By Irene Peter Atolo, FCA, FCIIN
The financial statements of an entity as earlier mentioned comprise of Statement of Financial Position, Statement of profit or loss and other comprehensive income including Statement of cash flow, Statement of Changes in Equities and Notes to the accounts.
These statements are quantitative and aggregated. For instance, the figure of Property, Plant and Equipment (PPE) shown in the statement of financial position is an aggregate of so many non-current assets such as land, motor vehicle, building, machinery, lease property, etc.
The notes to the accounts provide information that makes the figure in PPE comprehensible by showing a schedule of PPE. The schedule of PPE explains individual assets that form the PPE as well as the accounting policy adopted by an entity in depreciating the individual assets that form part of the PPE. The notes to the accounts, therefore, provide a comprehensive explanation to the mere figures in other statements that constitute the financial statements. The notes to the accounts make comparability and understandability possible.
For example, IAS 2, ‘Inventory Valuation’ permits the use of First in First out (FIFO) and Weighted Average in determining the value of closing inventories. If an entity A uses the FIFO method and entity B uses Weighted Average, the profits to be reported by these entities will be different as a result of the different methods used in valuing inventories.
On this basis, someone cannot decide on the performance of the entities except the financial statement are produced on the same accounting policies. These policies are always explained in the notes to the accounts.
Accounting policies on the other are methods, rules, and conventions adopted by an entity in the preparation and presentation of financial statements. The accounting policies as may be shown in the notes to the account also aid comparability of financial statements.
The accounting policies adopted by an entity also show the consistency of the treatment of transactions. Consistency is an enhancing qualitative characteristic of financial information. It is worth noting that entities are not allowed to will fully change their accounting policies. If there will be a need for changing accounting policy already adopted by an entity, the provision of IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ must be strictly followed.
IAS 8 provides among others that an entity can only change its policies if:
1. It is required by statute;
2. It is required by an accounting standard-setting body;
3. The change will result in a more appropriate presentation of events or transactions in the financial statements of the entity.
Finally, the explanatory notes, as well as the accounting policies, give flesh to the bones of other statements that constitute the financial statements.