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Understanding General
Financial Statements
Session Outline

• General Features of Financial Statements


• Components of Financial Statements
 Statement of Financial Position
 Statement of Comprehensive Income
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes and Disclosures
 Accounting policies
 Accounting estimates
 Errors
• Subsequent Events
Understanding General Financial Statements 14 November 2016
PwC Slide 2
General Features of Financial Statements

Main objective of FS: Provide information on financial position, performance and


changes in financial position for the users

Materiality
Fair Going Accrual basis
and
presentation concern of accounting
aggregation

Consistency
Comparative Frequency of
of Offsetting
information reporting
presentation

Understanding General Financial Statements 14 November 2016


PwC Slide 3
General Features of Financial Statements
Knowledge Check!

Question Answer
1. Comparative information shall be presented for narrative False
disclosures on a voluntary basis
2. Going concern assessment should cover the entity’s
prospect for at least 12 months from the balance sheet date True
3. Cash flow and profit forecast is one of important document
to support going concern assessments True

4. The accrual basis is used in the cash flow statements False


5. The intercompany balances are presented at net, only
when there is a legal right of offset and the balances are True
intended to be and will be settled on a net basis
6. Foreign exchange gains and losses can be presented at net,
because the gains and losses are arising from a group of
True
similar items
Understanding General Financial Statements 14 November 2016
PwC Slide 4
Components Financial Statements

A complete set of financial statements


• The primary statements
- Statement of financial position (balance sheet) - period end
- Statement of comprehensive income for the period
- Statement of changes in equity for the period
- Statement of cash flows for the period
• All primary statements of equal prominence
• Notes, including summary of accounting policies

Understanding General Financial Statements 14 November 2016


PwC Slide 5
Comparative information

• Comparatives required for all numerical information

• Comparatives required for narrative info when still relevant

• Additional statement of financial position


– When retrospective application of accounting policies,
restatements or reclassifications are made
– As at beginning of earliest comparative period
– Not required IF not impacted and this is disclosed

Understanding General Financial Statements 14 November 2016


PwC Slide 6
Statement of Financial Position

General guidelines :
 Minimum items on the face of the statement of financial position
 Order not prescribed
 May amend descriptions according to the nature of the entity
 Current/non-current classification or liquidity basis
 Post balance sheet refinancing agreements are no longer adjusting
events
 Breaches of loan covenants – Post balance sheet waivers are non-
adjusting events
 Offsetting is prohibited unless it is required or permitted by other
IFASs

Understanding General Financial Statements 14 November 2016


PwC Slide 7
Statement of Financial Position

Minimum Line Items


Assets Liabilities

• Property, plant, and equipment • Trade and other payables


• Investment property • Provisions
• Intangible assets • Financial liabilities
• Financial assets • Current tax liabilities
• Investments accounted for under • Deferred tax liabilities
equity accounting • Liabilities included in the disposal
• Biological assets group
• Inventories
• Trade and other receivables
Equity
• Cash and cash equivalents
• Current tax assets
• Non-controlling interest
• Deferred tax assets
• Issued capital and reserves
• Total of assets classified as held-for-
attributable to owners
sale

Understanding General Financial Statements 14 November 2016


PwC Slide 8
Statement of Financial Position

Current vs Non-current

Current asset Current liability


- Expected to be realised in, or - Expected to be settled in the
intended for sale or entity’s normal operating cycle
consumption in the, entity’s - Held primarily for trading
normal operating cycle purposes
- Held primarily for trading - Due to be settled within 12
purposes months after the balance sheet
date
- Expected to be realised within
12 months after the balance - There is no unconditional right
sheet date to defer settlement of the
liability
- Unrestricted cash or cash
equivalent

Understanding General Financial Statements 14 November 2016


PwC Slide 9
Statement of Financial Position
Knowledge Check!
Current vs Non-current
Determine if the following assets and liabilities are current or non-
current
Current Non-Current

