The formats
This chapter explains the prescribed formats for presenting the statement of profit or loss and the statement of financial position for both sole proprietorships and limited liability companies under IFRS 18.
Learning objective
By the end of this chapter, you should be able to:
- Explain the format for the statement of financial position and the statement of profit or loss as required by the IFRS standard
Sole proprietorships and limited liability companies often prepare financial statements differently, even though the final results reported (profit and net assets/equity) are usually similar.
Sole proprietorship
Sole proprietors typically present more detail directly on the face of the financial statements rather than in separate disclosure notes. Their presentation format is also not usually bound by strict regulatory frameworks like IFRS, which allows more flexibility and simplicity.
These financial statements are prepared mainly for:
- the owner (to support management decision-making)
- tax authorities (for compliance)
Limited liability companies
Limited liability companies are guided by IFRS 18 Presentation and Disclosure in Financial Statements. IFRS 18 requires summarised information to be presented on the face of the financial statements, with detailed breakdowns and supporting computations provided in the Notes to the Accounts.
The presentation must comply with regulatory requirements so that financial statements are consistent and comparable across entities. Limited liability companies are also often subject to statutory audit and regulatory filing requirements, which makes adherence to prescribed accounting standards and disclosure frameworks essential.
The statement of profit or loss
IFRS 18 requires that, at a minimum, the statement of profit or loss show:
- Revenue - income from ordinary business activities
- Operating expenses - classified by nature, by function, or both
- Share of profit or loss of associates and joint ventures - accounted for using the equity method (applicable for group accounts)
- Tax expense - current and deferred tax charges
- Discontinued operations - a single amount for the total of discontinued operations
- Profit or loss - the net result for the period
In addition, IFRS 18 requires income and expenses to be classified into specific categories, and requires specific subtotals to be presented.
Categories:
- Operating - the residual category; it holds all income and expenses not classified under investing, financing, income taxes, or discontinued operations
- Investing - income and expenses from investments that do not form part of the entity’s main operating business activities
- Financing - income and expenses from financing activities, such as interest on borrowings
- Income taxes - current and deferred tax
- Discontinued operations - the results of operations that have been discontinued
Required subtotals:
- Operating profit or loss
- Profit before financing and income taxes
- Profit for the year, with profit before income taxes presented as a further subtotal before the tax line
In the operating category, the statement must present expenses classified:
- by nature (e.g., depreciation, employee costs, raw materials),
- by function (e.g., cost of sales, distribution costs, administrative expenses), or
- by a mix of the two
The entity uses the classification that provides the most useful structured summary of its expenses.
All items of income and expense must be included in the statement of profit or loss unless an IFRS specifically requires or permits otherwise. The presentation should help users understand the entity’s financial performance for the reporting period.
Statement of profit or loss: sole proprietorship
Name of business
Statement of profit or loss for the year ended …(date)
| $ | $ | |
|---|---|---|
| Revenue | ||
| Sales revenue | xxx | |
| Less: Sales returns | (xxx) | |
| Net sales revenue | xxx | |
| Cost of sales | ||
| Opening inventory | xxx | |
| Add: Purchases | xxx | |
| Less: Purchases returns | (xxx) | |
| Add: Carriage inwards | xxx | |
| Goods available for sale | xxx | |
| Less: Closing inventory | (xxx) | |
| Cost of sales | (xxx) | |
| Gross profit | xxx | |
| Expenses | ||
| Salaries and wages | xxx | |
| Rent and rates | xxx | |
| Depreciation | xxx | |
| Irrecoverable debts | xxx | |
| Total expenses | (xxx) | |
| Net profit | xxx |
Statement of profit or loss: limited liability company
The expenses have been classified by function.
