IAS 1 Presentation of Financial Statements

IAS 1 Presentation of Financial Statements

 

Background

IAS 1 ‘’Presentation of Financial Statements’’ describes the general requirements which includes structure, minimum requirements of the content, and key concepts like going concern, the cumulative basis of accounting and current / non-current distinction in the financial statements. The standard requires a complete set of financial statements which includes:

A statement of financial position + a statement of income and other comprehensive income + a statement of changes in equity + a statement of cash flows.

IAS 1 was reissued in September 2007 and applies to annual periods beginning on or after January 1, 2009.

 

Objective

This Standard establishes basis for the presentation of financial statements to make sure comparability:

Ø     with the entity's financial statements from prior periods and

Ø     with the financial statements of other entities.

It outlines general requirements for the presentation of financial statements, guidelines for its structure and minimum requirements for its content.

 

Scope

• An entity shall apply this Standard when preparing and presenting general purpose financial statements in accordance with International Financial Reporting Standards (IFRS).

• Other IFRSs establish the recognition, measurement and disclosure requirements for specific transactions and other events.

• This Standard does not apply to the structure and content of condensed interim financial statements prepared in accordance with IAS 34 Interim Financial Reporting. However, paragraphs 15 to 35 apply to those financial statements. This Standard applies equally to all entities, including those that present consolidated financial statements in accordance with IFRS 10 Consolidated Financial Statements and those that present separate financial statements in accordance with IAS 27 Separate Financial Statements.

• This Standard uses appropriate terminology for non-profit entities, including commercial entities in the public sector. If entities with nonprofit activities in the public or private sector apply this Standard, they may need to amend the descriptions used for particular items in the financial statements and for the financial statements themselves.

• Similarly, entities that do not have equity as defined in IAS 32 Financial Instruments: Presentation (eg some mutual funds) and entities whose share capital is not equity (eg some cooperative entities) may need to adapt the presentation of the financial statements of members or interests of non-holders.

 

Key Definitions

Financial statements

Financial statements are those proposed documents which are prepared to satisfies the need of users those are not in a position to ask an entity to prepare reports cater to their particular information needs.

 

Impracticable

Application of any requirement, when the entity cannot apply it after making every reasonable effort to do so.

 

Material

If any omitting, misstating, or concealing information can reasonably influence the decisions of the primary users of financial statements then that information is material.

 

Other comprehensive income

It includes items of income & expenses (it includes adjustments for reclassification) that are not measured in results of required or allowed by other IFRSs. Illustration: Changes in the revaluation surplus as per IAS 16 PPE, new measurements defined benefit plans according to IAS 19 Employee benefits etc.

 

Owners are holders of instruments classified as equity

The profit & loss should be total income minus expenses which excludes the element of other comprehensive income.

 

Reclassification adjustments

Amounts which are reclassified to results in the current period that were recognized in the current or previous periods in other comprehensive income.

 

Total comprehensive income

It is the change in equity for the duration of a period which resulting from transactions and other events, excluding changes resulting from transactions with owners in their capacity as owners. Total comprehensive income comprises all elements of "profit & loss" and "other comprehensive income".

 

 

What’s financial statement and the objective of preparing for the entity?

The entity's financial statement presents the entity's financial position, and the purpose of general-purpose financial statements is to provide information about an entity's financial position, financial performance, and cash flows that is useful to a wide range of user decisions. To meet that objective, the financial statements provide information on:

• assets, liabilities, income and equity expenses, including profit and loss contributions and distributions and cash flows.

• That information, along with other information in the notes, helps users of the financial statements to predict the entity's future cash flows.

 

Components of financial statements

A complete set of financial statements includes:

• ·       Statement of financial position/balance sheet for the end of period
• ·       Statement of profit & loss and other comprehensive income(OCI) for the period (it may present as a single statement, or by presenting the profit & loss section in different statement of profit & loss,  followed by a statement showing comprehensive income)
• ·       Statement of equity change for the period
• ·       Cash flow statement for the period
• ·       Notes which comprise a summary of significant accounting policies and other explanatory notes
• ·       Comparative information prescribed by the standard
• ·       Statement of financial position at the beginning of the previous period when an entity applies an accounting policy retrospectively or in case when retrospectively restates the items in its financial statements, or when it reclassified the items in its financial statements, it should also present a statement of balance sheet as at the beginning of the first period comparative.

An entity may use labels for statements other than the labels indicated in above list. All financial statements should be presented with equal importance.

Reports presented outside the financial statements, including management financial reviews, environmental reports, and value-added statements, are outside the scope of IFRS.

