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1. TABLE OF CONTENTS
EXECUTIVE SUMMARY....................................................................................2
1.INTRODUCTION ..........................................................................................3
2.REGULATORY FRAMEWORK FOR PREPARATION OF FINANCIAL
STATEMENTS IN PAKISTAN............................................................................4
Tier 1: Publicly Accountable Entities..............................................................4
Tier 2: Medium Sized Entities (MSEs).............................................................5
Tier 3: Small Sized Entities (SSEs)................................................................5
Three-Tiered Structure Standards Application ................................................5
3.MANAGEMENT RESPONSIBILITY IN PREPARING FINANCIAL STATEMENT IN
PAKISTAN.......................................................................................................6
4.ACCOUNTING PRINCIPLES ENFORCED IN PAKISTAN...................................9
4.1.Elements.................................................................................................9
4.2.Measurement...........................................................................................9
4.3.Basic Overall Considerations.....................................................................10
4.3.1.Fair Presentation and Compliance with IFRS.........................................10
4.3.2.Going Concern..................................................................................10
4.3.3.Accrual Basis of Accounting................................................................10
4.3.4.Consistency of Presentation................................................................10
4.3.5.Materiality and Aggregation................................................................11
4.3.6.Off setting........................................................................................11
4.3.7.Comparative Information...................................................................11
5.CONTENTS OF FINANCIAL STATEMENTS PREPARED IN PAKISTAN............12
5.1.Components of Financial Statements:........................................................12
5.2.Balance Sheet........................................................................................13
5.3.Profit And Loss Account or Income Statement............................................13
5.4.Cash Flow Statement..............................................................................14
5.5.Accounting Policies..................................................................................15
6.ACTIVITIES FOR PREPARING FINANCIAL STATEMENTS.............................17
6.1.Journalizing and Ledger Posting in Pakistan:..............................................17
6.1.1. Manual System................................................................................17
6.1.2. Semi Automated System...................................................................17
6.1.3. Fully Automated System...................................................................17
6.2.Accounts Closing:...................................................................................18
6.3.Preparation of Balance Sheet, Income Statement and Cash Flow Statement:..19
7. CONCLUSION............................................................................................20
BIBLIOGRAPHY.............................................................................................21

2. EXECUTIVE SUMMARY
This report presents the details related to preparation of financial statements in
Pakistan. The Institute of Chartered Accountants of Pakistan (ICAP) is the accounting
standards-setting body in Pakistan. It works closely with State Bank of Pakistan and
Securities and Exchange Commission of Pakistan (SECP), which is the regulator of
corporate sector. Three tier structure is being enforced for preparation of financial
statements in Pakistan. Section 234 of the Companies Ordinance 1984 laid down the
basic requirements for preparation and submission of financial statements. In recent
years, Pakistan has made significant progress in adopting and implementing
International Financial Reporting Standards (IFRS) for listed companies through joint
efforts and close cooperation of the accounting profession and regulatory bodies. This
report covers the regulatory framework, management responsibility, accounting
principles, content requirements and activities for preparation of financial statements
in Pakistan.

3. 1. INTRODUCTION
Financial statements are a structured representation of the financial position and
financial performance of an entity. The objective is to provide information about
the financial position, financial performance and cash flows of an entity that is
useful to a wide range of users in making economic decisions. Financial
statements also show the results of management’s stewardship of the resources
entrusted to it. This information, along with other information in the notes, assists
users of financial statements in predicting the entity’s future cash flows and,
in particular, their timing and certainty.
Islamic Republic of Pakistan has been recognized as a significant contributor to the
World economy due to it’s relatively large population and considerable business
opportunities. This requires that the corporate sector in Pakistan comply with
internationally acceptable standards on financial system. Pakistan has a statutory
framework to regulate business activities, including regulatory institutions for
enforcing accounting and auditing standards which ensure high-quality corporate
financial statements. Appropriate enforcement mechanisms have been put in place
which help in preparation of financial statements according to the international
requirements thus provide an aid in creating a uniform basis for comparing financial
performance among domestic and international competitors.
Following text describes the details related to preparation of financial statements in
Pakistan.

