General Purpose Financial Statements
General purpose financial statements (GPFSs) are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. GPFSs include those that are presented separately or within another public document such as an annual report or a prospectus. GPFSs comprise the specific financial statements and the accompanying explanatory notes.
In Australia, GPFSs were known as general purpose financial reports (GPFRs) until 2007, when the terminology of the IASB was adopted in AASB accounting standards.
For more on general purpose financial statements, see Accounting Standard AASB 101 Presentation of Financial Statements.
Depreciation
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. In the case of an intangible asset, the term “amortisation” is generally used instead of “depreciation”. The two terms have the same meaning.
For more on depreciation, see AASB 116 Property, Plant and Equipment and AASB 136 Impairment of Assets.
Income tax
The deferred tax accounting method that was in general use for decades up to 2005 was based on permanent and timing differences between accounting profit and taxable income. However, deferred tax accounting now is based on temporary differences, which are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.
Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.
For more on accounting for income taxes, see AASB 112 Income Taxes.
Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. This definition is from AASB 132 Financial Instruments: Presentation.
The terms “financial asset”, “financial liability” and “equity instrument” are further defined in AASB 132. An equity instrument is simply any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. However, the definitions of financial asset and financial liability are long and complicated! These terms are very important, as there are extensive accounting and reporting requirements for financial instruments and their components.
One very important issue, for example, is the classification of financial instruments by the issuer of the instrument as equity, a liability, or even a combination of both. This is often called the “debt/equity classification” issue. Another difficult issue is the availability of hedge accounting for financial instrument risks that are hedged by other instruments, transactions or balances. Major issues such as these have kept standard setters busy for many years!
For more on financial instruments, see:
AASB 7 Financial Instruments: Disclosures
AASB 132 Financial Instruments: Presentation, and
AASB 139 Financial Instruments: Recognition and Measurement.
Cash flow statements
Users of an entity’s financial statements are interested in how the entity generates and uses cash and cash equivalents. This is the case regardless of the nature of the entity’s activities and irrespective of whether cash can be viewed as the product of the entity, as may be the case with a financial institution. Entities need cash for essentially the same reasons however different their principal revenue-producing activities might be. They need cash to conduct their operations, to pay their obligations, and to provide returns to their equity holders.
For more on cash flow statements, see AASB 107 Cash Flow Statements.