Presentation of financial statements

1. Presentation of financial statements The auditor’s review Presented by: Tahmeen Ahmad (ACA)

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. 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 Components of Financial Statements (contd.)

11. The Annual Report – other information 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