4. 2. REGULATORY FRAMEWORK FOR PREPARATION OF
FINANCIAL STATEMENTS IN PAKISTAN
The Companies Ordinance, 1984 sets primary
requirements for financial reporting of all companies
incorporated in Pakistan. The Companies Ordinance
requires the preparation, presentation and publication of
financial statements, including disclosures and auditing of
all companies incorporated in Pakistan. In addition to the
various provisions pertaining to financial reporting, the
Fourth Schedule of the Ordinance lays down the form,
content and certain disclosure requirements for preparing
financial statements for listed companies, while the Fifth
Schedule outlines the same for non-listed companies.
The Securities and Exchange Commission of Pakistan (SECP) is empowered
under Section 234 of the Companies Ordinance to prescribe the appropriate
international accounting standards. SECP notifies the accounting
standards based on the recommendation of Institute of
Chartered Accountants of Pakistan (ICAP). These are
mainly formulated in line with the principles underlined in
International Financial Reporting Standards (IFRS).
To provide a comprehensive framework of accounting and financial reporting that
covers all entities of varying sizes and addresses the degree of public interest involved
in such entities, three tiers segregate the requirements for preparation of financial
statements:
Tier 1: Publicly Accountable Entities
– listed companies.
– it has filed, or is in the process of filing, its financial statements with the Securities
and Exchange Commission of Pakistan.
– it holds assets in a fiduciary capacity for a broad group of outsiders, such as a
bank, insurance company, securities broker, pension fund, mutual fund or
investment banking entit.
– it is a public utility or similar entity that provides an essential public service.
– it is economically significant on the basis of criteria such as total assets, total
income, number of employees, degree of market dominance, and nature and
extent of external borrowings.

5. – The criteria for economically significant would be as follows:
• Turnover in excess of Rs. 1 billion, excluding other income
• Number of employees in excess of 750
• Total borrowings (excluding normal trade credit and accrued liabilities) in
excess of Rs, 500 million
Tier 2: Medium Sized Entities (MSEs)
– not a listed company or a subsidiary of a listed company.
– not filed, or is not in the process of filing, its financial statements with the
Securities and Exchange Commission of Pakistan (SECP).
– does not hold assets in a fiduciary capacity for a broad group of outsiders, such as
a bank, insurance company, securities broker/dealer, pension fund, mutual fund
or investment banking entity.
– not a public utility or similar entity that provides an essential public service;
– not economically significant on the basis of criteria as defined above.
– not a Small-Sized Entity (SSE) as defined below.
Tier 3: Small Sized Entities (SSEs)
– has paid up capital plus undistributed reserves (total equity after taking into
account any dividend proposed for the year) not exceeding Rs. 25 million.
– has annual turnover not exceeding Rs. 200 million, excluding other income.
– In order to qualify as a Small-Sized Entity, both of the above-mentioned
conditions must be satisfied.
Three-Tiered Structure Standards Application
Tier 1 The complete set of IFRS that is approved by ICAP
Publicly Accountable Entities and notified by SECP shall be applicable to these
entities.
Tier 2 The Accounting and Financial Reporting Framework
Medium-Sized Entities and Standard for Medium-sized Entities issued by
the ICAP are applicable to these entities.
Tier 3 The Accounting and Financial Reporting Framework
Small-Sized Entities and Standard for Small-Sized Entities issued by the
ICAP are applicable to these entities.