Non-current assets held for sale Bank loans payable on demand


Restricted cash with restriction Intercompany receivable due on
less than 12 months demand
Investment in shares held for Deferred tax assets
trading

Understanding General Financial Statements 14 November 2016


PwC Slide 10
Statement of Financial Position

Breaches of borrowing covenants


• Current/non-current status based on condition at balance sheet date
• Post year end covenant breaches:
- Classification not affected
• Pre- year end covenant breaches on long term loans:
- Current classification generally required, unless
› lender agrees to period of grace
› agreement occurs before balance sheet date
› agreement postpones required repayment until at least 12 months
from balance sheet date

Understanding General Financial Statements 14 November 2016


PwC Slide 11
Statement of Comprehensive Income
General guidelines :
 No required format, limited minimum line items
 An entity has a choice of presenting a single or two statements of
comprehensive income
 Operating profit is no longer required
 No extraordinary items
 Split of profit and loss attributable to non-controlling interest and
parent’s equity holders is now required
 Expenses are classified either by function or by nature
 An entity may present components of other comprehensive income
either:
• net of related tax effects, or
• before related tax effects with one amount shown for the aggregate amount
of income tax relating to those components
Understanding General Financial Statements 14 November 2016
PwC Slide 12
Statement of Comprehensive Income
Minimum line items:
• Revenue • Each component of other
• Finance costs comprehensive income by nature

• Share of profit or loss of • Share of other comprehensive


income of associates and joint
associates and joint ventures ventures
• Tax expense • Total comprehensive income
• Discontinued operations attributable to:
• Profit or loss - Minority interest
• Profit or loss attributable to: - Owners of the parent
- Minority interest
- Owners of the parent

Understanding General Financial Statements 14 November 2016


PwC Slide 13
Statement of Comprehensive Income
Single statement of comprehensive income

Understanding General Financial Statements 14 November 2016


PwC Slide 14
Statement of Comprehensive Income
Two statements of comprehensive income

Understanding General Financial Statements 14 November 2016


PwC Slide 15
Statement of Comprehensive Income
Function and nature
 Choose more relevant presentation analysis method; by:
• Function - usually used by manufacturers, retailers
• Nature - usually used by financial institutions

 If analysis by function is provided, additional note disclosures


analysing the nature of expenses is required

Understanding General Financial Statements 14 November 2016


PwC Slide 16
Statement of Comprehensive Income
Function and nature

Nature – what is the source of Function – what category should


the cost? the cost fit in?

Raw materials and Cost of sales


consumables
Employee benefits costs Other income/expense

Depreciation Distribution costs

Amortization Administrative expenses

Rent and utilities costs Research and Development

Understanding General Financial Statements 14 November 2016


PwC Slide 17
Statement of Comprehensive Income
Knowledge Check!

Function and nature

In what circumstances when mixing presentation of expenses by


function and by nature is possible?

a. The breakdown of expenses by nature is presented in the notes;


b. The proposed presentation on the face is not misleading; and
c. The presentation is applied consistently and the methods are
described in the accounting policies
d. All of the above

Understanding General Financial Statements 14 November 2016


PwC Slide 18
Statement of Changes in Equity
General guidelines :
 Presentation of total comprehensive income for the period
• attributable to owners of the parent
• attributable to non-controlling interest
 Reconciliation between the carrying amount at the beginning and
end of the period for the following:
• profit or loss
• each item of other comprehensive income
• transactions with owners

Understanding General Financial Statements 14 November 2016


PwC Slide 19
Statement of Changes in Equity

Key Disclosures
• Number of shares authorized
• Number of share issued and fully paid, and issued but not fully paid
• Par value per share or that the shares have no par value
• Reconciliation of number of shares outstanding at the beginning
and at the end of the period
• 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 or by its subsidiaries or
associates
• Share reserved for issue under options and contracts for the sale of
shares, including the terms and amounts
• Description and nature of each reserve within equity

