accounting” be considered.
Periodicity Assumption
To measure the results of a company’s activity accurately, we would need to wait until

13 | P a g e
it liquidates. Decision-makers, however, cannot wait that long for such information. Users need
to know a company’s performance and economic status on a timely basis so that they can
evaluate and compare companies, and take appropriate actions. Therefore, companies must
report information periodically.

Accrual Basis of Accounting

Companies prepare financial statements using the accrual basis of accounting. Accrual basis
accounting means that transactions that change a company’s financial statements are recorded
in the periods in which the events occur. For example, using the accrual basis means that
companies recognize revenues when it is probable that future economic benefits will flow to
the company and reliable measurement is possible (the revenue recognition principle). This is
in contrast to recognition based on receipt of cash.
Likewise, under the accrual basis, companies recognize expenses when incurred (the expense
recognition principle) rather than when paid. An alternative to the accrual basis is the cash
basis. Under cash-basis accounting, companies record revenue only when cash is received.
They record expenses only when cash is paid. The cash basis of accounting is prohibited under
IFRS. Why? Because it does not record revenue according to the revenue recognition principle
(discussed in the next section). Similarly, it does not record expenses when incurred, which
violates the expense recognition principle (discussed in the next section).
Financial statements prepared on the accrual basis inform users not only of past transactions
involving the payment and receipt of cash but also of obligations to pay cash in the future and
of resources that represent cash to be received in the future. Hence, they provide the type of
information about past transactions and other events that is most useful in making economic
decisions.
Basic Principles of Accounting
We generally use four basic principles of accounting to record and report transactions: (1)
measurement, (2) revenue recognition, (3) expense recognition, and (4) full disclosure. We
look at each in turn.
Measurement Principles
We presently have a “mixed-attribute” system in which one of two measurement principles is
used. The most commonly used measurements are based on historical cost and fair value.

14 | P a g e
Selection of which principle to follow generally reflects a trade-off between relevance
and faithful representation. Here, we discuss each measurement principle.
Historical Cost: IFRS requires that companies account for and report many assets and
liabilities on the basis of acquisition price. This is often referred to as the historical cost
principle. Cost has an important advantage over other valuations: It is generally thought to
be a faithful representation of the amount paid for a given item.
To illustrate this advantage, consider the problems if companies select current selling price
instead. Companies might have difficulty establishing a value for unsold items. Every member
of the accounting department might value the assets differently.
Further, how often would it be necessary to establish sales value? All companies close their
accounts at least annually. But some compute their net income every month. Those
companies would have to place a sales value on every asset each time they wished to
determine income. Critics raise similar objections against current cost (replacement cost,
present value of future cash flows) and any other basis of valuation except historical cost.
What about liabilities? Do companies account for them on a cost basis? Yes, they do.
Companies issue liabilities, such as bonds, notes, and accounts payable, in exchange for assets
(or services), for an agreed-upon price. This price, established by the exchange transaction, is
the “cost” of the liability. A company uses this amount to record the liability in the accounts
and report it in financial statements. Thus, many users prefer historical cost because it provides
them with a verifiable benchmark for measuring historical trends.
Fair Value: Fair value is defined as “the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date.” Fair value is therefore a market-based measure. Recently, IFRS has
increasingly called for use of fair value measurements in the financial statements.
This is often referred to as the fair value principle. Fair value information may be more useful
than historical cost for certain types of assets and liabilities and in certain industries. For
example, companies report many financial instruments, including derivatives, at fair value.
Certain industries, such as brokerage houses and mutual funds, prepare their basic financial
statements on a fair value basis. At initial acquisition, historical cost equals fair value. In
subsequent periods, as market and economic conditions change, historical cost and fair
value often diverge. Thus, fair value measures or estimates often provide more relevant

