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When reviewing the financial statements and supporting notes of a reporting entity, is it possible to find out about all the individual types of expenses and income that the entity has incurred or received? If not, how does management determine which expenses and income should be disclosed?
Does the statement of comprehensive income provide a reconciliation of opening and closing retained earnings? If not, where can such a reconciliation be found?
When is it permissible for a reporting entity to treat expenses directly as a reduction to retained earnings, rather than including them as part of the period's profit or loss?
Explain financial services industry codes of practice
Describe key requirements of organisational policy and procedures relevant to financial reporting
Identify and describe key requirements of relevant legislation and regulations relevant to financial reporting.
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When reviewing the financial statements and supporting notes of a reporting entity, is it possible to find out about all the individual types of expenses and income that the entity has incurred or received? If not, how does management determine which expenses and income should be disclosed?
The financial statements of any entity, whether profit making or not, small or big and dealing in any industry are guided and are being prepared in accordance with the International Financial Reporting Standards and the local Generally Accepted Accounting Principles. While reviewing the financial statements, it is very much possible to identify the individual types of incomes and expenses that pertain or accrue to the entity. The notes to account that generally are the detailed version of the headings on the consolidated profit and loss account and the statement of financial position have all the detailed information. For example in the below screenshot, the extract of the annual report one of the major companies in USA, Samsung Electronics has been attached (Jefferson, 2017). This shows the view of the consolidated profit and loss account.
In this there are several notes like 32, 24, 25, 12, 27, 28, etc which will show the detailed information of the incomes and expenses as contained in the profit and loss account. In case note 32 is analysed, we find that that the individual types of incomes are being classified on the basis of the operating segments which are CE, IM, Harman, semiconductors, DP and many others. The company has also shown the revenue that is being earned in various regions or geographies.
Similarly, the expenses are also grouped based on the nature of the expenses like the cost of goods sold, the purchases, the wages and salaries of the employees, the pension, the depreciation and amortization expenses, welfare, commission and service charges, advertising and sales promotion expenditure and others which are very small in amount.
Similarly, there is also a break up given for selling and administrative expenses like transportation, warranty, packaging, etc. IN this way, expenses can be determined and recognised in the financial statements however not all of them are reported. The management of the company first determines the materiality level and the cut off amount beyond which the individual expenses and incomes should be reported in the financial statements. Rest all the other incomes and expenses which are below the given value limit or below materiality are classified under the head “Others”. The materiality limit is generally determined as a percentage of the sales or the profitability and then the management reports all the critical and significant heads of expenses and incomes in the notes to accounts leaving the rest to the accounted under the head others (Dichev, 2017).
2.Does the statement of comprehensive income provide a reconciliation of opening and closing retained earnings? If not, where can such a reconciliation be found?
The statement of comprehensive income or the consolidated profit and loss account does not gives the opening and closing balances of the retained earnings and does not gives any sort of reconciliation. Retained earnings is a part of the equity or the profit that has been earned by the company over the period of time and which has not been distributed but retained in business for further reinvestment. The only change in it year on year is the adjustment of the profit earned or loss incurred during the year. The profit after distribution of dividend is added back and the loss incurred is deducted from the prior year’s balance (Alexander, 2016). Since this is part of the equity or the owner’s capital, the same is shown in the consolidated statement of changes in equity.
From the above statement, it can be found that the entire reconciliation has been given. The opening balance was $ 170710 Mn, the profit for the year was $ 36553Mn, the dividend distributed and the retirement of the treasury stock was $5965 and $ 10496 Mn which makes the closing balance of the retained earnings to be $ 190801 Mn.
3.When is it permissible for a reporting entity to treat expenses directly as a reduction to retained earnings, rather than including them as part of the period's profit or loss?
The accounting standards do give a note and way out to deal with the expenses relating to the prior period if it has been missed out in the previous year of reporting by the reporting entity. As the prior period item cannot be directly adjusted in the profit and loss account of the entity in the current year, AASB 108 gives the way forward. It requires that all the prior period errors can be corrected by directly adjusting the same against the balance of the retained earnings that has been carried forward from the last year and by reinstating the comparative information in the current year reporting (Goldmann, 2016).
This is also a general statement or a guideline in the accounting standard which states that when the entity applies accounting standard for the first time, then any retrospective change should be made through adjustment in the retained earnings and not the profit and loss account simple because of the reason that the adjustments pertain to the last or prior years and it should not have an impact on current year’s profitability or else it would lead to misrepresentation of the facts.
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), 617-632. Retrieved from https://doi.org/10.1080/00014788.2017.1299620
Goldmann, K. (2016). Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4, 103-112. Retrieved from https://doi.org/10.1007/978-3-319-39919-5_9
Jefferson, M. (2017). Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland . Technological Forecasting and Social Change, 353-354.
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