6. 3. MANAGEMENT RESPONSIBILITY IN PREPARING
FINANCIAL STATEMENT IN PAKISTAN
According to the regulatory guidelines from Govt. of Pakistan through above
mentioned institutions, every company must prepare annual accounts that report on
the performance and activities of the company during the year. The period reported
on in the accounts is called the financial year. This starts on the day after the
previous financial year ended or, in the case of a new company, on the day of
incorporation. A more precise term for a financial year is an accounting reference
period (ARD). For a new company, the ARD is set using its date of incorporation.
Every company is required to send a set of annual accounts to the registered address
of every member of the company at least twenty one days before the annual general
meeting. A listed company is also required to send five copies each of such balance-
sheet and profit and loss account and other documents (auditors' report, directors'
report etc) to SECP, the stock exchange and the registrar at least twenty-one days
before the date of annual general meeting. After the balance-sheet and profit and loss
account or the income and expenditure account, have been laid before the company
at the annual general meeting, every listed company is required to file with the
Registrar at least three copies duly signed by the chief executive, directors, chairman
of directors or the auditors of the company, as the case may be along with the reports
and other documents whereas in case of a public company, which is not a listed
company at least two copies, within thirty days from the date of such meeting.
Qualitative characteristics are the attributes that make the information provided in
financial statements useful to users. The principal characteristics which are required
to be adhered by the companies preparing financial statements in Pakistan are
mentioned below:
(a) Understandability: It is essential that information provided in financial
statements be readily understandable by users.
(b) Relevance: To be useful, information must be relevant to the decision making
needs of users.
(c) Materiality: The relevance of information is affected by its nature and
materiality, information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements. Materiality

7. depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement.
(d) Reliability: Information is reliable when it is free from material error and bias
and can be depended on by users to represent faithfully that which it is said to
represent. In assessing reliability, substance over form, prudence, neutrality and
completeness are also considered.
(e) Faithful Representation: To be reliable, information must represent faithfully
the transactions and other events it either purports to represent.
(f) Substance Over Form: Information is to represent faithfully the transactions and
other events that it purports to represent, it is necessary that they are accounted for
and presented in accordance with their substance and economic reality and not
merely their legal form.
(g) Neutrality: To be reliable, the information contained in financial statements must
be neutral, that is, free from bias.
(h) Prudence: Prudence is the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under conditions of uncertainty,
such that assets or income are not overstated and liabilities or expenses are not
understated.
(i) Completeness: To be reliable, the information in financial statements must be
complete within the bounds of materiality and cost. An omission can cause
information to be false or misleading and thus unreliable and deficient in terms of its
relevance.
(j) Comparability: Users must be able to compare the financial statements of an
entity over time in order to identify trends in the entity's financial position and
performance. Users must also be able to compare the financial statements of different
entities in order to evaluate their relative financial position, performance and changes
in financial position.
(k) Timeliness: If there is undue delay in the reporting of information it may lose its
relevance. Management may need to balance the relative merits of timely reporting
and the provision of reliable information. To provide information on a timely basis it
may often be necessary to report before all aspects of a transaction or other event

8. are known, thus impairing reliability. Conversely, if reporting is delayed until all
aspects are known, the information may be highly reliable but of little use to users
who have had to make decisions in the interim. In achieving a balance between
relevance and reliability, the overriding consideration is how best to satisfy the
economic decision–making needs of users.
(l) Balance between Benefit and Cost: The benefits derived from information
should exceed the cost of providing it. The evaluation of benefits and costs is,
however, substantially a judgmental process. The preparers and users of financial
statements should be aware of this constraint. In achieving a balance between
relevance and reliability, the overriding consideration is how best to satisfy the
economic decision-making needs of users.

9. 4. ACCOUNTING PRINCIPLES ENFORCED IN PAKISTAN
4.1. Elements
The elements directly related to the financial statements which are proposed by
concerned Pakistani regulatory bodies are defined as follows:-
(a) An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.
(b) A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
(c) Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
(d) Income is increase in economic benefits during the accounting period in the form
of inflows or enhancements of assets as well as decreases of liabilities that result in
increase in equity, other than those relating to contributions from equity participants.
(e) Expenses are decrease in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrence of liabilities that results in
decrease in equity, other than those relating to distributions to equity participants.
(f) Profit is frequently used as a measure of performance or as the basis for other
measures, such as return on investment or earnings per share. The elements directly
related to the measurement of profit are income and expenses.
4.2. Measurement
The measurement basis which should be adopted by entities in preparing their
financial statements is historical cost. This is usually combined with other
measurement bases. For example, inventories are usually carried at the lower of cost
and net realizable value, marketable securities may be carried at market value and
pension liabilities are carried at their present value.