Understanding General Financial Statements 14 November 2016


PwC Slide 20
Statement of Cash Flows

Cash equivalents are short term, highly liquid investments that are
readily convertible into cash and are subject to insignificant risk of
changes in value
Cash flows are to be reported and classified as operating
activities, investing activities, and financing activities

Practical Issues:
 Short term is usually three months from the acquisition date
 Equity investments should be excluded
 Restricted cash should be excluded, in general
 There will be instances when cash and cash equivalents in the
Statement of Financial Position and in the Statement of Cash
Flows will not reconcile

Understanding General Financial Statements 14 November 2016


PwC Slide 21
Statement of Cash Flows
Classification of cash flows
• Key principle: Nature of activity
• Operating activities
- Principal revenue-producing activities of the entity
- Other activities that are not investing or financing activities
• Investing activities
-Acquisition and disposal of long-term assets and other investments
not included in cash equivalents
• Financing activities
-Activities that result in changes in the size and composition of
contributed equity and borrowings

Non-cash investing and financing activities should be separately


disclosed and excluded from the statement of cash flows

Understanding General Financial Statements 14 November 2016


PwC Slide 22
Statement of Cash Flows
Methods of presenting operating activities

Understanding General Financial Statements 14 November 2016


PwC Slide 23
Statement of Cash Flows
Knowledge Check!
Classification of cash flow activities
Cash flow Classification

1. Payment of cash to building contractors for Investing


construction of property

2. Lease payments to lessor Financing - split between


capital repayment and
interest charge

3. Cash payments and receipts arising from Investing - except


forward contracts contract qualifies as the
hedge of the purchase of
inventory and the
classification should
follow the position being
hedged, i.e. operating

Understanding General Financial Statements 14 November 2016


PwC Slide 24
Exercise - Statement of Cash Flows
Classification of cash flow activities

Which of the following is a non-cash transaction?


a. Acquisition of assets by means of liability or finance lease
b. Acquisition of an entity by means of an equity issue
c. Conversion of debt to equity
d. All of the above

Understanding General Financial Statements 14 November 2016


PwC Slide 25
Notes and Disclosures
General guidelines:
 Statement of compliance with PSAKs
 Summary of significant accounting policies applied
 Disclosure of judgments in applying accounting policies
 Disclosure of assumptions about sources of estimation
uncertainties at balance sheet date
 Disclose information regarding the objectives, policies and
processes for managing capital
 Supporting information for line items presented in the financial
statements

Understanding General Financial Statements 14 November 2016


PwC Slide 26
PSAK 4 – Consolidated and separate F/S

A parent entity should prepare financial


statements on a consolidated basis when it has
control over a subsidiary

Control is the power to govern the financial and


operating policies of an entity so as to obtain
benefit from its activities

Understanding General Financial Statements 14 November 2016


PwC Slide 27
PSAK 4 – Consolidated and separate F/S

When does a parent entity have a control?

Situation

Parent owns > 50% voting power Standard presumes control


exists in this situation

Parent is able to have more than 50% of the


voting power through an agreement

Parent has the power to govern the financial and


operating policies through statute or agreement

Parent has the power to appoint the majority


of the members of the board of directors or commissioners

Parent has the power to cast the majority of


votes at board of directors or commissioners meetings

Understanding General Financial Statements 14 November 2016


PwC Slide 28
PSAK 4 – Consolidated and separate F/S

Potential voting rights:

This is when an entity owns instruments that, if exercised or converted,


give the entity power over the financial and operating policies of another
entity e.g. share warrants, share call options, debt or equity instruments
etc.

ALL FACTS AND CIRCUMSTANCES SHOULD BE EXAMINED

PSAK 4 (R 2009) requires all potential voting rights that are


CURRENTLY exercisable or CURRENTLY convertible be considered.

Understanding General Financial Statements 14 November 2016


PwC Slide 29
Exercise - Notes and Disclosures

Disclosure of contracts of service with another entity

Entity A have employees for which contract of services are with its
parent entity but the relative wages and salaries are paid by Entity A.

