Notes to Financial Statements - Term Paper Example

S TO THE ACCOUNTS Introduction s to financial ments convey the ideas, meaning, and explanation of presentation adopted in the financial statements. “Notes which accompany the balance sheet, the income statement, cash flow statement, and statement of changes in equity are an integral part of financial statements and so fall within the scope of international standards.” (Allan Melville)i Readers are greatly helped in understanding the implications of accounting policies, procedures, and the standards under which the statements are framed. The notes framed hereunder belong to an assumed group company having a number of subsidiaries and associates. An effort has been made to present notes that have practical implications. Notes of a fictitious company are as under: ABC Plc NOTES TO THE FINANCIAL STATEMENTS General Information ABC Plc is a listed with London Stock Exchange and is a group of four subsidiaries and an associate company. The company is domiciled in UK and its registered address is xxxxxxxx. The principal activity of the group is manufacturing and retailing. All amounts listed referred to GBP Sterling unless stated otherwise Note 1 : Significant Accounting Policies 1. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as applicable to UK, and the Interpretations of International Financial Reporting Standards (IFRIC). 2. All asset and liability items with a residual period of less than one year are classified as short term. 3. Accounting Principles and Estimates and changes thereto: Principal financial accounting and valuation methods used to prepare consolidated financial statements are set out in each of the following sections. The accounting methods are generally unchanged as compared to the previous year. Standard accounting and valuation principles that conform to IFRS are the basis of financial statements of the companies included in the consolidated financial statement. 4. The consolidated financial statement includes the financial statements of the Principal and the group companies in which group holds stake (its subsidiaries) until 31st December of each year. Majority stakes of the group deem to exist if the group can determine the financial and managerial policies of a subsidiary in order to obtain economic advantages. 5. In case of discontinued operations the income in the Income Statement has been adjusted by the amount of the debit difference. 6. Merger and Acquisitions: a. In case of acquisition of a company, the capital is consolidated using acquisition method. The assets and liabilities of respective subsidiaries are valued at market value attributable at the time of acquisition. If the acquisition costs exceed the attributable current market value of the acquired identifiable assets and liabilities, the capitalised difference is shown as goodwill; otherwise it is immediately adjusted against income. The Non- Controlling interests are reported as part of the current values of the stated assets and liabilities corresponding to their respective interests. b. Receivables and corresponding liabilities or provisions between the group companies are mutually offset. c. Revenues resulting from inter- company transactions and other intra- group income are set off against the corresponding expenses. Interim profits resulting from intra- group trading are eliminated. d. The earnings as well as assets and liabilities of associated companies are incorporated in this consolidated financial statement using the equity method of accounting. Interests in associated companies are given in SFP as acquisition costs adjusted by changes in the group share of net income following acquisition, and losses due to depreciation. Losses that exceed the group’s share in associated companies are not reported. Note 2: Property Plant and Equipments: Group Land & Building Group Furniture & equipments Group Total Company Total Cost as at 01.01.2011 XXX XXX XXX XXX Accumulated Depreciation and impairment XXX XXX XXX XXX Net Book value at 31.12.2011 XXX XXX XXX XXX 1. Land and Building have been stated at cost less accumulated depreciation and also recognized impairment. Costs include the acquisition cost of assets and any other costs to bringing the asset to its workable condition. These also include the borrowing costs. 2. Furniture and Fixture, vehicles, and other equipments have also been described at cost less accumulated depreciation including any recognized provision for impairment. Cost includes original acquisition price plus the cost to bring the assets to their working condition and intended application. 3. Depreciation method applied is to write down the costs of assets to their residual values. The method followed is straight line over the respective useful life as under: a. Freehold Land is not depreciated. b. Buildings and other leasehold properties are considered for 50 years as their useful life. Buildings that are under construction are not considered for depreciation. c. Other assets’ useful life ranges from 3years to 15 years. 4. Gains and losses on disposal of assets are recognized as operating profits. None of the assets has been considered for revaluation. Inventories 1. Weighted average cost method has been adapted to value inventories. Cost includes all the other expenses beside purchase price that are necessary to bring the inventory to their location for intended operations. 2. Inventories are carried at lowest of the cost and net realisable value. Intangible assets Goodwill shown is in fact the excess of fair value of the consideration of acquisition of subsidiaries over fair value of acquired net identified assets belonging to the group. Goodwill is recognized in the year when the acquisition process of subsidiaries gets completed. Goodwill is tested for impairment every year and carried at cost less accumulated recognised provision for impairment. Lease Obligations Leases are considered finance lease when terms and conditions of such lease transfer substantially all the risks and rewards to the group. All other leases are considered operating leases. Rental payments of operational leases are charged to income statement on a straight line basis over the lease term. Long Term Debts The Group has issued unsecured convertible bonds 2015 paying a coupon of 5% semi annually. The net proceeds have been split into a liability component and an equity component. Earnings per Share Basic earnings per share is calculated by dividing the earning that are attributable to ordinary shareholders by the weighted average number of shares outstanding during the year. 2011 2010 Weighted average numbers of shares in issue Underlying basic earnings Basic Earnings per share Weighted average number of dilutive shares Underlying dilutive earning Dilutive Earning Per share Xxxx Xxxx Xx Xxxx Xxxx Xxxx Xxxx Xx Xxxx Xxxx Employee Pension Obligations Different defined benefit and defined contribution schemes are operated. The defined benefit obligation is based on actuarial calculations. Post Balance Sheet Events A fire destructing a major production plant occurred after reporting date. It is hoped that loss assessor will soon determine the extent of recovery and the insurance companies are waiting for loss assessment before the concluding their obligations. Conclusion Notes to financial statements need to be explanatory helping readers to understand the intricacies of the statements as well the meaning of terminologies used. References to applied GAAP add to value of the notes. Word Count: 1091 References: Read More