10. 4.3. Basic Overall Considerations
Overall considerations for preparing and presenting financial statements in
Pakistan are:
− Fair Presentation and Compliance with IFRS.
− Going Concern
− Accrual Basis of Accounting
− Consistency of Presentation
− Materiality and Aggregation
− Off setting
− Comparative Information
They are discussed below:
4.3.1.Fair Presentation and Compliance with IFRS.
Financial statements shall present fairly the financial position, financial
performance and cash flows of an entity. Fair presentation requires the faithful
representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income
and expenses set out in the Framework. The application of IFRSs, with additional
disclosure when necessary, is presumed to result in financial statements that achieve
a fair presentation.
4.3.2.Going Concern
Financial statements shall be prepared on a going concern basis unless
management either intends to liquidate the entity or to cease trading, or has no
realistic alternative but to do so. When management is aware, in making its
assessment, of material uncertainties related to events or conditions that may cast
significant doubt upon the entity’s ability to continue as a going concern, those
uncertainties shall be disclosed. When financial statements are not prepared on a
going concern basis, that fact shall be disclosed, together with the basis on which the
financial statements are prepared and the reason why the entity is not regarded as a
going concern.
4.3.3.Accrual Basis of Accounting
An entity shall prepare its financial statements, except for cash flow
information, using the accrual basis of accounting.
4.3.4.Consistency of Presentation
The presentation and classification of items in the financial statements shall be
retained from one period to the next unless it is apparent, following a significant

11. change in the nature of the entity’s operations or a review of its financial statements,
that another presentation or classification would be more appropriate having regard to
the criteria for the selection and application of accounting policies or a Standard or an
Interpretation requires a change in presentation.
4.3.5.Materiality and Aggregation
Each material class of similar items shall be presented separately in the
financial statements. Items of a dissimilar nature or function shall be presented
separately unless they are immaterial.
4.3.6.Off setting
Assets and liabilities, and income and expenses, shall not be offset unless
required or permitted by a Standard or an Interpretation.
4.3.7.Comparative Information
Except when a Standard or an Interpretation permits or requires otherwise,
comparative information shall be disclosed in respect of the previous period for all
amounts reported in the financial statements. Comparative information shall be
included for narrative and descriptive information when it is relevant to an
understanding of the current period’s financial statements.

12. 5. CONTENTS OF FINANCIAL STATEMENTS PREPARED
IN PAKISTAN
5.1. Components of Financial Statements:
According to the ICAP standards available in Pakistan for preparation of financial
statements, a typical financial statement comprises of:
− A balance sheet.
− An income statement.
− A statement of changes in equity showing either
o all changes in equity, or
o changes in equity other than those arising from transactions with
equity holders acting in their capacity as equity holders;
− A cash flow statement.
− Notes, comprising a summary of significant accounting policies and other
explanatory notes.
Figure 1: An Extract of Section 234 of Companies Ordinance 1984

13. 5.2. Balance Sheet
According to the ICAP standards available in Pakistan for preparation of financial
statements, as a minimum, the balance sheet should include but are not restricted to
following line items which present the following amounts:
a. property, plant and equipment
b. investment property;
c. intangible assets;
d. financial assets;
e. investments accounted for using the equity method;
f. biological assets (agriculture);
g. inventories;
h. trade and other receivables;
i. cash and cash equivalents;
j. trade and other payables;
k. provisions;
l. financial liabilities;
m. liabilities and assets for current tax;
n. deferred tax liabilities and deferred tax assets;
o. minority interest, presented within equity; and
p. issued capital and reserves attributable to equity holders of the parent.
5.3. Profit And Loss Account or Income Statement
The company, as a minimum, the income statement should disclose the following
line items:
a. revenue;
b. finance costs;
c. share of the profit or loss of associates and joint ventures accounted for using the
equity method;
d. tax expense;
e. a single amount comprising the total of the post-tax profit or loss of discontinued
operations and the post-tax gain or loss recognized on the measurement to fair
value less costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operations;
f. profit or loss after tax.