 

Fair presentation and compliance according to IFRSs

Financial statements should present a true picture of an entity's financial position, financial performance, and cash flows. Fair presentation requires faithful presentation of the effects of transactions, other events and conditions in accordance with the definitions and criteria for recognition of assets, liabilities, income and expenses established in the Framework. The application of IFRS, with additional disclosure when necessary, is required in financial statements to achieve a fair presentation.

IAS 1 requires an entity whose financial statements comply with IFRSs to make an explicit and unqualified statement of such compliance in the notes. Financial statements cannot be described as complying with IFRS unless they comply with all the requirements of IFRS (which includes International Financial Reporting Standard(IFRS), International Accounting Standards (IAS), IFRIC Interpretations and SIC Interpretations).

Improper accounting policies cant be rectified either by disclosure of the accounting policies or by any notes or explanatory material.

IAS 1 recognizes that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of the financial statements set out in the Framework. In such case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons and impact of the item.

Going concern concept

The Conceptual Framework states that financial statements are normally prepared assuming that the entity is a going concern and will continue to operate for the foreseeable future.

IAS 1 obliges management to perform assessment of an entity's ability to continue as a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties should be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared based on a going concern, in which case IAS 1 requires a series of disclosures.

 

Accrual methodology of accounting

IAS 1 obliges an entity to prepare its financial statements (except for cash flow information) on accrual basis of accounting.

 

Materiality and accumulation

If any omitting, misstating, or concealing information can reasonably influence the decisions of the primary users of financial statements then that information is material. Every material class of similar kind of elements should be presented separately in the financial statements. If any element is individually immaterial then can be added.

Though, the information should not be concealed by adding or providing immaterial information, materiality considerations apply to all parts of the financial statements, and even when a standard needs specific disclosure, materiality considerations apply.

 

Offsetting allowance

Assets & liabilities and income & expenses can’t be offset except required or allowed by any IFRS.

 

Comparative information

IAS 1 requires comparative information from the prior period to be disclosed for all amounts reported in the financial statements, both in the face of the financial statements and in the notes, unless another Standard requires otherwise. Comparative narrative and descriptive information are provided where relevant to understand the current period financial statements.

An entity is required to present at least two of each of the following main financial statements:

• ·       statement of financial position/balance sheet  
• ·       statement of profit & loss and other comprehensive income (OCI)
• ·       separate statements of profit & loss (If in case presented)
• ·       Cash flow statement
• ·       statement of equity change
• ·       Notes for each of the above-mentioned items.

Note- There are cases when third statement of financial position is essential to be presented and which is when if the entity retrospectively applies any accounting policy, reclassifies or restates items, and if the adjustments had a material impact on the information in the financial position at the beginning of the comparative period.

If the comparative amounts are changed or reclassified, various disclosures are required.

 

Presentation Consistency

The presentation and classification of elements in the financial statements shall be maintained from one period to the next unless a change is justified by a change in circumstances or by a requirement of a new IFRS.

 

Reporting frequency

Financial statements carry presumption that it should be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the entity should disclose the reason for the change and state that amounts are not entirely comparable.

 

Structure and content of financial statements

IAS 1 entails an entity to clearly identify:

• ·       the financial statements, which should be distinguished from other information in a published paper
• ·       every financial statement and notes of the financial statements.

In addition, the below information should be displayed prominently, and repeated as essential:

• ·       the reporting entity name and any related change  
• ·       whether the financial statements are a group of entities or individual entity
• ·       information about the reporting period
• ·       the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign Exchange Rates)
• ·       the level of rounding used (e.g. thousands, millions).

 

Statement of financial position

Current and non-current distinction

The entity normally shows a classified statement of financial position, wherein it segregates current and non-current assets and liabilities, unless presentation based on liquidity provides information that is reliable. In either case, if an asset/liability category merges amounts that will be received/settled after 12 months with assets/liabilities that will be received/settled within 12 months then disclosure is obliged that splits of the longer-term amounts out from the 12-month amounts.

Ø     Current assets – Expected assets those are:

o   to be realised in the entity's normal operating cycle

o   Primarily held for the purpose of trading

o   expected to be realised within 12 months after the reporting period cash and cash equivalents (unless restricted).

Ø     Non current asset – Rest all assets are non-current.

 

Ø     Current liabilities – Liabilities that are expected:

o   to be settled within the entity's normal operating cycle

o   held for purpose of trading

o   To be settled within the period of 12 months

o   for which the entity does not have the right at the end of the reporting period to defer settlement beyond 12 months.