15 | P a g e
information about the expected future cash flows related to the asset or liability. For example,
when long- lived assets decline in value, a fair value measure determines any impairment loss.
The IASB believes that fair value information is more relevant to users than historical cost.
Fair value measurement, it is argued, provides better insight into the value of a company’s
assets and liabilities (its financial position) and a better basis for assessing future cash flow
prospects. Recently, the Board has taken the additional step of giving companies the option to
use fair value (referred to as the fair value option) as the basis for measurement of financial
assets and financial liabilities.
Revenue Recognition Principle
When a company agrees to perform a service or sell a product to a customer, it has a
performance obligation. When the company satisfies this performance obligation, it recognizes
revenue. The revenue recognition principle therefore requires that companies recognize
revenue in the accounting period in which the performance obligation is satisfied.
Expense Recognition Principle
Expenses are defined as outflows or other “using up” of assets or incurring of liabilities (or a
combination of both) during a period as a result of delivering or producing goods and/or
rendering services. It follows then that recognition of expenses is related to net changes in
assets and earning revenues. In practice, the approach for recognizing expenses is, “Let the
expense follow the revenues.” This approach is the expense recognition principle.
Full Disclosure Principle
In deciding what information to report, companies follow the general practice of providing
information that is of sufficient importance to influence the judgment and decisions of an
informed user. Often referred to as the full disclosure principle, it recognizes that the nature
and amount of information included in financial reports reflects a series of judgmental trade-
offs. These trade-offs strive for (1) sufficient detail to disclose matters that make a difference
to users, yet (2) sufficient condensation to make the information understandable, keeping in
mind costs of preparing and using it.
Users find information about financial position, income, cash flows, and investments in one of
three places: (1) within the main body of financial statements, (2) in the notes to those
statements, or (3) as supplementary information.
1.6. IFRS-based Financial Statements (IAS 1)

16 | P a g e
IAS 1 refers to financial statements as “a structured representation of the financial position and
financial performance of an entity”. They are a principal means through which an entity
communicates its financial information to external parties.
 Purpose of Financial Statements
They provide information about the:
 Financial position,
 Financial performance and
Cash flows of an entity to a wide range of users in making economic decisions. They also
show the results of the management’s stewardship of the resources entrusted to it.
Identification of financial statements: IAS 1 also requires disclosure of:
 Name of the reporting entity
 Whether the accounts cover the single entity or a group of entities
 The date of the end of the reporting period or the period covered by the financial
statements (as appropriate)
 The presentation currency.
 The level o f r o u n d i n g u s e d i n p r e s e n t i n g a m o u n t s i n t h e f i n a n c i a l
s t a t e m e n t s (thousands, millions…)
Complete Set of Financial Statements: IAS 1 defines a complete set of financial statements
to be comprised of the following:
 Statement of financial position as at the end of the period.
 Statement of profit or loss and other comprehensive income for the period.
 Statement of changes in equity for the period.
 Statement of cash flows for the period.
 Notes to the financial statements.
Statement of Financial Position
 The statement of financial position is presented as a primary statement
 In accordance with IAS 1.60, the entity has presented current and non-current assets, and
current and non-current liabilities, as separate classifications in the statement of financial
position. IAS 1 does not require a specific order of the two classifications. The entity has
elected to present non-current assets and liabilities before current assets and liabilities.
 IAS 1 requires entities to present assets and liabilities in order of liquidity when this

17 | P a g e
 presentation is reliable and more relevant.
 Equity presented prior to liabilities
 The statement of financial position is cross-referenced to the notes.

Statement of Profit or Loss

The statement of profit or loss was presented as a primary statement
 IAS 1.10 suggests titles for the primary financial statements, such as ‘statement of profit
or loss and other comprehensive income’ or ‘statement of profit or loss. Entities are,
however, permitted to choose. The entity applies the titles suggested in IAS 1.
 IFRS 15.113(a) requires revenue recognized from contracts with customers to be disclosed
separately from other sources of revenue, unless presented separately in the statement of
comprehensive income or statement of profit or loss. The entity has elected to present the
revenue from contracts with customers (hospital service fees) as a line item in the statement
of profit or loss separate from the other source of revenue.
 IAS 1.99 requires expenses to be analyzed either by their nature or by their function
within the statement of profit or loss, whichever provides information that is reliable and
more relevant. If expenses are analyzed by function, information about the nature of
expenses must be disclosed in the notes. The entity has presented the analysis of expenses
by function.
 The statement of profit or loss is cross-referenced to the notes.
Statement Changes in Equity
 The statement of changes in equity is presented as a primary statement
 The recognition of previously unrecognized land resulted in increased retained earnings and
this was presented separately
 The change in depreciable rate from tax-based rate to asset’s useful life-based rate created
decrease in property, plant, and equipment. The entity has elected to recognize this effect in
retained earnings
 The statement of changes in equity is cross-referenced to the notes.
Statement of Cash flows
 The cash flow statement is presented as a primary statement.
 IAS 7.18 allows entities to report cash flows from operating activities using either the direct

18 | P a g e
 or the indirect method. The entity presents its cash flows using the indirect method.
 The entity has reconciled profit before tax to net cash flows from operating activities.
However, reconciliation from profit after tax is also acceptable under IAS 7 Statement of
Cash Flows. Certain working capital adjustments and other adjustments included in the
statement of cash flows, reflect the change in balances between comparative years.
 The statement of cash flow is cross-referenced to the notes.

19 | P a g e