14. g. the company should present additional line items, headings and sub-totals in
income statement when such presentation is relevant to an understanding of the
Company's financial performance
h. the company should present the analysis of expenses in income statement.
i. Expenses, classified according to their function under the following sub-heads,
along with additional information on their nature, namely:
(i) Cost of sales;
(ii) distribution cost;
(iii) administrative expenses;
(iv) other operating expenses; and
(v) finance cost
j. Other operating income, namely:
(i) Income from financial assets;
(ii) income from investments in and debts, loans, advances and receivables to
each related party;
(iii) income from assets other than financial assets.
k. Finance cost separately show the amount of interest on borrowings from related
parties, if any.
l. Other information relating to the following, namely:-
(i) debts written off as irrevocable distinguishing between trade debts, loans,
advances and other receivables; and
(ii) provisions for doubtful or bad debts distinguishing between trade
debts, loans advances and other receivables.
m. The aggregate amount of auditors' remuneration, showing separately fees,
expenses and other remuneration for services rendered as auditors and for
services rendered in any other capacity and stating the nature of such other
services. In the case of joint auditors, the aforesaid information shall be shown
separately for each of the joint auditors.
5.4. Cash Flow Statement
The Companies are required to report cash flows from operating activities using
either the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed or the indirect method, whereby net profit or loss is adjusted
for the effects of transactions of non-cash nature, any deferrals or accruals of past or
future operating cash receipts or payments, and items of income or expense
associated with investing or financing cash flows.

15. The Company should report cash flows from the following operating, investing or
financing activities on a net basis.
The cash flows arising from transactions in a foreign currency recorded in Company’s
functional currency by applying to the foreign currency amount the exchange rate
between the functional currency and the foreign currency at the date of the cash flow.
The cash flows from interest and dividends received and paid should be disclosed
separately and classified in a consistent manner from period to period as either
operating, investing or financing activities?
The cash flows arising from taxes on income should separately disclosed and classified
as cash flows from operating activities unless they can be specifically identified with
financing and investing activities.
5.5. Accounting Policies
In Pakistan the accounting policies that a Company might consider presenting
include, but are not restricted to, the following:
a) revenue recognition;
b) consolidation principles, including subsidiaries and associates;
c) business combinations;
d) joint ventures;
e) property, plant & equipment
f) intangibles
g) capitalization of borrowing costs and other expenditure;
h) construction contracts;
i) investment properties;
j) financial instruments and investments;
k) leases;
l) research and development costs;
m) inventories;
n) taxes, including deferred taxes;
o) provisions;
p) employee benefit costs;
q) foreign currency translation and hedging;

16. r) definition of business and geographical segments and the basis for allocation of
costs between segments;
s) definition of cash and cash equivalents;
t) inflation accounting;
u) government grants;
v) method used for investment in associates;
w) valuation of inventories;
x) long-term contracts for construction;
y) borrowing costs;
z) segment reporting.

17. 6. ACTIVITIES FOR PREPARING FINANCIAL
STATEMENTS
The primary activities for preparing financial statements in Pakistan are discussed
below:
6.1. Journalizing and Ledger Posting in Pakistan:
There are three methods of capturing economic events being used by companies
in Pakistan:
6.1.1. Manual System
In which all entries are made manually in a General Journal in a specified format
(usually T-account) and then these entries are posted in the appropriate General
Ledger (G/L) account by manually adding to the total of the previous balance. In this
conventional system the trial balance is prepared at specified period usually after one
month. At these regular intervals the corresponding adjusting entries are made and
an adjusted trial balance is prepared. All these activities are performed manually
using the paper based calculations. This system is being used by small companies
who cannot afford to have automated accounting software. However this system is
vanishing fast due to affordable automation equipment and reliable software at very
low cost of ownership.
6.1.2. Semi Automated System
In which the journal entries are made through an automated system such as a
computer and these journal entries are separately posted into computer software for
updating the G/L accounts. Most of the medium sized companies in Pakistan have
adopted these semi-automated systems. They provide a balance in cost and benefits
realized in using these systems.
6.1.3. Fully Automated System
In which the journal entries are made through an automated system such as a
computer and these journal entries are automatically posted in the appropriate G/L
accounts instantly. These systems provide end to end automation of financial
reporting upto generation of all financial statements by a single click. Example of such
systems includes SAP and other Enterprise Resource Planning (ERP) software. Such
systems are very expensive to own and implement thus can be employed by only
large entities.

