An undertaking disclosing comparative information shall present, as a minimum, two statements of financial position, two of each of the other statements, and related notes.
When an undertaking applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements or when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two of each of the other statements, and related notes.
An undertaking presents statements of financial position as at:
(a) the end of the current period,
(b) the end of the previous period (which is the same as the beginning of the current period), and
(c) the beginning of the earliest comparative period.
Narrative information provided in the financial statements for the previous period may be relevant in the current period.
EXAMPLE- Comparative narrative information
Issue
Undertakings should include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.
When should management include comparative narrative information in the financial statements?
Background
An undertaking has an exclusive 3-year licence to operate the domestic mobile phone service; the government had granted the licence. The government sued the undertaking in 20X2, alleging that it has been providing service below the quality limits of the concession agreement. The government has indicated its intention to cancel the agreement that gives the undertaking the exclusivity to operate the service. The dispute is to be settled legally and at the balance date is yet to be resolved.
Solution
The undertaking should disclosure information about the dispute that is useful to the users of the financial statements. The information should not necessarily be limited to the events of the current period. The disclosure should focus on:
a) summary of the dispute;
b) the actual and potential financial effect; and
c) the likely outcome and the expected timing of a resolution.
The following is an example of an appropriate disclosure:
Note 10 Domestic mobile phone licence - dispute with government
In 20X1 the government granted the company a 3-year licence to operate the domestic mobile phone service. The company derives 25% of its revenue from domestic phone service.
The conditions of the licence included seven performance targets. The company is currently in dispute with the government over whether it has met a specific target.
The dispute has not impacted on the undertaking’s financial performance in 20X1
or 20X2. Withdrawal of the licence could potentially reduce the undertaking’s revenue in 20X3.
Management is confident however that it has met all performance targets, and the company’s legal advisers have confirmed this view.
Details of a legal dispute, the outcome of which was uncertain at the last end of the reporting period, and is yet to be resolved, are disclosed in the current period.
Users benefit from information that the uncertainty existed at the last end of the reporting period, and about the steps that have been taken during the period, to resolve the uncertainty.
Consistency of Presentation
The presentation, and classification, of items in the financial statements shall be retained from one period to the next unless:
(i) it is apparent, following a significant change in the nature of the undertaking’s operations, or a review of its financial statements, that another presentation would be more appropriate, having regard to the criteria for the application of policies in IAS 8; or
(ii) a Standard requires a change in presentation.
EXAMPLE-consistent policies
Using different measurement systems of inventory (FIFO and weighted-average cost are permitted by IFRS) generates different results. Consistent use of one method is essential to allow users to compare one period with another.
There should be no change of method, unless a Standard decrees it, or it would help users.
If other undertakings, in the same industry, use particular accounting policies, users will benefit if yours are consistent with theirs, to enable comparison.
A significant acquisition (or disposal), or a review of the presentation of the financial statements, might suggest that the financial statements need to be presented differently.
An undertaking changes the presentation of its financial statements only if the new presentation provides information that is reliable, and is more relevant to users, and the revised structure is likely to continue, so that comparability is not impaired.
(i) it is apparent, following a significant change in the nature of the undertaking’s operations, or a review of its financial statements, that another presentation would be more appropriate, having regard to the criteria for the application of policies in IAS 8; or
(ii) a Standard requires a change in presentation.
EXAMPLE-consistent policies
Using different measurement systems of inventory (FIFO and weighted-average cost are permitted by IFRS) generates different results. Consistent use of one method is essential to allow users to compare one period with another.
There should be no change of method, unless a Standard decrees it, or it would help users.
If other undertakings, in the same industry, use particular accounting policies, users will benefit if yours are consistent with theirs, to enable comparison.
A significant acquisition (or disposal), or a review of the presentation of the financial statements, might suggest that the financial statements need to be presented differently.
An undertaking changes the presentation of its financial statements only if the new presentation provides information that is reliable, and is more relevant to users, and the revised structure is likely to continue, so that comparability is not impaired.
Going Concern
When preparing financial statements, management shall make an assessment of an undertaking’s ability to continue as a going concern. Financial statements shall be prepared on a going-concern basis, unless management either intends to liquidate the undertaking or to cease trading, or has no realistic alternative but to do so.
EXAMPLE-going concern
Banks provide loans under specific conditions, including the financial performance of clients. A breach of these conditions may enable the bank to liquidate the client’s business. In these circumstances, unless the client can secure an alternative source of finance, financial statements should not be prepared on a going concern basis.
When management is aware of material uncertainties that may cast significant doubt upon the undertaking’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 undertaking is not regarded as a going concern.
In assessing whether the going-concern assumption is appropriate, management takes into account all available information about the future, which is at least twelve months from the end of the reporting period.
EXAMPLE-going concern
Management reviews its budgets to identify times when cash flows will be under pressure. It reviews its credit lines to ensure that sufficient funds will be available to cover any anticipated shortfalls. It arranges further lines of credit, if necessary. Having done this, it can produce accounts on a going-concern basis.
When an undertaking has a history of profitable operations, and ready access to financial resources, a conclusion that the going-concern basis is appropriate may be reached without detailed analysis.
In other cases, management may need to consider a wide range of factors, relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing, before it can satisfy itself that the going-concern basis is appropriate
EXAMPLE-going concern
Banks provide loans under specific conditions, including the financial performance of clients. A breach of these conditions may enable the bank to liquidate the client’s business. In these circumstances, unless the client can secure an alternative source of finance, financial statements should not be prepared on a going concern basis.
When management is aware of material uncertainties that may cast significant doubt upon the undertaking’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 undertaking is not regarded as a going concern.
In assessing whether the going-concern assumption is appropriate, management takes into account all available information about the future, which is at least twelve months from the end of the reporting period.
EXAMPLE-going concern
Management reviews its budgets to identify times when cash flows will be under pressure. It reviews its credit lines to ensure that sufficient funds will be available to cover any anticipated shortfalls. It arranges further lines of credit, if necessary. Having done this, it can produce accounts on a going-concern basis.
When an undertaking has a history of profitable operations, and ready access to financial resources, a conclusion that the going-concern basis is appropriate may be reached without detailed analysis.
In other cases, management may need to consider a wide range of factors, relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing, before it can satisfy itself that the going-concern basis is appropriate
EXAMPLE-Additional disclosure to enhance fair presentation
EXAMPLE-Additional disclosure to enhance fair presentation
Issue
A fair presentation of an undertaking’s financial position may require, in rare situations, additional disclosures to those that IFRS require.
When it is appropriate to provide additional disclosure about the reconciliation of the opening deferred tax balance to the closing deferred tax balance?
Background
An undertaking has material unused tax losses and its management has no expectation that future taxable profit will be available before they expire.
Solution
IAS 12’s required disclosures may not in this case provide enough information to understand the current period’s financial statements. Management should present additional notes.
Issue
A fair presentation of an undertaking’s financial position may require, in rare situations, additional disclosures to those that IFRS require.
When it is appropriate to provide additional disclosure about the reconciliation of the opening deferred tax balance to the closing deferred tax balance?
Background
An undertaking has material unused tax losses and its management has no expectation that future taxable profit will be available before they expire.
Solution
IAS 12’s required disclosures may not in this case provide enough information to understand the current period’s financial statements. Management should present additional notes.
Fair Presentation and Compliance with IFRSs
Financial statements shall present fairly the financial position, financial performance and cash flows of an undertaking.
Fair presentation requires the faithful representation of the impacts of transactions, in accordance with the definitions (and recognition criteria) for assets, liabilities, income and expenses set out in the Framework (see Framework workbook).
The application of IFRSs (with additional disclosure when necessary) is presumed to result in financial statements that achieve a fair presentation.
Financial statements that comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs, unless they comply with all the requirements of IFRSs.
A fair presentation also requires an undertaking:
(i) to select and apply accounting policies in accordance with IAS 8 Accounting Policies. IAS 8 sets out a hierarchy of guidance that management considers (in the absence of a Standard) that specifically applies to an item.
(ii) to present information, including policies, in a manner that provides relevant, reliable, comparable and understandable information.
(iii) to provide additional disclosures, when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, on the undertaking’s financial position, and performance.
Fair presentation requires the faithful representation of the impacts of transactions, in accordance with the definitions (and recognition criteria) for assets, liabilities, income and expenses set out in the Framework (see Framework workbook).
The application of IFRSs (with additional disclosure when necessary) is presumed to result in financial statements that achieve a fair presentation.
Financial statements that comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs, unless they comply with all the requirements of IFRSs.
A fair presentation also requires an undertaking:
(i) to select and apply accounting policies in accordance with IAS 8 Accounting Policies. IAS 8 sets out a hierarchy of guidance that management considers (in the absence of a Standard) that specifically applies to an item.
(ii) to present information, including policies, in a manner that provides relevant, reliable, comparable and understandable information.
(iii) to provide additional disclosures, when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, on the undertaking’s financial position, and performance.
Definitions
General purpose financial statements (referred to as ‘financial statements’) are those intended to meet the needs of users who are not in a position to require an undertaking to prepare reports tailored to their particular information needs.
Impracticable Applying a requirement is impracticable when the undertaking cannot apply it, after making every reasonable effort to do so.
Material Omissions (or misstatements of items) are material if they could influence the decisions of users, taken on the basis of the financial statements.
Materiality depends on the size, and nature, of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.
Notes contain information in addition to that presented in the statement of financial position, statement of comprehensive income, separate income statement (if presented), statement of changes in equity, and statement of cash flows.
Notes provide narrative descriptions, or disaggregations of items in those statements, and information about items that do not qualify for recognition in those statements.
Assessing whether an omission, or misstatement, could influence decisions of users, and so be material, requires consideration of the characteristics of those users.
Users are assumed to have a reasonable knowledge of business and accounting, and a willingness to study the information with reasonable diligence.
The assessment needs to take into account how users, with such attributes, are influenced in making decisions.
Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs.
The components of other comprehensive income include:
(i) changes in revaluation surplus (see IAS 16 Property, Plant and
Equipment and IAS 38 Intangible Assets);
(ii) actuarial gains and losses on defined benefit plans recognised in accordance IAS 19 Employee Benefits;
(iii) gains and losses arising from translating the financial statements of a foreign operation (see IAS 21);
(iv) gains and losses on remeasuring available-for-sale financial assets
(see IAS 39 Financial Instruments);
(v) the effective portion of gains and losses on hedging instruments in a cash
flow hedge (see IAS 39).
Owners are holders of instruments classified as equity.
Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.
Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods.
Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’
and of ‘other comprehensive income’.
Although IAS 1 uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total comprehensive income’, an undertaking may use other terms to describe the totals as long as the meaning is clear. For example, an undertaking may use the term ‘net income’ to describe profit or loss.
Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.
Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods.
Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’
and of ‘other comprehensive income’.
Although IAS 1 uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total comprehensive income’, an undertaking may use other terms to describe the totals as long as the meaning is clear.
For example, an undertaking may use the term ‘net income’ to describe profit or loss.
3
Impracticable Applying a requirement is impracticable when the undertaking cannot apply it, after making every reasonable effort to do so.
Material Omissions (or misstatements of items) are material if they could influence the decisions of users, taken on the basis of the financial statements.
Materiality depends on the size, and nature, of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, could be the determining factor.
Notes contain information in addition to that presented in the statement of financial position, statement of comprehensive income, separate income statement (if presented), statement of changes in equity, and statement of cash flows.
Notes provide narrative descriptions, or disaggregations of items in those statements, and information about items that do not qualify for recognition in those statements.
Assessing whether an omission, or misstatement, could influence decisions of users, and so be material, requires consideration of the characteristics of those users.
Users are assumed to have a reasonable knowledge of business and accounting, and a willingness to study the information with reasonable diligence.
The assessment needs to take into account how users, with such attributes, are influenced in making decisions.
Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs.
The components of other comprehensive income include:
(i) changes in revaluation surplus (see IAS 16 Property, Plant and
Equipment and IAS 38 Intangible Assets);
(ii) actuarial gains and losses on defined benefit plans recognised in accordance IAS 19 Employee Benefits;
(iii) gains and losses arising from translating the financial statements of a foreign operation (see IAS 21);
(iv) gains and losses on remeasuring available-for-sale financial assets
(see IAS 39 Financial Instruments);
(v) the effective portion of gains and losses on hedging instruments in a cash
flow hedge (see IAS 39).
Owners are holders of instruments classified as equity.
Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.
Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods.
Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’
and of ‘other comprehensive income’.
Although IAS 1 uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total comprehensive income’, an undertaking may use other terms to describe the totals as long as the meaning is clear. For example, an undertaking may use the term ‘net income’ to describe profit or loss.
Profit or loss is the total of income less expenses, excluding the components of other comprehensive income.
Reclassification adjustments are amounts reclassified to profit or loss in the current period that were recognised in other comprehensive income in the current or previous periods.
Total comprehensive income is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.
Total comprehensive income comprises all components of ‘profit or loss’
and of ‘other comprehensive income’.
