Ind AS 1 Practical Problems: Preparing Financial Statements

Understand Practical Problems on Preparing Financial Statements under Ind AS 1

Key rules to remember

Total income

Total income = Revenue from operations + Other income

Interest and dividend received, and gains not part of main activity, go under Other income.

Change in inventories

Changes in inventories = Opening inventory − Closing inventory

A positive figure is an expense. If closing is higher, the figure is negative and reduces total expenses.

Profit before tax

PBT = Total income − Total expenses − Exceptional items (if loss)

Show profit before exceptional items and tax first, then the exceptional item, then PBT.

Profit for the period

Profit for the period = PBT − (Current tax + Deferred tax)

Tax expense is split into current tax and deferred tax on the face of the statement.

Total comprehensive income

Total comprehensive income = Profit for the period + Other comprehensive income

OCI items are shown net of tax or with the tax shown separately, split into items that will not and will be reclassified to profit or loss.

Closing retained earnings

Closing retained earnings = Opening balance + Profit for the period − Dividends paid and transfers

Shown under Other Equity in the balance sheet.

Balance sheet identity

Total assets = Equity + Non-current liabilities + Current liabilities

Use this as your final check.

Current classification test

Current if realised or settled within the operating cycle or within 12 months of the reporting date, or held for trading

Current maturities of long-term borrowings are shown under other current financial liabilities.

How to solve Practical Problems on Preparing Financial Statements under Ind AS 1 questions

1. 1Read the adjustments first. Note closing inventory, depreciation, outstanding and prepaid items, tax, provisions and loan instalments due within a year.
2. 2Mark each trial balance item as Dr or Cr and as P&L item or balance sheet item. Make sure each adjustment is applied to both sides.
3. 3Prepare the statement of profit and loss in Schedule III order. Show employee benefits, finance costs, depreciation and other expenses as separate lines, and show changes in inventories separately.
4. 4Compute profit before exceptional items and tax, then PBT, tax and profit for the period. Add OCI if given, to reach total comprehensive income.
5. 5Add profit for the period to opening retained earnings to get closing Other Equity. Deduct any dividend actually paid in the year.
6. 6Classify every asset and liability as current or non-current. Move current maturities of long-term loans to current. Show outstanding expenses and tax payable under current liabilities.
7. 7Total the balance sheet and check that assets equal equity plus liabilities. If not, re-check adjustments and classification.
8. 8Add working notes for grouped items such as property, plant and equipment, and cash balances. Examiners give step marks for these.

Quickest way: Adjust, compute, classify, tally

Common mistakes in Practical Problems on Preparing Financial Statements under Ind AS 1

• Showing proposed dividend as a liability

  Older Indian practice showed a provision for proposed dividend.

  Fix: Under Ind AS 10 a dividend declared after the reporting period is not a liability at that date. Disclose it in notes. Show only dividends actually paid in the year.

• Leaving the whole long-term loan under non-current liabilities

  Students copy the trial balance heading and ignore repayment terms.

  Fix: Split the loan. The part due within twelve months goes to other current financial liabilities and the rest stays under non-current borrowings.

• Getting the sign wrong on changes in inventories

  Students add closing inventory instead of deducting it.

  Fix: Use opening minus closing. If closing inventory is higher, the figure is negative and reduces total expenses.

• Showing extraordinary items or leaving out exceptional items

  Students carry over old format habits.

  Fix: Ind AS 1 prohibits extraordinary items. Show material unusual items separately as exceptional items, between profit before exceptional items and tax and PBT.

• Showing the profit and loss balance as a separate balance sheet line

  Students use the old Schedule VI style.

  Fix: Under Division II, retained earnings is a part of Other Equity. Put opening balance plus profit for the year there.

• Ignoring OCI or mixing it into profit

  Remeasurement gains and losses look like income or expense.

  Fix: Show OCI items below profit for the period, split into items that will not be reclassified and items that will, then total comprehensive income.

Worked examples