18. 6.2. Accounts Closing:
After all journal entries are made to the General Ledger (G/L) accounts and Trial
Balance prepared the closing process starts which lead to preparation of all
components of financial statement. Typical steps in closing process are mentioned
below:
− Obtain bank statements for all accounts.
− Perform reconciliation between bank statement and G/L for all cash accounts.
− Review outstanding checklist for any long outstanding checks.
− Evaluate all investments for proper accounting and current accounting rules in
regard to accounting for equity investments.
− Obtain detail of Account Receivable (A/R) balances.
− Reconcile ending A/R balance to G/L.
− Prepare account analysis showing bad debt allowance.
− Tie Bad Debt Expense to Income Statement.
− Tie write-offs to actual write-offs recorded during the period.
− Tie ending balance to G/L.
− Ensure amounts are properly classified as Prepaid Assets.
− Review all asset items for proper classification of short-term vs. long-term.
− Review new Fixed Asset purchases during period.
− Ensure all items added to Fixed Assets are properly capitalized.
− Ensure journal entries were recorded correctly to remove asset which were
disposed and accumulated depreciation.
− Determine gain or loss recognized on disposals.
− Ensure that assets under Capital Lease are being amortized appropriately.
− Prepare footnote disclosure to show accumulated depreciation balances as of
period-end as well as current period depreciation expense.
− Perform Accounts Payable (A/P) cutoff. Reconcile A/P sub-ledger to G/L.
− Contact vendors for outstanding/unbilled amounts as of period-end—External
Auditors, Legal, Consultants, Recruiting firms, etc.
− Prepare reconciliation of Accrued Expenses accounts.
− Review all liability items for proper classification of short-term vs. long-term.
− Prepare footnote disclosure for future commitments.
− Tie Net Income in Retained Earnings roll-forward to Income Statement.

19. 6.3. Preparation of Balance Sheet, Income Statement and
Cash Flow Statement:
After the closing process has been completed, the trial balance provides the basis
for preparation of Balance Sheet, Income Statement and Cash Flow Statement.
− The income statement is prepared first using the appropriate revenue and expense
accounts. This statement also reports the tax liability of the company.
− The net income determined in the income statement is reported in the statement
of retained earnings.
− The statement of retained earning is calculated second because it determines
amount of retained earnings to be reported in the balance sheet.
− The balance sheet is developed using the company’s assets, liabilities and owner’s
equity. The balance of these accounts is taken directly from the trial balance.
Balance sheets are presented with asset accounts appearing on the left and
liabilities and owner’s equity accounts appearing on the right. Separate subtotals
for current assets and current liabilities are mentioned.
− The basis of preparation of the financial statements and specific accounting
policies selected and applied for significant transactions and events are disclosed
as explanatory notes.
Consolidated financial statements are to be signed by the same persons by whom the
individual balance sheet and the profit and loss account or income and expenditure
account of the holding company are required to be signed.

20. 7. CONCLUSION
Pakistan has made significant progress in closing the gap between local requirements
for corporate financial reporting and international standards by not only adopting IFRS
but also by establishing mechanisms to ensure their enforcement. Over the past few
years, this has contributed to maintaining uniformity in the process of preparation of
financial statements in Pakistan.

21. BIBLIOGRAPHY
• Accounting and Financial Reporting Standards for Medium-Sized Entities
MSEs) and Small-Sized Entities (SSEs)
• Review of practical implementation issues of International Financial Reporting
Standards - Case study of Pakistan, United Nations Conference on Trade and
Development.
• A Guide on Accounts and Accounting Reference Dates by Securities and
Exchange Commission of Pakistan.
• The Companies Ordinance 1984 by Government of Pakistan.
• Financial statements disclosure check list for listed companies by The Institute
of Chartered Accountants of Pakistan.
• Medium-Sized Entities Illustrative Financial Statements by The Institute of
Chartered Accountants of Pakistan.
• Business Recorder
• Pakistan Economist
• Official Pakistan Government site