Name of company
Statement of profit or loss and other comprehensive income for the year ended…(date)
| $ | $ | |
|---|---|---|
| Revenue | xxx | |
| Cost of sales | (xxx) | |
| Gross profit | xxx | |
| Operating expenses: | ||
| Administrative expenses | (xxx) | |
| Selling expenses | (xxx) | |
| Other expenses | (xxx) | |
| (xxx) | ||
| Operating profit | xxx | |
| Investing category: | ||
| Investment income | xxx | |
| Profit before financing and income taxes | xxx | |
| Financing category: | ||
| Finance cost | (xxx) | |
| Profit before income taxes | xxx | |
| Income tax | (xxx) | |
| Profit for the year | xxx | |
| Other comprehensive income: | ||
| Revaluation gain on PPE | xxx | |
| Total comprehensive income for the year | xxx |
Income tax expense shown in the statement of profit or loss is the current year’s estimated tax charge, adjusted for any under- or over-provision carried over from the prior year. If last year’s estimate turned out too low, the shortfall (an under-provision) is added to this year’s charge; if it was too high, the excess (an over-provision) is deducted. Only the current year’s estimate is carried forward as income tax payable on the statement of financial position.
Example: Income tax expense with an under-provision
A company estimates its income tax charge for the current year at $18,000. Last year’s tax charge was under-provided by $1,200.
- Income tax expense = $18,000 + $1,200 = $19,200
- Income tax payable (statement of financial position) = $18,000
Answer: Income tax expense of $19,200; income tax payable of $18,000
The statement of financial position
The statement of financial position rests on the accounting equation: assets = liabilities + equity. It also reflects the business entity concept, which treats the business as separate from its owner - this is why an owner’s drawings reduce capital rather than being treated as an expense. Profit for the year increases capital (for a sole proprietorship) or retained earnings (for a limited company), while a revaluation gain recognised in other comprehensive income increases the revaluation surplus.
IFRS 18 requires that, at a minimum, the statement of financial position show the following line items.
Assets:
- Property, plant and equipment
- Intangible assets
- Financial assets (excluding amounts shown under other headings)
- Investments accounted for using the equity method
- Inventories
- Trade and other receivables
- Current tax assets
- Cash and cash equivalents
Liabilities:
- Trade and other payables
- Provisions
- Financial liabilities (excluding amounts shown under other headings)
- Current tax liabilities
Equity:
- Issued capital and reserves attributable to owners of the parent
- Non-controlling interests (for consolidated statements)
The statement of financial position must classify assets and liabilities as either current or non-current, unless a liquidity-based presentation provides a more useful structured summary. The presentation should provide information that is useful in assessing the entity’s financial position, liquidity, and solvency at the reporting date.
Statement of financial position: sole proprietorship
Name of business
Statement of financial position as at (date)
| Cost | Accumulated depreciation | Carrying amount | |
|---|---|---|---|
| Non-current asset | $ | $ | $ |
| Land | xxx | - | xxx |
| Plant and machinery | xxx | xxx | xxx |
| Current asset: | |||
| Inventory | xxx | ||
| Trade receivables | xxx | ||
| Cash and bank | xxx | ||
| Total assets | xxx | ||
| Financed by: | |||
| Capital | xxx | ||
| Net profit | xxx | ||
| Drawings | (xxx) | ||
| Total equity | xxx | ||
| Non-current liabilities: | |||
| Loan | xxx | ||
| Current liabilities: | |||
| Trade payables | xxx | ||
| Total equity and liabilities | xxx |
Statement of financial position: limited liability company
Name of company
Statement of financial position as at (date)
| Note | $ | |
|---|---|---|
| Non-current asset | ||
| Property, plant and equipment | 1 | xxx |
| Intangible asset | 2 | xxx |
| Current asset: | ||
| Inventory | xxx | |
| Trade receivables | 3 | xxx |
| Cash and bank | xxx | |
| Total assets | xxx | |
| Equity: | ||
| Share capital | xxx | |
| Retained earnings | 4 | xxx |
| Revaluation reserve (surplus) | xxx | |
| Share premium | xxx | |
| Total equity | xxx | |
| Non-current liabilities: | ||
| Debenture | xxx | |
| Redeemable preference shares | xxx | |
| Current liabilities: | ||
| Trade payables | xxx | |
| Income tax payable | xxx | |
| Total current liabilities | xxx | |
| Total equity and liabilities | xxx |