Ø      Non current liability - Other liabilities are non-current.

o   When a long-term debt is expected to be refinanced under an existing loan facility, and the entity has the discretion to do so, the debt is classified as non-current, if liability would otherwise be due within the period of 12 months.

o   If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current despite the fact that the lender has agreed that post the reporting date and before the authorisation of the financial statements, shall not demand payment as a result of the breach. Nevertheless, the liability is categorized as non-current if the lender agreed by the reporting date to allow a period of grace ending at least 12 months post the end of the reporting period, within which the entity can correct the breach and during which the lender can’t demand instant repayment.

Settlement by the issue of equity instruments does not impact classification.

 

Line items

Below is the listing of line items to be considered on the face of the statement of financial position:

(a)      property plant and equipment (PPE)

(b)      Investment (other than shown under (e))

(c)      Intangibles

(d)      financial assets (other than assets shown under (e), (h), and (i))

(e)      investments accounted under equity method

(f)       biological assets

(g)      Inventory

(h)      trades and other receivables

(i)       cash and any cash equivalents

(j)       assets which are held for sale

(k)      trades and other payables

(l)       provisions

(m)     financial liabilities (other than shown under (k) and (l))

(n)      current tax liabilities and assets (defined under IAS 12)

(o)      deferred tax liability and asset (defined under IAS 12)

(p)      liabilities covered in disposal groups

(q)      non-controlling interests (NCI), shown within equity

(r)       issued capital and reserves.

Additional line items for headings and subtotals might be needed to fairly present the entity's financial position. For presentation of subtotals, those shall be encompassed of line items made up of amounts measured in accordance with IFRS; be presented and titled in a clear and understandable manner, be constant from period on period, and the information should not be displayed with more prominence than the obligatory subtotals and totals.

Furthermore, any sub-classifications of line items should be shown in the statement or in the notes, for illustration:

• ·       classes of property plant and equipment (PPE)
• ·       disaggregation of account receivables
• ·       disaggregation of inventories in agreement with IAS 2 Inventories
• ·       disaggregation of provisions into employee benefits and other items
• ·       classes of reserves and equity

 

Format of statement

IAS 1 does not recommend the format of the statement of financial position. Assets can be presented current then non-current, or vice versa, and liabilities and equity can be presented current then non-current then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed.

The long-term financing approach used in UK and elsewhere <- Fixed assets + current assets - short term payables = long-term debt plus equity –> is also acceptable.

 

Share capital and reserves

Concerning issued share capital and reserves, the subsequent disclosures are required:

• ·       numbers of shares which are authorised, issued and fully paid and also show shares issued but not fully paid
• ·       par value of shares (or that shares which do not have a par value)
• ·       reconciliation of number of shares remaining at the beginning and the end of the period
• ·       description of any related rights, preferences, and restrictions
• ·       treasury shares which includes shares held by subsidiaries and associates entities
• ·       shares those are reserved for issuance under options and contracts
• ·       a description of the nature and purpose of each reserve within equity.

Additional disclosures are required in respect of entities without share capital and an entity has reclassified puttable financial instruments. 

 

Statement of profit & loss and other comprehensive income

What’s profit & loss and comprehensive income?

Profit & loss is well-defined as "the total of income less expenses, excluding the components of other comprehensive income".  Other comprehensive income is described as comprising "items of income and expense (including reclassification adjustments) that are not considered in profit & loss as outlined by other IFRSs".  Total comprehensive income is defined as "the change in equity during a period resulting from transactions and other events, apart from those changes resulting from transactions with owners in their capacity as owners".

 

All items of income and expense considered in the period should be included in profit & loss except if a Standard or an Interpretation demands otherwise. Few IFRSs require that some element should be excluded from profit & loss and instead should be included in other comprehensive income(OCI).

 

Illustrations of items outside of profit & loss

Also, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the rectification of errors and the impact of changes in accounting policies to be measured outside profit & loss for the current year.

 

Choice in presentation and basic requirements

 Profit & loss section or statement

 The below are minimum line items should be displayed in the profit & loss:

Expenses measured in profit & loss should be examined by nature (like raw materials, staffing related costs, depreciation, etc.) or by function (cost of sales, selling cost, administrative expenses, etc). If an entity categorizes by function then the additional information on the nature of expenses – like depreciation, amortisation and employee benefits expense – needs to be revealed.

 

Other comprehensive income (OCI)

The other comprehensive income section is required to present items that are classified by their nature, and are grouped between those items that will or will not be reclassified to results in subsequent periods.

An entity's interest in OCI of associates and joint ventures accounted for in equity is presented as a whole as individual items on the basis of whether or not it will subsequently be reclassified to profit & loss.