Should Entity A disclose the paid wages and salaries as its


employee benefits expense?

a. Yes
b. No

Understanding General Financial Statements 14 November 2016


PwC Slide 30
Notes and Disclosures
Accounting policies

What is an accounting policy?


Specific principles, bases, conventions, rules and practices

Only permitted when:


Required by IFAS
or
Provides reliable and more relevant information

Understanding General Financial Statements 14 November 2016


PwC Slide 31
Notes and Disclosures
Accounting policies

Changes in Accounting NOT Changes in Accounting


Policies Policies
An entity should change an a) the application of an accounting
accounting policy if the change: policy for transactions, other
events or conditions that differ in
a) is required by a IFAS; or
substance from those previously
b) results in the financial statements occurring; and
providing reliable and more
b) the application of a new
relevant information
accounting policy for transactions,
other events or conditions that did
not occur previously or were
immaterial.

Understanding General Financial Statements 14 November 2016


PwC Slide 32
Notes and Disclosures
Accounting estimates

What is a change in accounting estimate?

Result from new information or new developments and are not


corrections of errors.

Understanding General Financial Statements 14 November 2016


PwC Slide 33
Notes and Disclosures
Errors

What is an accounting error?

Omissions and misstatements arising from a failure to use, or misuse


of, reliable information that:

• Was available when financial statements were issued


• Could be reasonably be expected to have been obtained and taken
into account in the preparation and presentation of the financial
statements
MOST EVERYTHING ELSE!

Understanding General Financial Statements 14 November 2016


PwC Slide 34
Notes and Disclosures
Knowledge Check!

Change in accounting policies, estimates or errors ?

1. Entity A re-evaluated the estimated life of an intangible asset and Accounting


determined that it should be extended from 10 to 15 years estimates

2. Entity B has changed the measurement basis for tangibles assets Accounting
from cost model to revaluation model. policies

3. Management discovered, when calculating the deferred tax for


Accounting
2013, that the deferred tax for 2012 was materially misstated due
errors
to a mathematical error in the calculation.

Understanding General Financial Statements 14 November 2016


PwC Slide 35
Notes and Disclosures
Summary
Change in Change in Change in Error
policy – policy – estimate
new IFAS voluntary

 
Reliable and
more relevant? N/A N/A
Retrospective
application?

Opening balance
It depends
  

sheet at the
It depends It depends It depends
beginning of the
preceding period ?

Detail disclosure of
nature and impact
   
Understanding General Financial Statements 14 November 2016
PwC Slide 36
Subsequent Events
Definition: Events that occur between the end of the reporting
period and the date on which the financial statements are authorized
for issue.

Types of Subsequent Events


1. Adjusting events – provide evidence of conditions that exist at
the end of the reporting period
 Required to be adjusted in the financial statements

2. Non-adjusting events – indicative of conditions that arise after


the end of reporting period
 Required to be disclosed in the financial statements if relevant
and reliable

Understanding General Financial Statements 14 November 2016


PwC Slide 37
Subsequent Events
Examples of adjusting events:
• Settlement after the reporting period of a court case
• Bankruptcy of a customer which occurs after the reporting period
• Sale of inventories after the reporting period may give evidence
about the net realizable value at reporting date
• Determination after the reporting period of the cost of assets
purchased or the proceeds from assets sold before the end of
reporting period
• Determination after the reporting period of the profit sharing or
bonus payment if the entity has the present obligation at the end of
reporting period to make such payment
• Discovery of fraud or errors that show the financial statements
were incorrect

