2. Purpose of Financial
Statements
• Financial statements are:
“Structured representation of the financial position
and financial performance of an entity.”
• Objective:
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.
3. The Framework
• The International Financial Reporting
Standards (IFRS), in particular guidance
on presentation and disclosure
• Local statutory requirements
– The Companies’ Ordinance, 1984, in particular the
Fourth/ Fifth Schedule for presentation purposes
– Directives of the regulatory bodies
– Industry specific legislation
– Generally accepted accounting principles
4. Amendments of the
Finance Bill 2007-2008
• The AGM must now be held after three months of the end
of the accounting year. (previously 4 months)
• Power of FG to require additional matters in the auditors’
report now vested in Commission
• NBFCs to comply with minimum equity requirements
rather than minimum capital requirement for incorporation
• Penalty for failure to comply with NBFC laws enhanced
from Rs 5 m to Rs 50 m
• Mandatory for listed Co to have independent share
registrar
• Substantial share holder (12.5%) can apply for re election
of directors in the case of a listed company
5. Amendments of the Finance
Bill 2007-2008 (Contd.)
• Power of FG to specify business of banking companies
now vests in the SBP
• Perpetual non cumulative preference shares included in
definition of share capital of Banking Company
• Additional conditions for eligibility to pay dividends by
banking company
• Additional provisions for auditors: all significant matters
to be reported to SBP, SBP may revoke the appointment of
auditors
• New Act ‘Payment System for Electronic Fund Transfer
2007’ introduced
• Contract worker now entitled to benefits under the
Companies Profits (worker Participation) Act 1968, and
amount of profit no longer subject to audit adjustments
6. Responsibility for
Financial Statements
• Final responsibility for fair presentation
of financial statements rests with the
BoD.
• Companies’ Ordinance 1984: directors
to present in the AGM annual accounts
that give a true and fair view of state of
affairs and Profit and loss of the
Company (u/s 233 & 234)
7. The Auditor’s Responsibility
“To express an opinion on financial statements
based on their audit”
• Audit is a statutory requirement for all
companies.
• Auditor to be Chartered Accountant for the
following:
– Public Cos.,
– Private Co that is a subsidiary of a public company, and
– Private Co having paid up share capital of Rs 3m or
more
• Auditors also issue reports on:
– Review of interim f/s (listed Cos.)
– Report on consolidated financial statements
– Report on changes in accounting policies (listed Cos.)
8. The Auditor’s
Responsibility (contd.)
– Review of compliance with Best Practices of
Code of Corporate Governance (Listed Cos.)
– Assets, liabilities, profits and losses, share
capital and its breakup value for prospectus
(Schedule II)
– Certification of financial information in
statutory report (for Co limited by shares etc)
– Significant issues identified during audits
(listed Cos)
– Industry specific reports (basel II, profit rate
verification, credit review reports etc)
9. Components of Financial
Statements
• General purpose financial
statements comprise of:
– Balance Sheet
– Profit and loss account
– Statement of changes in equity
– Cash flow statement
– Notes to the financial statements
10. Components of Financial
Statements (contd.)
Listed Cos .
– Balance sheet
– Profit and loss
– Statement of changes
in equity
– Cash flow
– Notes
• 4th
schedule applies
• This includes private
companies and public
non-listed companies
that are subsidiaries
of listed companies
Non Listed Cos.
– Balance sheet
– Profit and loss
– Notes
• 5th
schedule applies
11. The Annual Report –
other information
TYPE OF REPORT REQUIREMENT OF:
Director’s report Companies’ Ordinance 1984
Statement of Compliance
with Code of corporate
governance
Listing regulations
Company information
including financial progress
reports, management
structure etc
– Other information includes the following:
– The auditor may review the information in relation to the
accounts under audit
12. Review of the Financial
Statements
• Variation in presentation may arise
from difference in:
– Nature of business of the entity
– Type of Company (listed, non-listed public, private)
– Consolidated or unconsolidated accounts
– Management judgement on matters not specified
by statute / standards
13. Review of the Financial
Statements (Contd.)
• Identification of each f/s component
• Name of reporting entity
• Specified if accounts related to group entity
• Balance sheet date/period of account
• Presentation currency
• Level of rounding used in presenting amounts
• Comparatives
• F/s amounts supported by adequate notes
• Each F/s component signed by director and chief
executive.
14. Review of Balance Sheet
Presentation
• Please review the sample balance sheet:
• Our discussion will follow the line items:
ASSETS
• Fixed Assets
• Long term investments
• Long term loans and advances
• Long term deposits and prepayments
• Current assets
– Stores and spares
– Stock in trade
– Trade debts
– Loans and advances
– Trade deposits, prepayments
– Interest accrued
– Other receivables
– Financial assets
– Tax refunds
– Cash and bank balances
15. Balance Sheet (Contd.)
SHARE CAPITAL & RESERVES
● Share capital
● Capital reserves
● Revenue reserves
● Surplus on revaluation of fixed assets
NON CURRENT LIABILITIES
● Long term financing
● Debentures
● Liabilities against assets subject to finance lease
● Long term Murabaha
● Long term Deposits
● Deferred Liabilities
16. Balance Sheet (Contd.)
CURRENT LIABILITIES
• Trade and other payables
• Interest, profit, markup accrued
• Short term borrowings
• Current portion of long term borrowings
• Current portion of long term murabaha
• Provisions for taxation
CONTINGENCIES AND COMMITMENTS
17. Review of Income
Statement Presentation
• Please review the sample profit and loss account
• Line wise discussion follows:
TURNOVER
EXPENSES
• Cost of sales
• Distribution cost
• Administrative expenses
• Other operating expenses
• Finance cost
OTHER OPERATING INCOME
• Income from financial assets
• Income from investments/debts of related parties
• Income from assets other than financial assets
18. Review of Cash Flow
Presentation
• Please review sample cash flow statements
• Cash flows may be prepared under the indirect or direct
method.
• These methods affect the method of arriving at operating
cash flows only
• Discussion will follow the line items of the sample cash
flow:
– from operating activities
– from investing activities
– from financing activities
– cash& equivalents
• Cash flows are prepared in accordance with the
requirements of IAS 7
19. Review of Statement of
Changes in Equity
• Please review sample statements of
changes in equity
• Statement may either show:
– All changes in equity
– Changes other than transactions with equity
holders
20. Variations for Industries
• Variations can be seen in presentation &
disclosures of f/s for different industries,
eg:
– Banking Companies
– Manufacturing companies
– Telecom industry
– Petroleum exploration and production
– Funds
– Insurance companies
– Leasing Companies and other NBFCs