Although IAS 1 uses the terms ‘other comprehensive income’, ‘profit or loss’ and ‘total comprehensive income’, an undertaking may use other terms to describe the totals as long as the meaning is clear.
For example, an undertaking may use the term ‘net income’ to describe profit or loss.
3
Financial statements
Financial statements are a structured representation of the financial position, and financial performance, of an undertaking.
The objective of financial statements is to provide information about the financial position, financial performance, and cash flows, which is useful to a wide range of users in making decisions.
Financial statements also show the results of management’s stewardship of resources. To meet this objective, financial statements provide information about an undertaking’s:
(i) assets;
(ii) liabilities;
(iii) equity;
(iv) income and expenses, including gains and losses;
(v) contributions by, and distributions to owners in their capacity as owners; and
(vi) cash flows.
This information, with other information in the notes, assists users of financial statements in predicting the undertaking’s future cash flows and, their timing and certainty.
A complete set of financial statements comprises:
(i) a statement of financial position as at the end of the period;
(ii) a statement of comprehensive income for the period;
(iii) a statement of changes in equity for the period;
(iv) a statement of cash f lows for the period;
(v) notes, comprising a summary of significant accounting policies and other explanatory information; and
(vi) a statement of financial position as at the beginning of the earliest comparative period when an undertaking applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.
An undertaking may use titles for the statements other than those used in IAS 1.
An undertaking shall present with equal prominence all of the financial statements in a complete set of financial statements.
An undertaking may present the components of profit or loss either as part of a single statement of comprehensive income or in a separate income statement.
When an income statement is presented it is part of a complete set of financial statements and shall be displayed immediately before the statement of comprehensive income.
An audit report is not compulsory, but it will provide readers with independent assurance of the figures.
Many undertakings present, outside the financial statements, a financial review by management, that describes the main features of the undertaking’s financial performance, and financial position, and the uncertainties it faces.
Such a report may include a review of:
(i) the main factors determining financial performance, including changes in the environment, the undertaking’s response to those changes and their impact, and the policy for investment to maintain (and enhance) performance, including its dividend policy;
(ii) sources of funding and targeted ratio of liabilities to equity; and
(iii) resources not recorded in the statement of financial position in accordance with IFRSs.
Many undertakings also present reports, such as environmental reports and value added statements, particularly in industries in which environmental factors are significant, and when staff are regarded as an important user group.
Reports and statements presented outside financial statements are outside the scope of IFRSs.
The objective of financial statements is to provide information about the financial position, financial performance, and cash flows, which is useful to a wide range of users in making decisions.
Financial statements also show the results of management’s stewardship of resources. To meet this objective, financial statements provide information about an undertaking’s:
(i) assets;
(ii) liabilities;
(iii) equity;
(iv) income and expenses, including gains and losses;
(v) contributions by, and distributions to owners in their capacity as owners; and
(vi) cash flows.
This information, with other information in the notes, assists users of financial statements in predicting the undertaking’s future cash flows and, their timing and certainty.
A complete set of financial statements comprises:
(i) a statement of financial position as at the end of the period;
(ii) a statement of comprehensive income for the period;
(iii) a statement of changes in equity for the period;
(iv) a statement of cash f lows for the period;
(v) notes, comprising a summary of significant accounting policies and other explanatory information; and
(vi) a statement of financial position as at the beginning of the earliest comparative period when an undertaking applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.
An undertaking may use titles for the statements other than those used in IAS 1.
An undertaking shall present with equal prominence all of the financial statements in a complete set of financial statements.
An undertaking may present the components of profit or loss either as part of a single statement of comprehensive income or in a separate income statement.
When an income statement is presented it is part of a complete set of financial statements and shall be displayed immediately before the statement of comprehensive income.
An audit report is not compulsory, but it will provide readers with independent assurance of the figures.
Many undertakings present, outside the financial statements, a financial review by management, that describes the main features of the undertaking’s financial performance, and financial position, and the uncertainties it faces.
Such a report may include a review of:
(i) the main factors determining financial performance, including changes in the environment, the undertaking’s response to those changes and their impact, and the policy for investment to maintain (and enhance) performance, including its dividend policy;
(ii) sources of funding and targeted ratio of liabilities to equity; and
(iii) resources not recorded in the statement of financial position in accordance with IFRSs.
Many undertakings also present reports, such as environmental reports and value added statements, particularly in industries in which environmental factors are significant, and when staff are regarded as an important user group.
Reports and statements presented outside financial statements are outside the scope of IFRSs.
