Chapter 1

• Financial statements are the means by which the information accumulated and process in financial accounting is periodically communicated to the users.
• Financial statements are a structured financial representation of the financial position and financial performance of an entity.
• General purpose financial statements are the statements intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.
• The objective of general purpose financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions.
• Financial statements show the results of the stewardship of management of the resources entrusted to it.
• Fair presentation is achieved if financial statements are prepared in accordance with PFRS.
• An entity whose financial statements comply with PFRS shall make an explicit and unreserved statement of such compliance in the notes.
• Fair presentation is defined as faithful representation of the effects of transactions and other events in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses laid down in the Conceptual Framework.
• Fair presentation requires an entity: 


  a.To select and apply accounting policies in accordance with PFRS.

  b. To present information, including accounting policies, in a manner that provides relevant and faithfully represented financial information.

  c. To provide additional disclosures necessary for the users to understand the entity's financial statements
• An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory information.
• An entity is permitted to depart from a standard:

  a.In extremely rare circumstances.

  b. When management concludes that compliance with the standard would be misleading.

  c. When the departure from the standard is necessary to achieve fair presentation.

  d. When the regulatory Conceptual Framework requires or otherwise does not prohibit such a departure.
• Required disclosure includes:

  • Title of the standard departed from
  • Nature of the departure
  • Treatment that the standard would require
  • Reason why that treatment would be misleading
  • Treatment adopted by the entity
• Going concern or continuity assumption means that the accounting entity is viewed as continuing in operation indefinitely in the absence of evidence to the contrary.
• The going concern postulate is the very foundation of the cost principle.
• Assets are normally recorded at original acquisition cost
• Financial statements shall be prepared on a going concern basis unless management intends to liquidate the entity or cease trading or has no realistic option but to do so.
• If the financial statements are not prepared on a going concern basis, such fact shall be disclosed together with the measurement basis and the reason therefor.
• An entity shall prepare the financial statements, using the accrual basis of accounting except for cash flow information.
• Accrual basis means that assets are recognized when receivable rather than when received and liabilities are recognized when payable rather than when actually paid
• Accrual accounting means that income is recognized when earned regardless of when received and expense is recognized when incurred regardless of when paid.
• The essence of accrual accounting is the recognition of accounts receivable, accounts payable, prepaid expenses, accrued expenses, deferred income, and accrued income.
• An entity shall present separately each material class of similar items.
• An entity shall present separately items of dissimilar nature or function unless they are immaterial.
• Financial statements result from processing large number of transactions or other events that are aggregated into classes according to their nature or function.
• The final stage in the process of aggregation and classification is the presentation of condensed and classified data which form line items in the financial statements.
• Materiality dictates that an entity need not provide a specific disclosure required by standard if the information is not material.
• An item is material if knowledge of it would affect the decision of the primary users of the financial statements.
• an information is material if the omission, misstatement and obscuring of the information could reasonably affect the economc decision of primary users.
• The revised definition of materiality highlights three important aspects:

  1. Could reasonably be expected to influence

  b. Obscuring information

  c. Primary users
• material information shall be limited to the economic decision of primary users rather than to all users which is too broad in scope.
• Obscuring information means the presentation of financial information not readily understood or not clearly expressed.'
• Obscuring information may be characterized by deliberate vagueness, ambiguity and abstruseness.
• The primary users include the existing and potential investors, lenders and other creditors.
• Materiality of an item depends on relative size rather than absolute size.
• The factors of materiality is the relative size and nature of the item
• Assets and liabilities, and income and expenses, when material, shall not be offset against each other, unless it is required or permitted by another PFRS.
• An entity shall present a complete set of financial statements at least annually.
• When an entity changes the end of the reporting period and presents financial statements for a period longer or shorter than one year, the entity shall disclose:

  1. The period covered by the financial statements.
  2. The reason for using a longer or shorter period.
  3. The fact that amounts presented in the financial statements are not entirely comparable.
• Comparative information shall be included for narrative and descriptive information when it is relevant to an understanding of the current period's financial statements.
• A third statement of financial position is required when an entity:

  1. Applies an accounting policy retrospectively.
  2. Makes retrospective restatement of items in the financial statements.
  3. Reclassifies items in the financial statements.