Understanding General Financial Statements 14 November 2016


PwC Slide 38
Subsequent Events
Examples of non-adjusting events:
• Business combination after the reporting period
• Plan to discontinue an operation
• Major purchase and disposal of asset or expropriation of major
asset by government
• Destruction of a major production plant by a fire after the
reporting period
• Major ordinary share transactions and potential ordinary share
transactions after the reporting period
• Entering into significant commitments or contingent liabilities,
like issuing guarantees
• Commencing major litigation arising solely from events that occur
after reporting period
• Changes in tax rate enacted or announced after the reporting
period
Understanding General Financial Statements 14 November 2016
PwC Slide 39
Subsequent Events
Knowledge Check!
The balance sheet date of PT A is 31 December 2013
PT A should consider subsequent events that occur before which of
the following dates?
a. 28 February 2014 – draft financial statements are completed
b. 18 March 2014 – Board authorizes the financial statement for
issue
c. 19 March 2014 – PT A announces its profits
d. 1 April 2014 – financial statements are posted to shareholders
e. 15 May 2014 – annual meeting of shareholders, at which the
financial statements are formally adopted
f. 17 May 2014 – approved financial statements are filed with the
local regulatory body

Understanding General Financial Statements 14 November 2016


PwC Slide 40
Adjusting or non-adjusting?
Knowledge Check!

Dividend declaration
(approved by Board)

Balance sheet Authorisation for


date issue date

Non-
adjusting

Declaration
Disclosure after balance
sheet date
Understanding General Financial Statements 14 November 2016
PwC Slide 41
Subsequent Events
Key Disclosures:
• Date when the financial statements were authorized for issue and
who gave that authorization
• For each non-adjusting event, disclosure of the nature of the event
and estimate of its financial effect (or a statement that such
estimate cannot be made)
• Update on disclosures that relate to adjusting events in light of
new information received

Understanding General Financial Statements 14 November 2016


PwC Slide 42
Financial ratios – liquidity

Ratio Formula
Current assets
Current ratio
Current liabilities
Current assets – Inventories
Quick ratio
Current liabilities
Total equity
Equity ratio
Total assets
Net working capital Current assets – current liabilities
Current assets – current liabilities
Working capital to total assets Total assets

Understanding General Financial Statements 14 November 2016


PwC Slide 43
Financial ratios – leverage

Ratio Formula
Working capital Current assets – Current liabilities
Working capital turnover Net sales
Average working capital
Assets utilization Net sales
Average total assets
Debt-to-equity ratio Total debt
Total equity
Total liabilities to equity Total liabilities
Total equity
Debt to EBITDA Net debt
EBITDA
Interest coverage ratio EBIT
Interest expense

Understanding General Financial Statements 14 November 2016


PwC Slide 44
Financial ratios – operating

Ratio Formula
Receivable turnover Net credit sales
Average trade receivables
Number of days sales Number of days in a year
Receivable turnover
outstanding
Inventory turnover Cost of goods sold
Average inventory
Average age of inventory Number of days in a year
Inventory turnover
Cash cycle Receivables + Inventory
Average cost of goods sold

Understanding General Financial Statements 14 November 2016


PwC Slide 45
Financial ratios – profitability

Ratio Formula
EBITDA Net income minus (interest + taxes
+ depreciation + amortization)
Gross profit margin Gross profit
Net sales
Pre-tax profit margin Income before tax
Net sales
Net return on sales Net income
Net sales
Return on equity Net income
Total equity
Return on assets Net income
Average total assets

Understanding General Financial Statements 14 November 2016


PwC Slide 46
Any questions?

This publication has been prepared for general guidance on matters of interest only, and does
not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained
in this publication, and, to the extent permitted by law, KAP Tanudiredja, Wibisana, Rintis &
Rekan, its members, employees and agents do not accept or assume any liability,
responsibility or duty of care for any consequences of you or anyone else acting, or refraining
to act, in reliance on the information contained in this publication or for any decision based on
it.

© 2016 KAP Tanudiredja, Wibisana, Rintis & Rekan. All rights reserved. In this document,
“PwC” refers to KAP Tanudiredja, Wibisana, Rintis & Rekan which is a member firm of
PricewaterhouseCoopers International Limited, each member firm of which is a separate legal
entity.