SCOPE
IAS 1 shall be applied to all general purpose financial statements presented in accordance with IFRS.
IAS 1 does not apply to interim financial statements, (see IAS 34 Interim Financial Reporting). IAS 1 applies equally to all undertakings, whether they need to prepare consolidated, or separate financial statements.
IFRS 7 specifies additional requirements for banks and similar financial institutions, which are consistent with the requirements of IAS 1.
IAS 1 uses terminology that is suitable for profit-oriented undertakings, including public-sector business undertakings.
Similarly, undertakings that do not have equity as defined in IAS 32: some mutual funds, and undertakings whose share capital is not equity: some co-operative undertakings may need to adapt the of members’ (or unitholders’) interests.
IAS 1 does not apply to interim financial statements, (see IAS 34 Interim Financial Reporting). IAS 1 applies equally to all undertakings, whether they need to prepare consolidated, or separate financial statements.
IFRS 7 specifies additional requirements for banks and similar financial institutions, which are consistent with the requirements of IAS 1.
IAS 1 uses terminology that is suitable for profit-oriented undertakings, including public-sector business undertakings.
Similarly, undertakings that do not have equity as defined in IAS 32: some mutual funds, and undertakings whose share capital is not equity: some co-operative undertakings may need to adapt the of members’ (or unitholders’) interests.
OBJECTIVE
The objective of IAS 1 is to prescribe the presentation of financial statements, to ensure comparability both with financial statements of previous periods, and with the financial statements of other undertakings.
IAS 1 sets out requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content.
(The recognition, measurement and disclosure of specific transactions and other events are dealt with in other Standards and in Interpretations).
IAS 1 sets out requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content.
(The recognition, measurement and disclosure of specific transactions and other events are dealt with in other Standards and in Interpretations).
Presentation of Financial Statements - Introduction
OVERVIEW
Aim
The aim of this workbook is to assist the individual in understanding the IFRS Presentation of Financial Statements. This is the subject of IAS 1.
IAS 1 was updated in 2007. The changes are listed in the Annex to this workbook. One of the changes is the retitling of the balance sheet as the statement of financial position.
The Board decided to rename a new statement a ‘statement of comprehensive income’. The term ‘comprehensive income’ is not defined in the Framework but is used in IAS 1 to describe the change in equity of an undertaking during a period from transactions, events and circumstances other than those resulting from transactions with owners in their capacity as owners.
Although the term ‘comprehensive income’ is used to describe the aggregate of all components of comprehensive income, including profit or loss, the term ‘other comprehensive income’ refers to income and expenses that under IFRSs are included in comprehensive income but excluded from profit or loss.
The Board decided that an undertaking should have the choice of presenting all income and expenses recognised in a period in one statement or in two statements. An undertaking is prohibited from presenting components of income and expense (ie non-owner changes in equity) in the statement of changes in equity.
The Board acknowledged that the titles ‘income statement’ and ‘statement of profit or loss’ are similar in meaning and could be used interchangeably, and decided to retain the title ‘income statement’ as this is more commonly used.
This workbook is complemented by the Illustrative Corporate Financial Statements and the IFRS Disclosure Checklist which appear on the project website.
Aim
The aim of this workbook is to assist the individual in understanding the IFRS Presentation of Financial Statements. This is the subject of IAS 1.
IAS 1 was updated in 2007. The changes are listed in the Annex to this workbook. One of the changes is the retitling of the balance sheet as the statement of financial position.
The Board decided to rename a new statement a ‘statement of comprehensive income’. The term ‘comprehensive income’ is not defined in the Framework but is used in IAS 1 to describe the change in equity of an undertaking during a period from transactions, events and circumstances other than those resulting from transactions with owners in their capacity as owners.
Although the term ‘comprehensive income’ is used to describe the aggregate of all components of comprehensive income, including profit or loss, the term ‘other comprehensive income’ refers to income and expenses that under IFRSs are included in comprehensive income but excluded from profit or loss.
The Board decided that an undertaking should have the choice of presenting all income and expenses recognised in a period in one statement or in two statements. An undertaking is prohibited from presenting components of income and expense (ie non-owner changes in equity) in the statement of changes in equity.
The Board acknowledged that the titles ‘income statement’ and ‘statement of profit or loss’ are similar in meaning and could be used interchangeably, and decided to retain the title ‘income statement’ as this is more commonly used.
This workbook is complemented by the Illustrative Corporate Financial Statements and the IFRS Disclosure Checklist which appear on the project website.
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