When an entity presents subtotals, those subtotals will be made up of items composed of amounts recognized and measured in accordance with IFRS; be presented and labeled in a clear and understandable way; be consistent from one period to another; it will not display more prominently than the required subtotals and totals; and reconciled with the subtotals or totals required in IFRS

 

Other requirements

Additional items may be required to fairly present the results of the entity's operations. Items cannot be shown like 'extraordinary items' in the financial statements or in the notes.

Certain items must be disclosed separately in the statement of comprehensive income or in the notes (if material), including:

Statement of changes in equity

IAS 1 obliges an entity to show a separate statement of changes in equity. The statement should present:

·       total comprehensive income for the period presenting separate amounts attributable to owners of the parent and to non-controlling interests (NCI)

·       Any retrospective application effect of accounting policies or restatements made as per IAS 8, shown separately for each component of other comprehensive income

·       reconciliations essential between the carrying amounts at the opening and the end of the period for each component of equity. Thus, distinct disclosure is required for following:

o   profit & loss

o   other comprehensive income (OCI)

o   transactions with owners which show separate contributions by and distributions to owners and any change in the ownership interests in subsidiaries which is not result of loss of control

The below amounts might also present on the face of the statement of changes in equity (or they might be presented in the notes):

·       amount of dividends considered as distributions

·       the related amount per share.

 

Statement of cash flows

Cash flow information provides users of financial statements with a basis for assess the entity's ability to generate cash and cash equivalents and the the entity's needs to use those cash flows. IAS 7 establishes requirements for the presentation and disclosure of cash flow information.

 

Notes to the financial statements

The notes should:

·       present information of preparation basis of the financial statements and the specific accounting policies used

·       disclose any data required by IFRSs which isn’t presented elsewhere in the financial statements and

·       offer additional information that is not shown elsewhere in the financial statements but that is relevant for understanding of any of them

Notes should be presented in a logical manner and cross-referenced with the face of the financial statements for the relevant notes.

IAS 1.114 advises that the notes should normally be shown in the following order:

·       statement of compliance with IFRSs

·       summary of significant accounting policies which are applied. That includes:

o   the measurement basis adopted in preparing the financial statements

o   the other accounting policies followed that are applicable to an understanding of the financial statements

·       supporting details for substances shown on the face of the statement of financial position, profit & loss and other comprehensive income, statement of changes in equity and cash flows statement, in order to which each statement and each line item is presented

·       other disclosures, including:

o   contingent liabilities (as per IAS 37) and contractual commitments which are not recognised

o   non-financial disclosure, like the entity's financial risk management objectives and policies (see IFRS 7 Financial Instruments: Disclosures)

 

Other disclosures

Judgements and key assumptions

In the summary of significant accounting policies or other notes, entity should disclose the judgements, except from those involving estimations, which management has establish in the application process of the entity's accounting policies that have the most significant impact on the amounts considered in the financial statements.

 

Examples cited in IAS 1.123 include management's judgements in determining:

·       when substantially all the significant risks & rewards of financial assets ownership and lease assets were transferred to other entities

·       whether, in substance, sales of any goods were financing arrangements and result of no rise to the revenue.

An entity should also disclose in the note’s information about key assumptions about the future and other key sources of estimation uncertainty at the end of the reporting period that they have a significant risk of causing a significant adjustment in values. the assets and liabilities within the next financial year. These disclosures do not imply disclosing budgets or forecasts.

 

Dividends

In addition to information on distributions in the statement of changes in equity (see above), the following should be disclosed in the notes:

• the number of dividends proposed or declared before the financial statements were authorized for issue but were not recognized as a distribution to owners during the period, and

• the related amount per share the amount of any unrecognized cumulative preferred dividend.

 

Capital disclosures

An entity should disclose information about its objectives, policies, and processes for managing capital. To adhere that the disclosures should include:

• qualitative information on the entity's objectives, policies and processes for managing capital, including

• description of the capital that manages the nature of the external capital requirements, if any, how it is meeting its objectives

• quantitative data on what the entity considers to be changes in capital from one period to another if the entity has complied with the external capital requirements and, if it has not, the consequences of such noncompliance.

 

Puttable financial instruments

IAS 1 entails the below additional disclosures if an entity has a put option instrument that is classified as an equity instrument:

• summary of quantitative data on the amount classified as equity

• the entity's objectives, policies and processes to manage its obligation to repurchase or exchange the instruments when the holders of the instruments so require, including changes from the previous period.

• the expected cash outflow on the redemption or repurchase of that class of financial instruments and

• information on how the predictable cash outflow on redemption or repurchase was identified.

 

Other information

If in case, following are not disclosed anywhere in the published financial statement, then the below ‘’other note disclosures’’ are essential by IAS 1: