Accounting IV: Company Accounts and Sri Lanka Accounting Standards
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The Limited Liability Company
A company is a separate legal entity with limited liability for its shareholders. In Sri Lanka, companies are governed by the Companies Act, No. 7 of 2007, and must keep books and records and prepare financial statements (NIE, n.d.-a). Companies may be private or public (listed on the Colombo Stock Exchange).
Capital
- Ordinary shares (residual claim on profits; voting rights) and preference shares (fixed dividend; priority).
- Stated capital is the total consideration received for shares.
- Issue of shares (at par or premium in some systems), rights issues, bonus issues.
- Debentures and long-term loans.
- Reserves: capital reserves and revenue reserves (retained earnings), and revaluation reserves.
Financial Statements
Under the Sri Lanka Accounting Standards, a complete set of financial statements includes (LKAS 1; CA Sri Lanka, n.d.):
- A statement of profit or loss and other comprehensive income;
- A statement of financial position;
- A statement of changes in equity;
- A statement of cash flows; and
- Notes.
Sri Lanka Accounting Standards
Sri Lanka's accounting standards (the SLFRS and LKAS) are issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and are based on International Financial Reporting Standards (IFRS) (CA Sri Lanka, n.d.). The A/L syllabus focuses on the following standards (NIE, n.d.-a; NIE, n.d.-b):
| Standard | Main idea |
|---|---|
| Conceptual Framework | The objective and qualitative characteristics of financial reporting; the elements of financial statements |
| LKAS 2 Inventories | Value at the lower of cost and net realizable value; cost formulas FIFO and weighted average (LIFO is not permitted) |
| LKAS 16 Property, Plant and Equipment | Recognize at cost; measure after recognition by the cost model (cost less accumulated depreciation and impairment) or the revaluation model; depreciate over the useful life |
| SLFRS 15 Revenue from Contracts with Customers | Recognize revenue when (or as) control of goods or services is transferred |
| SLFRS 16 Leases | Lessees recognize a right-of-use asset and a lease liability for most leases |
| LKAS 10 Events after the Reporting Period | Adjusting events (evidence of conditions at the reporting date) change the statements; non-adjusting events are disclosed |
| LKAS 1 Presentation of Financial Statements | Overall requirements for presentation |
| LKAS 7 Statement of Cash Flows | Classify cash flows as operating, investing, and financing |
| LKAS 37 Provisions, Contingent Liabilities and Contingent Assets | Recognize a provision when there is a present obligation, a probable outflow, and a reliable estimate |
Inventory example (FIFO). Purchases: 100 units at 50, then 100 units at 60. Sales: 150 units. FIFO cost of sales = (100 × 50) + (50 × 60) = 8 000; closing inventory = 50 × 60 = 3 000. Under weighted average, the average cost = (5 000 + 6 000) ÷ 200 = 55, so cost of sales = 150 × 55 = 8 250 and closing inventory = 50 × 55 = 2 750.
Statement of Cash Flows
Prepared from the statement of profit or loss and the changes in the statement of financial position. Indirect method for operating activities: start with profit before tax; add back depreciation and finance costs; adjust for changes in inventories, receivables, and payables; subtract tax paid. Then add investing activities (purchase or sale of non-current assets) and financing activities (share issues, loan movements, dividends paid) to find the net change in cash.
Dividends and Taxation
Profit after tax is distributed as dividends or retained. Corporate income tax is levied on taxable profit (rates and rules change, so refer to the Inland Revenue Department).
Common Mistakes
- Using LIFO.
- Not distinguishing adjusting from non-adjusting events.
- Forgetting that revaluation gains go to other comprehensive income and a revaluation reserve.
- Presenting cash flows from the wrong activity category.
CHAPTER 7